The 5 Elements That Determine Whether a Financial Advisor Is a True Fiduciary (According to Canadian Courts)

By HighView Financial on September 18, 2018

“In a client’s best interests” is a phrase heard often in the financial industry. While many investment advisors simply talk about this concept, fiduciary financial advisors have a moral and ethical duty to live up to it.

So what makes a financial advisor a fiduciary?

The topic of “fiduciary duty” is something the Canadian Securities Administration has delved into and has, as a result, laid out certain criteria that must be met in order for advisors and other broker-dealers to be regarded as fiduciaries. We take a closer look at what a fiduciary is and those five elements that make financial advisors and others true fiduciaries.

What Is a Fiduciary?

The Canadian Securities Administration has defined fiduciary duty as “a duty of a person to act in another person’s best interests.” In the case of an advisor, this means they have a legal and ethical duty to act in the best interests of their client.

There are some wealth management roles in Canada like trustees that are always fiduciaries, but other broker-dealers and advisors, financial planners and investment advisors included, can exist in a grey zone depending on their legal status.

According to Canadian courts, there are five interrelated factors that can be used to determine whether a financial advisor has a fiduciary relationship with their client:

1. The degree of vulnerability of the client as a result of factors like their age or lack of education, language skills, investment knowledge, or experience with stock markets.
2. The degree of trust that the client places with the advisor and the extent to which the advisor accepts it.
3. Whether the client has historically relied on the advisor’s advice and judgement, and if the advisor claims to have special knowledge or skills on which the client can rely.
4. The extent to which the advisor has discretion or power over the client’s investments or accounts.
5. Professional rules and codes of conduct that help to establish the advisor’s duties and the standards to which they will be held.

At HighView, we define a fiduciary as someone acting in a position of trust on behalf of, or for the benefit of, a third party. As such, they are required to act in that third party’s best interests. HighView is registered as a Portfolio Manager (through HighView Asset Management Ltd.) in the provinces of Ontario, British Columbia, Alberta, Saskatchewan, and Manitoba, which means we are held to the fiduciary standard both legally and ethically.

The 5 Elements That Make an Financial Advisor a True Fiduciary

In a Consultation Paper (CSA Consultation Paper 33-403), the Canadian Securities Administration outlines five elements (or duties) that determine whether or not an advisor or dealer is acting as a fiduciary:

1.      Client Interests Are Paramount

In other words, a fiduciary is obligated to single-mindedly serve the best interests of their clients in all matters to do with the service they are providing and put a client’s interests above their own.

According to the Canadian Securities Administration, this is the foundational obligation from which the next four duties all emanate.

2.      Conflicts of Interest Are Avoided

A fiduciary must avoid placing themselves in a conflict-of-interest situation with their beneficiaries. If circumstances are genuinely unavoidable, the fiduciary must take the following actions:

• Provide the client with a full, frank disclosure as to the nature of the conflict.
• If necessary or relevant, advise the client to seek independent advice.
• Acquire explicit consent from the client that the fiduciary can place themselves in an actual or potential conflict of interest.

Regardless of disclosure or consent, a fiduciary always needs to stay true to their first duty—ensuring client interests are paramount.

3.      Clients Are Not Exploited

A fiduciary must be careful to avoid any type of personal pursuit that is not consistent with their client’s best interests. If they learn about an opportunity while acting as a fiduciary, they must not take advantage of it even if the client is not able to.

In essence, a fiduciary must not be rewarded for pursuing interests other than single-mindedly serving their client’s best interests in every matter related to the service they provide.

4.      Clients Are Provided with Full Disclosure

A fiduciary is obligated to provide full disclosure of any material that is related to the service they provide. This means a fiduciary must take all reasonable steps to make clients aware of options available to them as well as any associated benefits or risks.

5.      Services Are Performed Reasonably Prudently

A fiduciary must ensure they perform their services with the level of skill, care, and diligence that a reasonably prudent individual would exercise in those circumstances.

Why You Need a Fiduciary Financial Advisor

By choosing a fiduciary financial advisor, you ensure you have an advocate who sits on your side of the table to whom you can turn for objective investment advice and always rely on to put your interests first.

Ultimately, this gives you peace of mind knowing that the wealth you worked so hard to build is being effectively and sustainably managed.

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HighView is an experienced portfolio management firm for affluent Canadian families and foundations. We would be happy to discuss our goals-based investment approach with you and your professional advisors.

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