When someone enlists the services of an Investment Advisor, they generally do so after deciding the candidate understands their needs and has an approach compatible with their goals and personality. In many cases they have made the right choice, but what they might not know is their anointed advisor is legally under no obligation to act in their best interests. In Canada, there is no fiduciary duty that requires an Investment Advisor to act in a client’s interests, whereas, in Australia and the UK, this duty does exist.
The refusal of Canadian regulators and the industry to properly address the fiduciary duty issue is unfortunate, particularly in the present environment. Investors increasingly are concerned about the sincerity of commitment by advisors, amid recent calamities such as the massive losses from securities purchased prior to the credit crisis and, in extreme cases, outright fraud committed by unscrupulous advisors.
While the issues of improved advisor-client relations and better disclosure is being addressed by the investment advisory industry through the Client Relationship Model (CRM) initiative, the notion of fiduciary duty is not included in regulations that are being introduced over the next few years. (CRM focuses on four areas: account opening documentation, conflicts of interest management, costs and compensation transparency, and performance reporting.) Moreover, CRM is not ensconced in securities law and instead is being introduced through the self-regulatory organizations, IIROC and MFDA.
More than ever, there is a need to formalize the advisor’s responsibility to act in a client’s best interests. Thus it falls to individual advisors to produce evidence that they have a fiduciary duty in their client relationships. As a result, a number of Canadian investment advisory firms have or are considering obtaining certification by CEFEX, the Centre for Fiduciary Excellence, an independent organization that is in the business of certifying that an investment advisory firm adheres to fiduciary standards as laid out in the CEFEX handbook, Prudent Practices for Investment Advisors. Once obtained, this certification must be reconfirmed through annual audits.
It is important to mention that advisors who hold the chartered financial analyst (CFA) designation, including Portfolio Managers who are members of the Portfolio Managers Association of Canada, are bound by the CFA code of ethics to act in their client’s best interests. There is, however, no audit process in place, initially or ongoing, to verify that a CFA holder is in fact respecting the code of ethics. Thus CEFEX certification is a significant asset to Portfolio Managers as well as Investment Advisors.
Independent oversight by CEFEX will increase the trust a client has in his or her advisor. In a time of financial industry anxiety, trust is more important than ever to firms that provide fiduciary functions and support services.
In terms of business development, CEFEX maintains that its certification gives investment advisory firms a competitive advantage. In particular, it can help increase assets under management. Fiduciaries can differentiate themselves from mainstream advisors because they can substantiate their excellent practices and attract new clients, and reassure existing ones. Advisors who can clearly communicate how they manage investment decisions to a defined fiduciary standard will stand out among their peers.
Clients deserve the respect and high service level that comes with fiduciary duty. Moreover, advisors can only benefit – in terms of professional satisfaction as well as business development – from operating at that level. The mainstream industry’s CRM initiative is increasing investor and news-media attention on how to ensure advisors act in a client’s best interest. That only can be achieved through a fiduciary relationship, which the current industry proposals do not address.
Anthony S. Layton