The article “Why It’s Time for Canada’s Financial Industry to Put the Customer First” was originally published on Financial Post on June 16, 2017.
Jason Heath: Why is government hesitating to force advisers to do what is right — to act in clients’ and customers’ best interests?
Scrutiny of the financial industry has been on the rise in recent months, fuelled in part by CBC News reports alleging unscrupulous practices at Canada’s big banks. The CBC’s findings may not have been surprising to insiders, who have been witness to the industry’s indiscretions for years. What is surprising is the government’s continued hesitation to force advisers to do what is right — to act in clients’ and customers’ best interests.
There are benefits to free markets with limited government intervention when open market forces or self-regulation keep businesses honest. But the general public’s lack of knowledge about financial products and financial planning coupled with limited interest in the industry properly regulating itself makes government oversight a necessary evil.
The Province of Ontario has taken the lead recently by flirting with regulation with the establishment of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives. The final report from the Expert Committee, released with little fanfare earlier this year, identified the three biggest risks to consumers as: “the lack of specific, harmonized regulation of financial planning and financial advice; the confusing titles and credentials used by providers of financial planning and advisory services; and the lack of an explicit obligation to act in the client’s best interest.”
The third and final pillar of the Committee’s recommendations is a key consideration for anyone with a financial adviser in Canada: we are not obligated to act in your best interest. And no matter how nice or how seemingly honest your adviser appears, depending on what licensing they have, they are at most held to a suitability standard to recommend advice or products that are suitable for you.
If you compare a non-fiduciary financial adviser to a fiduciary in the health care industry, the significance becomes more clear. Imagine your doctor held three jobs — a general practitioner, a pharmacist and a pharmaceutical company sales rep. Further, imagine the only one of those three jobs that paid him or her was the pharmaceutical company for selling drugs and that different drugs generated different sales commissions.
This is the current state of the financial industry. For the most part, advisers, who are really just salespeople, get paid for selling financial products. Little to no diagnosis takes place up front and the financial prescription that gets written is frequently influenced, whether people admit it or not, by the size of the sales commission.
I am reluctant to paint my entire industry with the same brush because there are lots of good, honest people out there. There are also new business models, a renewed focus on financial planning and other very encouraging developments. But the industry’s broad reluctance to self-regulate by enforcing a fiduciary standard just goes to show you that the majority of those in the financial industry do not want to be required act in a client’s best interest – they just want you to think that they do.
You have to ask yourself, “why?”
Ontario Finance Minister Charles Sousa said after the release of the Expert Committee report that the Ontario government will “examine the feasibility of a statutory best interest duty in Ontario,” but has fallen short of saying that the province will require financial advisers to act in clients’ best interests.
The Chair and Chief Executive Officer of the Ontario Securities Commission (OSC), Maureen Jensen, said in an address to the Toronto Region Board of Trade last fall that “the time has also come to rethink embedded mutual fund fees. Research we published last year found compelling evidence that embedded fees create conflicts (where) funds that pay higher trailing commissions attract more client money, even when those funds are underperforming. In other words, embedded fees incent advisors to select funds with higher fees, regardless of performance of the fund — putting the advisor’s interest ahead of their clients’.”
For the most part, advisers, who are really just salespeople, get paid for selling financial products
The other provinces are closely watching developments in Ontario, the largest province in the country and the epicentre of the Canadian financial industry.
Nationally, the Financial Consumer Agency of Canada (FCAC) has announced a review of business practices in the financial sector that is now underway. It is focusing primarily on one of practices highlighted in the CBC News investigation, involving financial products issued to clients without their consent.
According to FCAC Commissioner Lucie Tedesco, “”FCAC is responsible for enforcing federal financial consumer protection obligations. The law requires that, in order to provide consumers with new or expanded products or increase their credit limits, financial institutions obtain their customers’ prior consent and disclose key information about the costs and charges of the products they are purchasing.”
Earlier this month, Tedesco told the House of Commons finance committee, which is holding hearings into bank practices prompted by the CBC reports, that “If we discover that laws were broken, we will conduct investigations then we will take the necessary measures that include penalties against financial institutions.”
Meanwhile, the Financial Planning Standards Council (FPSC), which is the governing body for Certified Financial Planners (CFPs) in Canada, has been leading the charge nationally to ensure that those who hold themselves out to the public as “financial planners” are limited to those who are professionally certified.
FPSC President and CEO Cary List feels that Canadians deserve a profession of financial planners so that they know that they are not speaking to someone who is just trying to sell them a product. “The big impediment is something that has developed over the past two decades,” says List.
“In the mid-90s, things started to turn and the mutual fund industry claimed the term ‘financial planner.’ The mutual fund salesperson became a financial adviser and that got blurred with a financial planner. Consumers, regulators, policymakers and politicians all started to see the terms as conflated.”
It is important that consumers recognize that bank employees, mutual fund salespeople and insurance agents are often not financial planners. Or even if they are, they may not be acting as a financial planner first and foremost when their compensation is tied to a selection of products they can sell.
It is even more important that policymakers and politicians stop waiting for regulators to do what is clearly in everyone’s best interests by implementing a best interest standard. This standard is the only way to strengthen consumer protection at a time when confidence in the financial services industry continues to reach new lows.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.