It’s time for client interests to come ahead of sales targets

I didn’t think a recent report on sales practices at Canada’s big six banks got enough attention in the investment industry. Its conclusions are a wake-up call for those who think we don’t need tougher investor protection in this country.

In the report, the Financial Consumer Agency of Canada warns that the banks’ culture “is predominantly focused on selling products and services, increasing the risks that consumers’ interests are not always given the appropriate priority.”

“This sharp focus on sales can increase the risk of mis-selling and breaching market conduct obligations.”

Bank employees tell horror stories

FCAC’s report came after the CBC reported horror stories from bank employees being pressured to upsell, trick and even lie to customers to meet unrealistic sales targets. The CBC was flooded with 1,000 emails from bank employees after an initial report about practices at TD.

The sales practices referred to in the CBC reporting and the FCAC study covered the full range of retail financial products offered by the banks, including their very large businesses selling mutual funds and other investment products.

The FCAC report comes at a time when other investment industry practices have come under fire.

The Ontario Securities Commission handed hefty fines to three mutual fund companies for giving away trips, tickets to concerts and sporting events, and other lavish gifts to investment advisors to encourage them to sell their funds.

And the investment industry self-regulatory agency recently moved to stop discount brokers from selling mutual funds carrying commissions normally paid to financial advisors. Discount brokers aren’t allowed to provide investment advice. Investor advocate Ken Kivenko estimates discount brokerage clients have been overcharged about $190 million a year.

A rule to put client interests first

Clearly there’s a systemic problem, and it’s time to deal with it. The best way to do that is with a rule requiring advisors to put their clients’ interests ahead of their own.

Acting in clients’ best interest is known as a fiduciary standard, and you might be surprised to learn Canadian investment advisors aren’t already held to it. Instead, they are held to a “suitability standard” that requires them only to ensure that any investment recommendations are suitable given the client’s profile and objectives.

Acting in the clients’ best interest would require advisors to avoid or disclose conflicts or interest like those freebies from mutual fund companies and ensure fees and expenses are optimized so investors aren’t gouged like those clients were by discount brokers.

A fiduciary standard is not some wild-eyed scheme. It’s the law in in the U.S., Australia and Britain.

Action is needed

In the absence of a fiduciary requirement for all types of investment advisors, responsibly minded firms, including PWL, are obtaining independent accreditation as fiduciaries. We are accredited by CEFEX.

The need for a clients’ best interest rule has been debated for years. Recent events show it’s time for action.