One of the issues in wealth advising and planning is the regulation of those who provide financial product sales advice and financial planning services—often offered under the nomenclature of estate planning or retirement planning advice. A lot has happened recently in many jurisdictions, including Canada and the U.S., as regulators grapple with what standards should apply to those who offer such services.
One of the burning issues is whether a statutory “best interests” standard should apply.
Following the lead of the U.K., Australia, and the U.S., some jurisdictions are now considering adopting the “fiduciary rule”. In the U.S., the Obama administration proposed adoption of the fiduciary rule, but the Trump administration ordered a review of the rule which delayed its implementation which otherwise would have come into effect in April 2017. Subsequently, the U.S. Securities and Exchange Commission finalized a rule package on June 5, 2019 that includes a best interest standard for broker/dealers.
Regulation Best Interest requires that a broker/dealer may not put its financial interests above those of a client when making recommendations. It includes a transition period until June 30, 2020, to give firms time to comply, and despite Covid-19, it appears to be on track.
As well, the U.S. Department of Labor’s fiduciary rule was slated to come into effect on June 9, 2019, but it was vacated because of a court decision. It then advised it would issue a revised rule to replace the one that had been vacated. Advisors are waiting to see whether a new improved rule will be proposed to ensure consistency with the SEC’s “Regulation Best Interest”.
Its fiduciary rule required anyone who provides retirement investment advice for a fee to act in the best interests of their clients and that all fees and commissions for retirement plans and retirement planning to be clearly disclosed to clients. Prior to these changes, many U.S. financial institutions had decided to get onboard anyway to implement the best interests rule and they recognized that client expectations demand it.
In the Canadian context, the Canadian Securities Administrators (“CSA”), which is the umbrella organization for 13 provincial and territorial securities commissions, after a lengthy consultation process which examined standards of care and adopting a best interest standard of care to replace the suitability standard, ultimately decided in the last part of 2019 not to do so.
The prior standard only required that clients be dealt with fairly, honestly and in good faith and that investments be suitable. The new obligations will codify “best practices” governing the suitability of investments to be phased in over a two-year period which began in December 2019.
The rules provide that advisors must address material conflict of interests and put the clients’ interests first when determining the suitability of investments. More needs to be done with regard to disclosure of compensation and fees. Ontario and New Brunswick in the face of opposition had originally tried to push for an overarching best interest standard, but then changed course in favour of more targeted reforms.
A robust regulatory environment that protects investors and those receiving financial advice as well as financial and estate planning services is more important than ever, as aging baby-boomers are in, or fast-approaching, their retirement years. In providing such advice, clarity, transparency, and a well-regulated legal framework are needed now more than ever.
It remains to be seen how the CSA and the Canadian financial industry will address disclosure of compensation, no doubt a hot-button issue. What is particularly concerning is how little public and media attention appears to have been given to these issues given the growing need for investment advice for our aging population and to ensure the integrity of retirement planning for Canadians. Here is a rare article, published in The Financial Post, “OSC drops push for ‘best interest’ standard as regulators propose narrower reforms.”
The necessity for objective, independent financial advice in an aging demographic where clients need a secure retirement and unbiased investment advice to achieve it cannot be questioned. There is a broad-based lack of understanding within the public with regard to conflicted advice, hidden commissions, the amount of fees charged, and what their advisors’ obligations are.
Is Canada lagging behind on these issues, given the direction of the U.S., the U.K., Australia, and the EU to adopt either the fiduciary rule or stringent standards and disclosure, in particular when it comes to fees and compensation? Will we be viewed as a backwater when it comes to investor protection and are Canadians getting enough transparency from their financial advisors, particularly when it comes to fees?
– Margaret O’Sullivan