By Greg Rodger on October 30, 2024
As the concept of fiduciary is being discussed more in the media and among Canadian securities regulators, we believe it is important to address this concept as it’s all about putting the investor-client interests first!
We view a fiduciary as someone acting in a position of trust on behalf of, or for the benefit of, a third party; and as such, they are required to act in their best interest. This is the view fi360, a US based organization that has developed a set of practice standards for investment fiduciaries.
For this reason, an investment fiduciary is typically held to a higher standard of care than someone who is not a fiduciary.
According to fi360, though, the following considerations are important:
–Fiduciary status can be difficult to determine, and is based on facts and circumstances.
–In general, the issue is whether a person has effective control or substantial influence over investment decisions.
–It is not uncommon for fiduciaries to be unaware of their status.
In Canada, we’ve always known specific wealth management roles – such as trustees and discretionary investment money managers — to be fiduciaries. The grey zone is for broker-dealers and other advisors such as Financial Planners depending upon their legal status.
As a result, Financial Advisors who are not considered Fiduciaries are only held to a Suitability Requirement, which means that as long as an investment product is suitable but not necessarily the best solution for the client, then the job of the Financial Advisor is complete. With the rising standards of care from both clients and regulators, the fiduciary definition is receiving growing discussion and debate in our industry.
In a Consultation Paper published by the Canadian Securities Administrators (CSA Consultation Paper 33-403), the CSA states that acting in the best interest of the client means that the fiduciary must ensure that:
- client interests are paramount;
- conflicts of interest are avoided;
- clients are not exploited;
- clients are provided with full disclosure; and
- services are performed reasonably prudently.
In determining whether someone is a fiduciary, Canadian courts have identified five interrelated factors to be considered when determining whether financial advisors stand in a fiduciary relationship with their clients:
Vulnerability: the degree of vulnerability of the client due to such things as age or lack of language skills, investment knowledge, education or experience in the stock market.
Trust: the degree of trust and confidence that a client reposes in the advisor and the extent to which the advisor accepts that trust.
Reliance: whether there is a history of relying on the advisor’s judgment and advice and whether the advisor holds him or herself out as having special skills and knowledge upon which the client can rely.
Discretion: the extent to which the advisor has power or discretion over the client’s account or investments.
Professional Rules or Codes of Conduct: such rules and codes help to establish the duties of the advisor and the standards to which the advisor will be held.
We believe that with the growing affluence of our society, combined with the rising complexity of wealth management issues and the trusted role that Financial Advisors perform in clients’ financial lives, that it’s time for regulators to re-examine the application of fiduciary standards to various wealth management roles.
The notion of what it means to be an investment fiduciary — an investment professional who acts in the sole interest of their clients – will continue to gain traction in the wealth management industry and the media. Investors are increasingly saying, “I want someone who I can trust and who puts my interests ahead of their own!”
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