September 16, 2015
Expert Committee to Consider Financial Advisory and Financial Planning Policy
c/o Frost Building North, Room 458
4th Floor, 95 Grosvenor Street
Re: Financial Planning/Advice Consultation (the “Consultation”)
We are supportive of the consultation process that the Ministry of Finance is undertaking with respect to financial advisory and planning activities. We believe the lack of regulation of financial planners is an important issue. We would encourage the Ministry to co-operate with the other provinces and territories to ensure that any measures taken would apply across Canada. It is already confusing for investors to understand the categories of registration under the securities registration regime set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, as well as what each category actually means in terms of obligations to that investor. This problem will be exaggerated to the extent any new requirements relating to the financial advisory industry are not harmonized across the country.
In the Ontario Securities Commission (the “OSC”) Notice 11-771 - Statement of Priorities - Request for Comments Regarding Statement of Priorities for Financial Year to End March 31, 2016, the OSC acknowledged the importance of a well-functioning investor/advisor relationship to the economic well-being of Ontarians. As CFA charterholders, we have agreed to uphold the Code of Ethics, which requires us to put the best interest of our clients ahead of our own. As a general comment, we wish to stress the importance of implementing a statutory best interest standard on all persons providing investment or financial planning advice. Such a standard would help ensure that an investment or allocation of financial resources is in fact in a client’s best interests, and would help mitigate concerns relating to potential conflicts of interest, particularly as it relates to decoupling financial or planning advice from sales commissions. The end users of these services, the investment industry and society as a whole would benefit if all professionals offering financial planning and investment advice were held to this high standard.
1. What activities are within the scope of financial planning? Is the provision of financial advice different from financial planning? If so, please explain the distinction.
In broad terms, financial planning generally involves determining an approach to allocating an individual’s or an entity’s financial resources. Typically, the financial planning process will result in a written investment policy or broader financial plan. Such planning tends to be strategic. The financial plan may be adjusted every year or every few years, but usually not as frequently as implementation decisions, i.e. which specific funds or investment vehicles in which to invest. We would consider a financial planner to be anyone receiving compensation, either directly or indirectly, for assisting with this planning process or with any decisions regarding allocation of financial resources.
We do not believe there is a practical distinction between financial planning and providing financial advice. While it would be possible to draw such a semantic distinction, doing so would be counter-productive from the point of view of protecting the end users of these services. Many end users of financial products and services are not going to understand or appreciate distinctions in which some financial planning activities are regulated while others are not, and this could potentially expose the end users to negative consequences if such distinctions were used.
Similarly, we believe it would be counter-productive to attempt to regulate individual titles. If financial planners are regulated, for example, and retirement planners are not, it would be very difficult to educate all potential users on this distinction. Regulation of certain titles would just invite those who wish to avoid the regulatory requirements to invent new titles that are not covered by the regulations.
However, while the adoption of a very broad definition of financial planning is the only way to prevent those who do not wish to be regulated from defining their activities in such a way as to avoid regulation, there is a danger that regulation of financial planning, if it is too broadly defined, may have the unintended consequence of restricting many professionals’ ability to provide the same level of assistance to clients in future as they currently provide. For example, a lawyer assisting a client with estate planning, or an accountant assisting a client with tax planning, or a CFA charterholder assisting a client with an investment policy, may all be providing some financial planning advice. It is hoped that none of these services would be restricted in future by onerous regulatory requirements imposed upon financial planners. We would therefore urge the Ministry to avoid a detailed regulatory framework and use principles-based regulation that fully recognizes the protections already afforded investors and end users of financial planning advice by these various professions.
2. Is the current regulatory scheme governing those who engage in financial planning and/or the giving of financial advice adequate?
We would consider the current regulatory scheme to be incomplete. There are clearly gaps in coverage at the current time, but we feel there has been a lot of positive improvement in regulation achieved by the CSA and provincial regulators over the past several years. Many investment advisers are already required to be regulated under existing securities legislation. The Client Relationship Model has been a significant step forward in the protection of retail investors. And we are hopeful that the on-going initiatives, including the current consideration of a best interests standard and the study of mutual fund fees, will lead to even better investor protection in future. We would therefore urge the government to integrate any additional regulatory requirements with the existing securities regulation rather than merely laying on an additional, possibly redundant, level of regulation.
A major gap in current regulatory coverage arises from the fact that much of the current regulation tends to be product-focused rather than service-focused. This is a significant gap since determining the tactical allocation of an investor’s assets often has a more profound effect on the overall success of a financial plan than decisions regarding which specific funds or investment products in which to invest to implement the plan.
Gaps in regulatory coverage are not limited to retail investors. Consultants to pension funds and other institutional investors who actively assist these institutional investors with all aspects of their investment programs currently are not regulated, and therefore the trustees of such investment funds are entirely left to their own devices in determining the skill, education level, ethics, and possible conflicts of interests, of their advisors.
However, it is the more vulnerable members of society who are most in need of regulatory protection. We were pleased to attend a roundtable last year hosted by the Ontario Securities Commission on the topic of seniors’ investment issues, and it became clear through the discussion at this roundtable that there is a real need to provide many seniors with greater protection, especially since questions of competency may arise later in life, rendering any sort of caveat emptor approach problematic.
3. What legal standard(s) should govern conflicts of interest and potential conflicts of interest that may arise in financial planning and the giving of financial advice?
We believe that the most appropriate overall legal standard for investment advisors and financial planners should be a best interest standard. Investment and financial planning professionals should be required to put the interests of their clients ahead of their own and their employer’s business interests. Given such a general standard, conflicts of interest should not be tolerated.
At the very least, proper disclosure of any real or potential conflicts of interest should always be mandatory. The increased requirements under CRM2 have been a move in the right direction in this regard. However, disclosure alone, no matter how detailed and complete, can never be expected to fully protect the end users of financial planning advice, since the knowledge and information asymmetry may be too great. End users of financial planning advice expect to be able to trust their financial planners without having to conduct extensive due diligence to determine the financial planners’ trustworthiness.
At the current time, many of those with the title of ‘financial planner’ are actually commission-based salespeople. This leads to a systematic conflict of interest which is very much to the detriment of the recipients of these financial planners’ advice. The latest study of the mutual fund fee issue, which was made public earlier this year, pointed out the obvious fact that funds paying higher commissions tended to be recommended more often. If financial planners are regulated, but a high standard of care is not established and the compensation-driven conflicts of interest are not eliminated, the regulation will fail to provide adequate protection to the end-users of these services. In fact, such regulation would be worse than nothing, for it will result in the end-users having a false sense of security, believing their interests are being protected in a way that they are not.
4. To what extent, if at all, should the activities of those who engage in financial planning and/or giving financial advice be further regulated? Please consider the following in your response:
a. Licensing and registration requirements;
We consider the key issues in protecting end-users of financial planning services to be the establishment of an overall best interests standard of care and the elimination of compensation-driven conflicts of interest. Any licensing or registration that does not directly deal with these central issues will be of little benefit to the end-users of financial planning services.
Licensing and registration requirements would be useful from the point of view of establishing basic levels of competency. However, we would urge a simple, cost-effective approach that would recognize the existing credentials of the many professionals working in this area, especially existing registrants, rather than forcing another layer of redundant registration upon these professionals.
With respect to the use of financial designations, we generally agree with the criteria set out by IIROC, which include a rigorous curriculum, an emphasis on ethics, and a method for determining the individual’s current status regarding the designation and whether the designation has been issued by a reputable or accredited organization. In particular, we strongly support the emphasis on ethics, as we believe it is an essential criterion for an investment professional. We also urged in our 2013 letter to IIROC to require dealer members to use objective measures when examining the rigor of each of the financial designations’ curriculum. Such objective measures would include exam pass rates, number of exams, length of each exam, as well as the length and type of work experience required to attain the designation. A summary of such measures should also be published, as we strongly believe the transparency of these objective measures is very important for enhancing investor awareness and protection.
It is important that any additional licensing or registration requirements be simple, cost-effective, integrated with existing regulation, and recognize existing professional credentials so that the compliance costs of such licensing and registration do not outweigh the consumer protection benefits.
b. Education, training and ethical responsibilities;
We believe that the best approach to regulation of financial planning would be inclusive rather than exclusive. There are numerous professional bodies whose services overlap in the financial planning space. A minimum set of educational requirements, training and ethical responsibilities may be established, but we would hope the regulation would recognize and respect the current standards established by existing professional bodies such as the Law Society of Upper Canada, CPA Ontario, the CFA Institute, the Canadian Institute of Actuaries, etc. rather than imposing another set of criteria, which may be less appropriate and possibly less rigorous, on to these professionals.
It would be unrealistic to expect every financial planner to be an expert in every possible aspect of financial planning, so a single uniform educational standard would also be unrealistic. There will be times, for example, when an investment expert will need to bring in the services of a tax expert or a legal expert. A best interests standard would entail any professional sourcing the best possible advice for the client rather than attempting a “do-it-all-yourself” approach.
c. Titles and designations of individuals who engage in financial planning and/or the giving of financial advice;
In 2013, IIROC published a Request for Comments - Use of Business Titles and Financial Designations as set out in IIROC Notice #13-0005. We agree with the conclusions drawn by IIROC from its Dealer Member survey and investor research about the confusion faced by retail investors due to the plethora of titles and designations currently used by advisors. We believe it is an important investor protection initiative to educate investors, to the extent possible, with respect to the qualifications and experience required for various advisor designations, and to ensure that advisors’ titles provide meaningful information to clients, potential clients, and the general public.
It is important that persons providing financial planning services do not misrepresent their qualifications. As part of our comments to IIROC, we indicated that IIROC should limit the choice of titles that can be used by firms in formulating their policies and procedures on the use of titles. An example of such a list would contain a small number of broad categories based on registration type, and a limited choice of variations in titles within each such category based on a clear differentiating factor, such as seniority in the firm, that can be comparable across categories. If the number of possible titles was limited and these titles were used consistently by all representatives and across firms, it would be easier to educate the public on their meaning and would help investors compare advisors at different firms on a more appropriate basis.
However, as discussed in question #1 above, if only those using certain titles are regulated, and others are free to offer unregulated services by using different titles, then such regulation is unlikely to be very effective.
d. Specific activities that should be included or excluded in a regulatory scheme;
As discussed in question #1 above, we do not believe that it is feasible to attempt to narrowly define financial planning. We believe a broad-based definition is the most practical approach, as long as it does not lead to any restriction or diminishment of professionals’ abilities to provide service to their clients.
e. Costs and other burdens of regulation;
We would urge the government to keep the costs and other burdens of regulation to a minimum by relying as much as possible on the existing regulatory framework and by relying on the numerous professional bodies involved in the financial planning area to all self-police their own memberships.
Since professionals from a lot of different professional bodies are currently engaged in assisting their clients with aspects of what would broadly be considered financial planning, we do not feel it would be appropriate to choose any single professional body to act as a self-regulatory organization, especially if this would entail forcing other professionals to have to pay fees to and follow the rules of this single organization or cease to assist their clients with financial planning in future.
In particular, no single professional body should be given a monopoly with respect to licensing or certification of education, training, or ethics. Other professionals would then be faced with having to pass along such costs to their clients, or they would be restricted in the assistance they could provide to their clients.
Also, any single professional body may have biases embedded in its membership. We believe that if there is to be a regulator of financial services, it should be entirely independent of any single professional group. Using the provincial securities regulator in this regard would appear to be the best alternative.
f. Regulation of compensation; and
Most abuses in the financial planning area are likely to arise from conflicts of interest in which the financial planner’s level of compensation is affected by the advice given.
In April 2013 we responded to the CSA Discussion Paper and Request for Comment 81-407—Mutual Fund Fees. In our letter we stated, “To fully protect investors and ensure cost transparency, we are of the view that the payment of trailing commissions cannot be made from the manager to the dealer, but must instead be made directly from the ultimate client.”
The principle here is the same. The only way to effectively eliminate conflicts of interest with regard to compensation is to have all payment for financial planning services come directly from end-user clients. Users of financial planning services should not be placing reliance on any financial planners who are compensated in any way by the providers of financial products. To the extent that the level of compensation may vary based upon the advice given or the financial plan adopted, the financial planning advice is tainted. Mere disclosure of such a conflict of interest is not sufficient.
g. Complaints and discipline mechanisms.
In order to control costs and reduce complexity as much as possible, we would urge the use of the existing regulatory framework wherever feasible. In this regard, there is already a well-developed complaints mechanism through the Ombudsman for Banking Services and Investments (OBSI).
In the same regard, we would consider the Ontario Securities Commission to be in the best position to provide any enforcement and discipline mechanisms as required by the regulation of financial planners in Ontario.
5. What harm(s) and/or benefit(s) do consumers experience in the current environment? Please provide specific evidence to support your views where available.
In general, we feel that most investors in Ontario are receiving valuable financial planning advice from a number of professional sources, although there are undoubtedly some cases of substandard advice. However, we would like to emphasize one of the benefits of the current environment is the fact that a large number of professionals are able to offer assistance to clients in areas that may overlap with pure financial planning.
It would be hard to measure in the retail investor space the effect of any inadequate or deficient financial plans. However, a lot of ‘financial planners’ are also registrants who are compensated for selling investment products to clients, and from time to time these registrants have been found guilty of placing their clients in unsuitable investment products.
Again, most of the current problems we are aware of arise in situations of conflicts of interest, where the ‘financial planner’ is being compensated for possibly churning the client’s account or providing unsuitable advice that will lead to greater commissions or other forms of compensation for the adviser.
We are also aware of situations in which consultants or advisers to pension funds regulated by the Financial Services Commission of Ontario have provided very poor advice to their pension fund clients which resulted in a substantial loss of assets. While the pension funds were considered accredited investors, since these were multi-employer plans, the loss in assets resulted in reductions in the plan members’ benefits, so that it was the less sophisticated rank and file members who had no control over the investment decisions that suffered the financial loss.
6. Should consumers have access to a central registry of information regarding individuals and entities that engage in financial planning and the giving of financial advice including their complaint or discipline history?
While a central repository of information concerning consumer complaints and ongoing investigations might be useful, a full registry might be too costly and burdensome to establish and maintain.
We believe the best protection for the end-users of financial planning advice will be holding all financial planners to a best interests standard. Our fear with this type of central registry is that it implies a caveat emptor approach, where the end-users of financial planning advice are expected to conduct due diligence to ensure that they will not be cheated, or at least that their financial planner has not cheated others in the past. Leaving the end-users of financial planning advice to try to fend for themselves in this way is not the best approach.
We thank you for the opportunity to provide these comments. We would be happy to address any questions you may have or to meet with you to discuss these and related issues in greater detail. We appreciate the time you are taking to consider our points of view. Please feel free to contact us at firstname.lastname@example.org on this or any other issue in future.
(Signed) Robin Pond
Robin Pond, CFA
Chair, Canadian Advocacy Council
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