FAIR Canada/Hennick Centre Conference: The Fiduciary Standard and Beyond
On March 25, FAIR Canada and the Hennick Centre for Business and Law hosted the first Canadian conference focused on the fiduciary standard in the context of the financial advisor-client relationship. At the conference, the question of whether investment advisors should be required to put their clients’ best interests first was considered in the context of the US proposal to implement a uniform fiduciary standard for all advisors and broker-dealers.
Questions discussed at the conference included:
The conference brought together experts from Canada, the US and the UK. The program’s ultimate objective was to inform and motivate relevant policy initiatives in Canada through discussion and comparative analysis. Click here for full Conference programme and speaker information.
Some of the key issues discussed at the conference were as follows:
1. Role of the advisor needs to be clarified.
Many investors believe that advisors are required to act in the client’s best interests. Both clients and advisors could benefit from greater clarity about the advisor’s role.
In Canada, advisors are currently required to follow a suitability standard, and must act honestly, fairly and in good faith with their clients. But they are not always required to put their clients’ best interests ahead of their firm’s and their own interests. This means that an advisor may offer a client investment advice that, while “suitable” for the client, may be more costly and not necessarily in the client’s best interest.
In the absence of a statutory fiduciary duty or other requirement to put a client’s interests first, clients need to be clearly told that the advisor is selling a product without an obligation to put a client’s interests first. The advisor should also be required to clearly explain all of the fees (and sources for those fees) payable by the investor in connection with the sale of an investment product.
2. Need more clarity in Canada about fiduciary duties.
The law on fiduciary duties in Canada remains unsettled and evolving. A number of Canadian litigators, including Joe Groia, Kelley McKinnon, Ellen Bessner, Laura Paglia and Pierre Pacquet explained that, while there is no fiduciary standard imposed by securities law on financial advisors, it may be possible to find that a fiduciary relationship exists based on the specific facts of a case. Courts have generally found fiduciary duties in client-advisor scenarios where elements of trust, confidence, vulnerability, and reliance on skill and knowledge and advice are present. The principal remedy for the breach of a fiduciary duty in the investment context is the full return of an investor’s funds (including any commissions). It is worth noting that the concept of the statutory fiduciary duty exists for investment fund managers and pension plan administrators.
3. A clear fiduciary duty could be a useful, additional investor protection tool.
Although no consensus was reached about whether the introduction of a statutory fiduciary duty would help with enforceable remedies for investors, it was clear that a finding of a fiduciary duty can be helpful to investors because full compensation is awarded. Janis Sarra (Professor of Law, UBC) noted that a clearly articulated fiduciary duty could also assist advisors in understanding expectations from clients, and ultimately lead to a higher standard of diligence and professionalism in the advisory community.
4. Canada should consider developments in the US and the UK.
Tamar Frankel (Professor of Law, Boston University) and Knut Rostad (Chairman, The Committee for the Fiduciary Standard) discussed the initiative under the US Financial Regulatory Reform Bill, supported by The Committee for the Fiduciary Standard, to introduce a uniform, statutory fiduciary duty for all investment advisors and broker-dealers. Broker-dealers in the US are currently subject to a suitability standard, while investment advisors are statutorily required to follow a fiduciary standard. Knut Rostad highlighted five core fiduciary principles associated with the proposed fiduciary standard:
Peter Smith (UK Financial Services Authority (FSA)) provided a detailed update on the UK Retail Distribution Review, under which the UK hopes to align client and advisor economic incentives by:
FAIR Canada was pleased that the conference inspired and engaged numerous discussions, and looks forward to continuing to engage regulators, governments, academics and market participants on this very important topic.
FAIR Canada Report: Canadian Money Market Funds – Zero Returns
In connection with the notion of advisors putting their clients’ best interests first, FAIR Canada recently published Canadian Money Market Funds – Zero Returns. One of the key recommendations in the FAIR Canada report was that advisors act in their clients’ best interests and consider recommending that clients switch from money market funds (MMFs), which are providing zero or even negative returns, to alternatives like CDIC-insured premium savings accounts, if no other compelling reasons exist to remain invested in MMFs.