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Best Interest – Conflict of Interest: The Provision of Financial Advisory and Financial Planning Services

As we look forward in our crystal ball to looming issues on the horizon for 2017, one that certainly comes to the fore is the regulation of those who provide financial advice and financial planning services, often offered under the nomenclature of “estate planning” or “retirement planning” advice.

There is a lot of movement afoot as Ontario and other Canadian provinces grapple with how best to regulate those who offer financial advice and financial planning services given the lack of a comprehensive legal framework to do so.

One of the burning issues is whether a “best interests” standard should apply. Presently, there is no express obligation for those who provide financial product sales and advice (as opposed to portfolio managers) and financial planning advice to act in the client’s best interest. Financial planning as an activity is not subject to a general regulatory framework, and the provision of financial product sales and advice generally is subject to know-your-client and suitability requirements. A number of financial industry groups have recommended adoption of a best interests standard, in line with current changes in other major jurisdictions, including the U.K. and the U.S., as well as the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives appointed by the Ontario government in its preliminary recommendations of April 5, 2016.

The concern is that many clients believe and have the expectation that the financial advice and financial planning services they receive are based on their best interests, with no understanding that their advisor may in fact have a conflict and not be providing objective advice, in particular where his or her compensation is a commission or other financial reward based on sales.

The best interests standard is one we as trust lawyers are well acquainted with, as it is derived from the law of equity and fiduciary relations. One of the fundamental requirements of a fiduciary is that he or she not place himself or herself in a position where his or her self-interest might conflict with his or her duty of loyalty to act in the best interests of his or her client or other person to whom the duty is owed.

Those involved in the professions are well-schooled in the fiduciary obligation owed to one’s client. The category of fiduciaries includes lawyers, accountants, directors, agents, public officials, partners and others. There is a key difference between providing objective advice based on a best interest standard and “making a sale”. The societal basis for creating the professions is arguably to place important and essential work into a protected class where the interests of the person receiving the service must always come first, and the rough and tumble buyer-beware profit-focused rules of the market place should not interfere.

No doubt, a robust regulatory environment that protects investors and those receiving financial advice and financial planning services is more important than ever as aging baby-boomers are in, or fast-approaching their retirement years. Requiring complete transparency is only fair. The need for independent, objective financial advice which often has a profound impact on important life decisions, in particular in financial planning, is critical for society in general, and clarity and a well-regulated legal framework is needed to support it.

We would like to take this opportunity to extend to all our readers a joyful holiday season and good health, peace and prosperity for 2017.

– Margaret O’Sullivan

Please watch for our next blog post on special needs planning.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.