What is a fiduciary standard? Putting your financial interests first

Do you know if your investments were recommended in your best interests in terms of risk and long-term sustainability?

It’s natural to assume your investment advisor is committed to act in your best interest. However, this isn’t the case in many advisor-client relationships – particularly when an advisor receives commissions or other sales-based compensation.

You may or may not have heard, but the Canadian investment industry is in the midst of a debate over the extent to which advisors should be legally required to act in their clients’ best interests.

Some players want to limit law

On one side, many major players in the industry appear to be attempting to limit the law’s reach and would prefer to continue operating under something called a “suitability standard.” Under a suitability standard, a firm must have a reasonable basis to believe that a recommended investment is suitable, given the client’s objectives. If this seems cryptic, well, that’s because it is.

On the other side of the debate is the push for what is called a fiduciary standard. Under a fiduciary standard, a firm must put their client’s interests above its own, regardless of its profit ambitions, and act strictly in the client’s best interest. This is a lot less cryptic and open to interpretation and requires a third party audit.

Only some advisors must meet fiduciary standard

At present, only certain types of advisors operate under a fiduciary standard in Canada, including portfolio managers, as designated by the Portfolio Management Association of Canada, and, in Quebec only, financial planners, accredited by the Institute québécois de planification financière.

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

CEFEX-accredited firms adhere to the Global Fiduciary Standard of Excellence, which means they must act in the best interest of investors. To obtain this accreditation, PWL was required to undergo an extensive “best interest” review – and to maintain this status we must be verified through annual audits by CEFEX.

How advisors meet the fiduciary standard

Dealing with an advisor who operates under a fiduciary duty means they:

  • have no conflicts of interest
  • will pursue an investment strategy using products that have only your best interests in mind
  • will place you only in investment products that are cost effective and, therefore maximizing the return on your actual investment

In order to maximize the return on your investment, you need an advisor who has a fiduciary duty, and whose firm makes the clients’ best interest the cornerstone of its philosophy and operations.