The article “Why Ontario’s Financial Advice Industry is Fraught With More Issues Than Insiders Are Willing to Admit” was originally published on The Financial Post on July 10, 2015.
It has been almost two years since Ontario first raised the prospect of regulating the financial planning industry. Now all the anticipation is coming to a head as a newly appointed Expert Committee seeks public consultation on how to protect consumers from an industry fraught with more issues than most insiders are willing to admit.
“We are constantly looking for ways to protect consumers,” said Ontario Minister of Finance Charles Sousa. “While many financial services are regulated, financial advisory and financial planning activities are not subject to comprehensive regulatory oversight. The work of the Expert Committee will ensure that … Ontarians are protected.”
It seems curious that the financial industry’s self-regulating bodies have not sought to impose stricter standards for members before this. Instead, Ontario’s primary measure for financial advice is a “suitability” standard — though whom this low standard benefits most is questionable. I would argue that it makes it easier for unscrupulous advisers to take advantage of consumers, since their recommendations must only be suitable and not necessarily in a client’s best interest.
Many professions – accountants or psychologists, for example — have strict guidelines for professional practices. Can you imagine if we only had a suitability standard for doctors or engineers? While it is easy to dismiss financial advice as less critical, it is the foundation of our financial decision making and retirement security, which are vitally important.
When Ontarians think that they are getting financial planning, they may not be getting financial planning at all.
In Canada, only Quebec has education requirements and permits for financial planners. That the Ontario government is now stepping in to change the situation in the province should be a sign to consumers to take notice.
The U.K., the European Union and Australia already have a qualified best-interest standard for advisers.
In the U.S., Registered Investment Advisers are subject to a fiduciary standard that requires them to put clients first. President Barack Obama endorsed a proposal earlier this year to impose the same fiduciary duty upon broker dealers, insurance salespeople and advisers who instead operate under a suitability standard, a move that would make a fiduciary standard universal in the U.S. for financial advisers.
Ontario’s suitability standard for financial advisers is the same as the one Obama is looking to abolish. Suitability in this case does not require advice to be in the best interest of a client or to be the lowest priced or least risky option available; it simply requires advice to be suitable, which is, of course, a very broad definition that benefits the adviser and their company at the expense of the consumer. Time and time again I come across investors in expensive mutual funds who have not been educated about other available alternatives, for example.
Many Ontarians probably think that their financial adviser has their best interest at heart. Hopefully they do of their volition, but there are no professional or regulatory requirements to force advisers to adhere to a best-interest standard.
As a result, significant conflicts of interest exist in Ontario’s financial industry. For example, different products may pay different compensation to advisers, creating financial rewards for advisers for sometimes unsuitable behavior. In this context, I would argue that “unsuitable” behavior theoretically goes against the suitability standard, but in practice, goes largely unnoticed and undisciplined.
Furthermore, when Ontarians think that they are getting financial planning, they may not be getting financial planning at all. The Financial Planning Standards Council states that “a comprehensive (or integrated) financial plan looks at the big picture to consider all relevant aspects of your life, including budgeting, investing, tax, retirement, estate planning and debt or risk management.”
Unfortunately, for many Ontarians, the extent of the financial planning advice they get is why they should have Japanese stock market exposure in their RRSP this year.
According to York University’s Alan Goldhar, finance graduates are generally surprised by how little of their personal finance training gets implemented once they’re on the job. Ninety per cent of graduates do not go on to complete their advanced “Capstone” course because “the industry has jobs for investment sales people, not for professional financial planners,” he says.
In my view, these are a few of the things that the Expert Committee needs to address specifically:
1. The lack of regulation of titles within the financial industry is confusing for consumers. Titles should be regulated so that not just anyone can call themselves a financial planner. Standardized titles would also make it easier for consumers to know whom they are working with across the financial industry.
2. Delineating the two tiers of financial advisers — independent and fiduciary — as is done in the U.K. and U.S could be implemented here. This way, if not all advisers are forced to work as fiduciaries, those that choose to are easily identifiable by consumers.
3. Fee disclosure needs to be explicit. Changes are coming federally with respect to disclosure rules, but financial products are the only products in the world that can dupe purchasers with hidden, embedded fees because you are literally giving all your money to the seller.
4. Tax refunds are a great way to incentivize people to do certain things. The Public Interest Advocacy Centre (PIAC) has suggested in their “Purse Strings Attached” report “the creation of a tax credit for those persons who employ a fee-only financial planner in order to incent investors to move to the fee-only (independent model).”
5. Education is lacking in this province and in this country. Even very intelligent people who are good at whatever it is they do for a living are often very uneducated about their money. The U.K. government has a “Money Advice Service” — an independent service set up by the government — to “help people manage their money” by providing “free and impartial service.” This could be especially valuable for low income Ontarians who may not otherwise be able to afford financial advice, but would be valuable for anyone looking for an unbiased resource.
There is clearly a problem with the financial planning industry if the Ontario government is using valuable resources to contemplate changes. Given the progress in the U.S. and farther abroad, it seems it is just a matter of time before we see similar changes here.
The pace of change will hopefully be accelerated by the Expert Committee, especially if they focus primarily on the position of consumers, for whom “suitability” may be a less suitable standard for advisers than a true fiduciary responsibility.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.