Since the founding of PWL Capital, we have adhered to the principle that our clients’ interests must come first in all our interactions and decisions.
This means we act according to what’s known as a fiduciary standard of conduct and are accredited as fiduciaries by the independent Centre for Fiduciary Excellence (CEFEX). We have also long advocated for this being the standard of conduct for all investment advisors in Canada.
It may seem like common sense that client interests should come before those of advisors or their firms, but that’s not the case in this country. Instead, advisors are held to a lower standard of conduct—the obligation they recommend investments that are “suitable” for clients.
This leaves the door open to all sorts of bad behaviour including aggressive sales practices and conflicts of interest where investors end up on the losing end and their hopes for a secure retirement are put at risk.
Now, a new study by a group of U.S. researchers provides empirical evidence that investors really do benefit from a fiduciary standard. It found that the fiduciary standard leads to a shift to a lower-fee, higher return investment products.
As a proxy for investments, the researchers examined sales of annuities—products with complex fee structures—by a large financial services company. Using real account data, the study compared annuity sales by broker-dealers in states where a fiduciary duty is in force versus those in states with a lower standard for broker-dealer conduct (suitability).
The study found broker-dealers operating under a fiduciary standard sell substantially fewer variable annuities—investments that are often criticized for their high fees and low-returns as compared to fixed, indexed annuities.
“Annuity products have complex and multidimensional fee structures, and we find that extending fiduciary duty to broker-dealers causes their clients to purchase products with lower fees on many of these dimensions,” the study says. “Moreover, under fiduciary duty broker-dealers steer customers towards products with a larger and more diverse set of investment options that, under several alternative assumptions on the portfolio allocation, lead to improved mean returns.”
For more information on the study, you can read this Investment Executive article.
Canadian securities regulators have resisted calls to bring in a fiduciary standard for advisors, bowing to pressure from the investment industry that argues it will be too onerous.
Yet, the fiduciary standard works well in other countries including Britain and Australia. It is also the law for a portion of the U.S. industry—those designated as registered investment advisors–and just this month Massachusetts joined a growing list of states in proposing it be extended to brokers.
The U.S. study shows in empirical terms what we know at PWL—a fiduciary standard really does help protect investors from bad advice. Other jurisdictions have done it, and now it’s time for those whose job it is to protect investors in Canada to act.