: David McGruer - Submission

June 12, 2016

Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives
c/o Frost Building North, Room 458
4th Floor, 95 Grosvenor Street
Toronto, Ontario
M7A 1Z1

Dear Expert Committee Members:

My name is David McGruer and I submitted a lengthy comment during the first round and attended the Ottawa discussion. As before my comments are my own and do not represent the opinions of, and I do not speak for any other company or association. My comments in the first round focused on the moral principles required for a free and healthy society and drew a connection between these principles and the type of regulation that is proper in such a society. I used concrete examples to illustrate the fundamental flaws in the principles driving regulation today and called for you to advocate for a re-discovery of the political and ethical principles on which Canada is founded, leading to a major change in the regulation of financial advice. In your preliminary recommendations you touched on only one issue I discussed, the question of how to deal with titles. In my verbal presentation I focused on the need to preserve a wide range of advisor levels so as to serve the widest range of clients, the primary work being done on financial literacy by advisors, the value of setting a standard for designations and above all the need for a profession of financial advice and the enormous risk of forcing a statutory best interest on the advisory community. In neither case did I feel my message was really getting through. Rather than speak in relatively abstract terms as in my first written submission, this time I will try to concretize more and ask you to imagine yourselves engaged in an adventure.

Let me tell you in a story. Imagine you are a financial advisor who has time traveled from the year 1900 to 2016. You look around and see the incredible growth of wealth, health and opportunities that has occurred since 1900 and decide to stay for a while and resume your career as a financial advisor, but in Ottawa instead of your home town of Montreal.

In researching the state of your profession you find out Canada has moved far away from its founding principles that were based on discoveries by great enlightenment thinkers. In your Canada, individual rights and freedoms were at the heart of what defined and animated the country. The ideas of John Locke that shaped law were widely recognized by both Liberal and Conservative leaders, who knew the laws of Canada are based on the Bill of Rights 1689 that it is still in force today in all Commonwealth realms such as Canada. You wonder "how did Canadians forget so much of the enlightenment?"

You try to join a company that has a seat on a securities exchange to resume your career but learn, to your surprise, the power of government and its agencies over the population has multiplied many times over, especially in the business of finance and there are now hundreds of thousands of pages of regulations and rules to dictate minutiae of almost every aspect of the sector. With splits between banking, securities and insurance and further splits along provincial lines, you learn there are now about five dozen federal and provincial regulators presiding over an increasingly expensive and stifling bureaucracy. You can't help but wonder: "Why has Canada adopted so many of the ideas of Karl Marx, Immanuel Kant and their kind when the past century is so full of examples of their failure and destructiveness?"

Taken aback, you decide to learn more about what appears to be the largest regulator, the Ontario Securities Commjssjon (OSC}, created in 1933 to replace the Security Frauds Prevention Act of 1928. You read that the OSC's stated purpose is "To provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets." Further, the OSC's goals are:

  1. Deliver strong investor protection
  2. Deliver responsive regulation
  3. Deliver effective compliance, supervision and enforcement
  4. Promote financial stability through effective oversight
  5. Be an innovative, accountable and efficient organization.

From the point of view of your eighteenth century education, you find this puzzling and contradictory. The great thinkers you learned about in school showed that fairness is meaningless unless it corresponds to justice, meaning it is warranted by the facts of reality. Today, it seems the concept of fairness has been so disconnected from its moral basis it is used to justify all manner of injustices, such as claiming as a right the forcible taking of the effort and product of innocent people. "Have people lost all contact with rational morality?" you ask yourself.

In your Canada the question of improper practices was one for the people engaged in a transaction to determine and those not involved did not have the political power to force either one of you to accept an outside definition of proper or fair.

Where you came from, fraud was clearly a crime and vigorously prosecuted by the police and the court system, who knew that fraud was a form of theft. These days it is claimed that the imposition of rules on honest value traders will somehow deter those who would commit fraud.

In contrast to the present, where government agencies override the reasoning of corporate leaders, financial advisors and their clients, in your time people knew their best and only true preventative protection was education, reasoning and the strength of corporate and individual reputations. In your time, regulation was accomplished mostly by the competitive marketplace for ideas and products, backed by a government whose dominant function was the protection of individual rights to life, freedom and property. The 19th century had conclusively demonstrated the power and morality of this system by unleashing the greatest increase in knowledge, education, business processes, energy, wealth creation, productivity and progress seen in any century in history. Where previously centuries had mostly seen gradual, linear or even negative progress, the century in which you were born had seen exponential growth in all these areas.

Back in your time, economists such as those in the Austrian school had recognized that financial stability is a function of freedom to trade for mutual benefit; that central planning and controls are in fact what creates systemic risk and leads to instability in an economy; that political and economic freedom maximizes the information available in society and optimizes progress. Today the financial world has powerful central controls that create systemic risks and there is a cult-like following of the very spoken words of powerful central planners, in an attempt to guess which way they will twist things next, stifling innovation and progress in many areas. You observe, ironically, that the OSC itself has identified low interest rates and slow economic growth [a direct product of the policies of central planners] as a problem for savers, leading them to invest more in equity markets with their higher fluctuations, causing a mis-match between client investment literacy level and investment choices, leading to higher levels of fear, psychological biases in investing and errors of selection and timing. This naturally leads to more people complaining about investments and investment advisors. Thus, the interference of one central planner in the market leads to problems landing on the lap of other central planners, and the cycle continues. Almost never is the existence of central controls identified as the source of the problems. Instead the freedom of market participants such as advisors is blamed and more layers of regulation are enacted. In your day, great thinkers such as Frederic Bastiat had long ago identified central control as causing the effect known as the law of unintended consequences. 'Why," you wonder, "why has the country moved so far from individual thinking and towards collectivism?"

After learning about the OSC and other organizations ( some of which are called self-regulatory even though they are clearly creatures government control and not born of choices in a free market) you feel severely depressed and then you realize things are about to get a lot worse for financial advisors and their present and prospective clients. You learn of regulatory initiatives underway that will cause massive damage to the future of Ontario. In its 2016-17 annual priorities the OSC mentions that volatility of investment markets remains (somehow they don't realize this is normal, despite decades of historical data) and that more people, especially after the financial crisis of 2007-2009 [caused at root by central planning of mortgage lending practices, housing policy, investment risk rating, banking rules and bankruptcy] are seeking the help of financial advisors. While you know that the seeking of financial advice is a very good thing, you can tell the regulators see this as the reason to engage in still more central planning. They have already recently enforced a list of changes (CRM2) that restrict and limit the possible relationships between advisors and their clients and this will create its own set of unexpected consequences such as greater confusion about the costs of mutual fund investing and financial advice, and will discourage some from using advice.

This is troubling enough to you, but the central regulators/planners are now actively embarking on policies that not only can be shown to be morally wrong because they violate the rights of clients and advisors alike but are known from international experience to severely damage the marketplace, decrease freedoms, reduce financial advice, increase dependency and slow societal wealth creation. They shroud this effort to expand controls in terms such as "investors need to be confident in the fairness of the market", "achieving better alignment between the interests of investors and their advisors", "address embedded commissions" and "asymmetry of financial literacy."

You know that when they say "investors need to be confident in the fairness of the market" they do not mean that there should be a level playing field, that investors should use their own reasoning and judgement to make informed choices and that they should be scrupulous in choosing an advisor, his firm and investments. Rather, they mean investors should rely on a handful of central planners to substitute their judgement for that of millions of free individuals. They do not mean that confidence comes from personal knowledge, reasoning and monitoring but rather that it comes from rules made by central planners. They do not mean fairness as determined by individuals working with advisors for mutual long term benefit, they mean a substitution of the wishes and whims of collectivist lobby groups and regulators for the reasoning of individuals.

You can see that "achieving better alignment between the interests of investors and their advisors" by force is a logical contradiction since the current diversity of compensation mechanisms has evolved through decades of market experimentation to discover and adapt to the precise changing preferences of consumers. Overriding consumer preferences can only create mis-alignments. You further know that "address embedded commissions" means nothing more than central planners, who apparently know better than individual citizens what their preference is, arbitrarily eliminating the overwhelming preferences of the investment consumer.

You clearly see the irrationality in identifying a knowledge asymmetry as a problem when in fact it is the ideal solution. In your education you learned about how the division of labour in a free market leads to a steadily growing body of knowledge and a consequent increase in human capabilities, progress and wealth. In every field where your contemporaries sought professional advice and services, they hoped for the highest possible asymmetry of knowledge because it meant the professional knew far more than they ever would and could thus bring great value to the table of economic exchange. They wanted to enjoy the services of the most knowledgeable engineers, scientists, entrepreneurs, industrialists, educators, tradesmen etc. in every area of life, and to become highly skilled in a specialty of their own so they could create greater value to trade with others. People today seek the same asymmetry. Today's financial advisors have a greater knowledge, greater set of company resources, access to more specialists and a greater amount of valuable information at their disposal than ever before. This is a logical and highly desirable outcome of human progress, not a societal problem for central controls and regulations to forbid, address or overcome.

These things and many more trouble you so greatly you determine to find a way to speak out. As luck would have it, the Ontario government created an Expert Committee to investigate the regulation of financial advice in Ontario and make recommendations to improve it. Although none of these four individuals is a financial advisor, they have legal and professional backgrounds and you hope they are open to reason and have the vision and courage to make major recommendations. You find a way to address the Committee at one of their local appearances.

The central thesis of your short verbal presentation is this: that the greatest change the Committee could recommend is for a change in the basic method of regulation of financial advice in Ontario- away from the total domination by a tangled maze of government agencies and without meaningful representation by the advisory community, towards a profession that is recognized as unique in legislation and which derives its authority from the consent of the governed and its expertise from the very field professionals it both serves and disciplines. You emphasize how your home Province of Quebec has a system such as this that is widely supported and closely matches that proposed by Advocis. You point out that not long ago such an initiative had strong all-party support among the Ontario Members of Provincial Parliament.

Second, you stress that the push for a statutory best interest is being imposed from the outside and will of necessity cause great damage to the advisor-client relationship in many cases. Whereas the current common law duty of care allows for the widest possible range of responsibilities of advisors towards clients, reducing all these to a single, highest standard will put advisors in an untenable position of having to treat all clients as potential liabilities, as individuals lacking the ability to think for themselves, as ignorant even when they are knowledgeable, as potential opponents instead of willing partners in the exchange of values. You highlight how such a standard is a large step towards the banning of the types of advisor compensation most preferred by the public, and other types of distortions that will disenfranchise the public and advisors alike.

Third, you took care to address the issue of the plethora of designations, pointing out the whole issue can be simply and permanently addressed by establishing standard criteria that constitute ANY designation. Such criteria would best be identified by a professional body of financial advisors, and would likely include criteria for identifying an area of specialty, a body of knowledge related to it, a means of demonstrating proficiency with this knowledge and an amount of continuing education required to maintain the designation. There could be different designations or levels of designations to identify degrees of mastery or complexity, such as basic, intermediate and advanced. With this one action, all present designations could be objectively rated and consumers would have a clear way to identify the relevance and value of such designations in their advisor. It would also enable all possible future designations to come into existence as the landscape and consumer preferences evolves.

In your summary, you note that these three things- establishing a profession, allowing for a continuation of multiple levels of advisor duty towards clients and the establishment of a standard for designations, if done thoughtfully and on a proper moral and legal basis, would radically improve the financial services sector, likely more than all efforts to do so in the past combined. This, you emphasize, is the ground-breaking potential of the Expert Committee to improve life in Ontario and its potential to be remembered as an incredible power for good.

You know the regulatory bodies themselves seem impervious to reason and to changes that would improve economic freedom in Ontario by replacing their subjective and arbitrary political power with the objective economic power of a free and competitive market. Yet, hoping your message (which you know is vital to the future of the financial advice sector) has reached the right minds who will then advocate for such changes to the legislators, you go back to doing the work you are so committed to and for which your dients are pleased to compensate you in a mutually beneficial manner- reaching out to, engaging in discussion, educating, identifying needs and goals, recommending strategies to improve lives and helping clients avoid the big mistakes of financial planning.

Your time travel story ends here, but the work of re-shaping the financial advice sector requires much hard work, thinking and rights-protecting legislation in the years ahead.