If you’ve spent some time on this site, then you probably already know that I’m a big proponent of DIY investing. Becoming a DIY investor is much easier than many people think, and if you’re just starting out on your investing journey, I highly recommend going this route.
However, if you’re already working with a financial advisor, then you’ll want to determine if he or she is a fiduciary.
What is a fiduciary?
According to the Canadian Securities Administrators (CSA) a fiduciary duty is defined as “a duty of a person to act in another person’s best interests”. In the world of financial advisors, this would mean an advisor who is also a fiduciary has a legal and ethical responsibility to act in their client’s best interests.
This is really important, because it means that a fiduciary has to block out all outside factors that could influence their recommendations and actions for their client and simply focus on what is best for their client.
Are all financial advisors fiduciaries?
Unfortunately, the vast majority of people using the “financial advisor” or “financial planner” titles are not fiduciaries and therefore are not bound to act in your best interests.
To make matters worse, they may have very little money management knowledge or experience. Quite often, the training that they have received focuses only on the operational aspects of how to open investment accounts (RRSPs, TFSAs, non-registered investment accounts) and how to sell mutual funds to clients without getting sued.
In an effort to address this situation, after years of foot dragging, Ontario’s Financial Services Regulatory Authority (FSRA) is finally taking action to enforce minimum training and credentials as a prerequisite for using the financial planner or financial advisor title.
“Until now, there has been no regulation of the usage of Financial Planner or Financial Advisor titles. This has contributed to confusion among consumers, and questions about the expertise of individuals offering financial planning and advisory services…”
Huston Loke, Executive Vice President, Market Conduct, FSRA
The situation is similar in other provinces across Canada.
These changes are being phased in over the next few years, but they don’t go so far as to require financial advisors and planners to act under a fiduciary standard. Sadly, the goal is only to set minimum standards for education and knowledge regarding investments.
So, the next time you go to your bank to buy mutual funds during RRSP season, keep in mind that the person helping you may have a name tag that says Financial Advisor, Financial Planner, or Financial Services Representative, but they are not required to act in your best interests. And they may not even be very knowledgeable about investments.
What makes a financial advisor a fiduciary?
The Canadian Securities Administrators (CSA) has outlined in Consultation Paper 33-403 five required elements a financial advisor must abide by to be considered a true fiduciary.
Think of this as a checklist of standards you would want any financial advisor to follow.
1. Client interests are paramount.
“Fiduciaries must place their clients’ interests ahead of their own.” The CSA calls this element foundational as the other four elements flow directly from this core element.
They also highlight that this element means that for a fiduciary there can be no “balancing” of interests between the advisor (and/or their employer) and the interests of the client. This resonates with me personally as I recall from the banking world that there was an ongoing struggle to balance the needs of customers, employees, and shareholders.
This struggle to find a balance between the 3 stakeholders (customer, employee, shareholder) is going on all the time inside Canada’s major banks.
For a true fiduciary, it would be straightforward and simple – the client’s needs come first.
2. Conflicts of interest are avoided.
A fiduciary must avoid placing themselves in a position of possible or potential conflict of interest with their client. This means that incentives need to be aligned to, and support, the interests of clients. Product level sales targets and larger payouts for sales of more profitable products are incompatible with this objective.
The CSA also points out that simply disclosing a conflict of interest, doesn’t cure the conflict of interest in terms of the client/advisor relationship.
3. Clients are not exploited.
“Any personal pursuit inconsistent with the best interests of the client” must be avoided.
4. Clients are provided with full disclosure.
“This means that fiduciaries must take reasonable steps to ensure that clients are aware of the available options and the potential benefits and risks associated with them.” Risks are part of investing, but clients need to be aware of the risk/reward trade-offs inherent in various investment options.
This includes the risk of being too conservative regarding investment choices. Being overly conservative, especially for younger investors, can put at risk the investor’s goal of building a certain level of wealth and achieving their goal of financial independence.
5. Services are performed reasonably prudently.
“Fiduciaries must ensure that they perform their services with the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances.”
How can I confirm if my financial advisor is a fiduciary?
This would be simple if there was a law requiring financial advisors and planners to act as fiduciaries, but unfortunately that doesn’t exist. One thing we know for certain, though, is that bank and insurance company employees are not fiduciaries. These two groups cover the majority of financial advisors and planners that most Canadians deal with.
In addition, most advisors and planners with the large financial planning firms such as IG Wealth Management (aka Investors Group), and Edward Jones, are also not fiduciaries.
If you’re unsure, you can always ask your advisor if the are a fiduciary and what code of conduct they follow.
What level of care do big bank financial advisors provide?
If financial advisors with the big banks, as well as advisors at other large wealth management firms and insurance companies, are not fiduciaries, what level of care do they generally aim for?
They are focused primarily on product suitability.
For an investment advisor, the suitability standard of care can be a much lower bar than a fiduciary standard of care. Under the suitability standard, a recommended investment product doesn’t have to be the highest quality or the lowest cost, it just needs to be “suitable” given the investor’s stated level of risk tolerance and their investment goals.
This gives the investment advisor the flexibility to recommend a higher fee product, or one that offers the best sales commission, while still meeting the suitability requirement.
What should I do if my financial advisor isn’t a fiduciary?
The best course of action would be to become your own financial advisor. That way you ensure that the client ALWAYS comes first and there are no conflicts of interest.
I can’t stress enough how easy it can be to manage your investments yourself. But, if you’re not quite ready for that, you could try a robo advisor such as Wealthsimple (no affiliation). With a robo advisor you’ll still pay some management fees, but they’ll be much than what a financial advisor would charge. You’ll also get some experience investing in ETFs, which again, have much lower fees than the mutual funds a financial advisor would most likely get you into.
Then, over time, you can transition to managing your investments yourself. This is the best position to be in if your goal is to achieve financial independence.
The bottom line.
Fiduciaries are required to act in the best interests of their clients. Unfortunately, most financial advisors and planners in Canada are not fiduciaries and therefore are not required to act in your best interests.
Don’t assume an advisor will act in your best interests just because they seem like a nice person. Behind the scenes, they are most likely trying to balance your needs with their own needs (earning a commission or bonus, or getting a promotion) as well as the needs of their employer (increasing profits).
Generally, your best option is to manage your own investments. Keep in mind that no one out there, not even a fiduciary, is going to care as much about your money as you do.
If you need more time to get comfortable managing your own investments, an alternative is to leverage a robo advisor initially and over time move your investments into your self managed investment accounts.