Should financial advisors be held to a higher standard?
December 15, 2016
The ongoing conversation about how investors should be treated is an embarrassment to the investment industry.
The issue is centered on the rights of investors. How should people who invest their life savings be treated by their investment advisors?
On one side, there is the regulatory body that proposes financial advisors act in the “best interest” of their clients. On the other side, the large companies that make millions of dollars in their wealth management divisions complain a “best interest” standard is not possible.
In the middle of this debate, and in most cases oblivious that the conversation continues, is the investor.
The Ontario Securities Commission has proposed a new rule that would require financial advisors to better serve their clients. Specifically, all recommendations made by advisors must be in the “best interest” of their clients.
Currently, high standard of care is not required. At present advisors are only required to make “suitable” investment recommendations. The two different standards might sound similar however, they are not.
A “suitable” investment recommendation in my opinion is a very lame standard. It just means a recommendation is not unsuitable.
That allows a lot of leeway for an advisor to make any number of investment recommendations.
The gold-standard of care from an advisor is when they put their client’s interests first. That is very simple; do what is best for your client or suffer the consequences.
There was a roundtable discussion in Toronto where industry participants voiced their opinions. One opinion came from the head of the wealth management compliance department of one of the largest Canadian banks.
He said it would be unclear how financial firms could implement new regulatory standards. He went on to say these new “best interest” standards could jeopardize the existing model of providing financial advice.
Respectfully, and in my opinion, I think that comment is totally absurd. Canada’s big banks pride themselves on being global leaders and they have had success in operating their businesses in an increasingly complex, global financial marketplace.
Implementing a “best interest” standard is not a life-changing event for the financial services industry. Doctors, lawyers, accountants, and many other professions have a fiduciary obligation to provide what is best for their clients and are able to deliver that high standard. When required, the professional organizations that govern their members have been able to discipline members who don’t conform.
In summary, clients of those professions have the comfort of knowing that their best interests will be served.
This lopsided conversation about whether deciding for once and for all to do what is right for the client has gone on far too long. It is time for the regulatory bodies that control the financial services industry to increase the standard of care for investor clients.
My opinion is to end this endless debate and have the regulatory bodies mandate a “best interest” standard to protect individual investors.