Graham Westmacott CFA

Portfolio Manager

Susan Daley CFA

Associate Portfolio Manager
  • T519.880.0888
  • 1.877.517.0888
  • F519.880.9997
  • The Marsland Centre
  • 20 Erb St. W,
    Suite 506
  • Waterloo, Ontario N2L 1T2

The Suitability Industry

May 22, 2013 - 0 comments

A recent US documentary questions whether financial advisors act in their own best interests or their client’s.

We Are What we Repeatedly Do (Aristotle)

The financial industry does not have a great reputation. A recent UK report stated that only 2% of students would consider working in financial services1.   One of the reasons is that it sets itself astonishingly low standards and then fails to meet them. 

A recent PBS documentary aired in the U.S. highlights three areas where investors tend to get exploited rather than serviced by the financial industry: fund fees, the lure of active management, and accountability. We will focus on accountability in the Canadian context.

In Canada, all investment dealers (including PWL Capital) are regulated by the Investment Industry Organization of Canada (IIROC). From their website:

“The Investment Industry Regulatory Organization of Canada is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.” 

Note that IIROC is a self regulatory organization, funded by its members and with leadership from the major banks and Canadian stock exchanges.  IIROC sets and enforces standards for Canadian investment advisors and firms under its jurisdiction through a set of rules. 

The S Word

IIROC stipulates that client’s should be dealt with “fairly, honestly and in good faith” which are sentiments that are difficult to oppose. Many of the subsequent regulations are founded on the idea that the investments should be “suitable” for the client.

Suitable is a word that is required to do a lot of heavy lifting by IIROC, but what does it really mean? According to the Oxford English Dictionary, suitable means:

“right or appropriate for a particular person, purpose, or situation”

The “person, purpose, or situation” is covered by the Know Your Client (KYC) Rule which is an obligation on the investment advisor to learn the financial, personal and investment objectives of the client. What emerges is a spectrum of relationships. At one extreme is a confident client with a track record of investing who treats the advisor as an order taker. In this situation, most of the responsibility for the suitability of a particular investment lies with the client.  At the other extreme is an investor who delegates all the decision making to the advisor and relies on their advice for the portfolio construction and maintenance.   In this instance, the advisor acts as a fiduciary, akin to any other professional advisor (e.g. lawyer, doctor). The fiduciary advisor is obliged to ensure that clients are aware of available options and the potential benefits and risks. In Canada, anyone registered as a Portfolio Manager is likely to be deemed by Canadian courts to have a fiduciary relationship with their clients.

In summary, clients who choose a non-discretionary relationship with their advisor, in which the client approves trades within the account, have less protection than a client that chooses a discretionary relationship.  At PWL Capital we have a strong preference for the fiduciary obligations created, in large part, by acting as discretionary managers with all our advisory teams lead by Portfolio Managers.

What investors really want

What investors really want, of course, is their advisor to put the client’s interests ahead of their own.  On this issue, in the opinion of the author, the current regulatory environment for Canadians is weak and lags a worldwide shift from dispensing advice that is merely suitable to explicitly putting the client’s interests first. The CFA Institute’s Statement of Investor Rights 2 provides a more progressive viewpoint.

The example of fees will illustrate the low bar of suitability.

Fees subtract from investor returns. Thus there is no escaping that, all other things being equal, a higher fee payment to intermediaries (the advisor, the financial institution and the fund companies) will result in a lower return to the client.

Many in the investment industry argue that they can overcome the cost of higher fees with higher returns. Decades of research do not support this contention3, yet it lingers on because it is self serving.  John Bogle, founder of The Vanguard Group, estimated the wealth transfer in the United States in 2004 from clients to the financial industry was $350 billion (or approximately 3% of U.S. GDP)4.   Meanwhile many Canadian investors hold investments with high charges that would meet IIROC’s suitability criteria but maximize the advisor’s wealth, rather than the client’s.

Only 12% of assets in Canada are managed by discretionary advisors5, who have an obligation to put their client’s interests first.  Since many discretionary managers tend only to work with higher net work clients Investor Economics, a consultancy firm, estimate only 3% of all advisors are discretionary managers.

 Why doesn’t every investor seek out a fiduciary? The response to this question posed to a representative of one of the US banks in the PBS documentary was that fiduciary relationships can be more expensive. But more expensive for whom? The only difference between a fiduciary who charges a 1% advisory fee and a commissioned bank advisor who gets a 1% trailer is that in the latter case the client is more likely to find themselves holding expensive mutual funds or other products that may satisfy the suitability threshold but are not in the client’s best interest.

The figure below summarizes the trend outside Canada towards a fiduciary standard that touches not only on fees but all aspects of the client relationship.

In 2012 the UK and Australia announced bans on financial advisors accepting commissions on investment products in order to move the industry closer to a fiduciary model. In Canada the response has been much weaker, with merely new disclosure requirements phased in over 2 years. “Buyer beware” could be here a while.


  3. There are many sources cited on the PWL web site that discuss the limitations of active management. To see a video interview with Eugene Fama who has spent his academic career understanding sources of market returns see .
  4. Successful Investing is a Process, Jacques Lussier, (2013)
  5. Investor Economics, CFA 2012 Annual wealth Management Conference.
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