The Investment Industry Regulatory Or-ganization of Canada says that “industry costs may increase marginally” because of the compliance requirements contained in its proposed financial planning rule. However, given the long list of dealer obligations under this proposal, it’s unclear how additional costs can be contained to modest levels.

Under the proposed rule, each IIROC dealer will be required to:

> set standards for advisors providing planning services

> develop written policies and procedures

> create data gathering forms and letters of engagement

> spot-review financial plans.

The first two requirements can be very easy filled. A dealer, for instance, could require its advisors to obtain the internationally recognized certified financial planner designation in order to offer financial planning services. The dealer could then adopt the Financial Planners Standards Council’s code of ethics and standards of practice for the bulk of its written policies and procedures. But that’s where the easy stuff ends.

Next on the list is the creation of templates for letters of engagement, data-gathering forms and some guidance on what a written plan should contain. Although the same general framework can be applied to all types of financial plans, the finer details of each plan’s contents will multiply the number of forms and templates required. In addition to investing, advisors counsel clients on retirement, taxation, and life and disability insurance planning.

For example, the content of an investment plan differs greatly from that of a retirement plan. Although the six-step planning process followed by those holding the CFP designation is a general framework that applies to all financial plans, the dealer may be required to specify what constitutes an “appropriate financial plan.” So, dealers may need to outline the contents of different types of plans. Similarly, a very different set of client data is required for each type of plan, which necessitates data-gathering forms for each plan type offered by the dealer’s advisors.

The IIROC’s cost expectation is predicated on the assumption that existing compliance officers (and staff) have sufficient multi-disciplinary financial planning knowledge — and free time on their hands — to supervise financial planning properly. The weakness of this assumption should not be overlooked, given that a dealer needs to be able to define what constitutes an appropriate financial plan, be able to review and approve planning software and review a sample of financial plans completed by its advisors.

For example, will compliance officers know that retirement plans for clients with holding companies should include, at a minimum, inquiries into the respective corporations’ refundable dividend taxes on hand and capital dividend account balances? That’s unlikely. But even if they did, would they know if the advisor is giving the right advice based on this information?

It’s just not realistic to expect compliance staff instantly to add such a large repertoire of financial planning knowledge to the investment knowledge that has taken years to accumulate. This rule might prompt compliance staff to limit advisors’ planning advice if they don’t have the capacity to supervise that advice, which makes the rule’s benefits questionable.

The same might happen with approvals of planning software. Either compliance staff will restrict approval to just one or two applications, or they will move through the complex software applications at a glacial pace.

Before finalizing anything resembling the current proposal, I hope that the IIROC thinks hard about these practical issues and the resulting costs/benefits. IE



Dan Hallett, CFA, CFP, is president of Windsor, Ont.-based Dan Hallett & Associates Inc., which provides a mutual funds recommended list and investment research to advisors.