: Jamie List - Submission

June 17, 2016
Expert Committee to Consider Financial Advisory and
Financial Planning Policy Alternatives
Frost Building North, Room 458
4th Floor
95 Grosvenor Street
Toronto, Ontario
M7A 1Z1

email: Fin.Adv.Pln@ontario.ca

Members of the Committee,

Much of the submission below is taken from my presentation given on May 20, 2016, at the meeting in Hamilton. I am an independent and accredited financial advisor, and I would like to thank the Committee for inviting me to comment on your preliminary recommendations, both in person and in writing.

Being independent, I have limited resources for research and gathering evidence. Nevertheless, I would urge you to consider this submission and the discussion we had at the meeting (during and after my presentation), as to whether your current course (combining Statutory Best Interest, with market intermediary SRO oversight) is a prudent one.

Much of the interim report is commendable and achievable, and will give Ontario’s consumers clarity and confidence when seeking prudent financial advice and counsel.

However, I am troubled by the committee’s findings about Statutory Best Interest Duty, and deeply troubled by its recommendation that the current regulators are well-suited to be in a position to regulate financial advice.

The Statutory Best Interest Duty principle is sound, in theory. It may give consumers confidence that their interests are being seen to with the utmost integrity. But while often held as an ideal for client-advisor relationships, fully implemented, problems emerge.

At the meeting on May 20th, one of the committee members posed a question to the audience. To paraphrase, the question asked: if best interest duty was already in the code of conduct of many of the organizations in the financial services community, why such significant concern about it being codified?

Immediately, there are a series of thinly veiled responses to this question from practitioners whose responses express concern about limiting compensation.

Casting those aside, there are three concerns that trouble advisors.

First, at the simplest end of the spectrum, there are many advice-giving functions that are best and most efficiently served by delivering a “packaged” or “standard” solution. This could be a product sale, or a standardized piece of advice.

In the face of a Best Interest Duty, the concern is that the solution will be measured only with a simple cost/benefit evaluation. As a result, the advisor becomes concerned that the solution they are recommending can be investigated ex-post and evaluated on that simple function, even though the advisor may have genuinely been acting in what they believed was the best interest at the time. There is the danger that the SBID principle will lead to a price analysis, rather than an outcome analysis.

Second, at the other end of the spectrum of possible outcomes, there is concern that a unilateral principal like Statutory Best Interest limits competitive forces, and that inflates cost and limits choice. Many professions are already priced beyond the mass market; for example, the legal profession.

Legal Aid Ontario’s website notes, in its 2014 fiscal year, the Ontario Government had to subsidize over $711,000,000 for various legal services. Neither Ontarians nor the Ontario Government are likely prepared for the cost and burden of financial advisors with a full Statutory Duty.

The third and most troubling concern comes from the combination of the SBID and the oversight proposed by the committee. The committee has recommended that the existing SRO’s would be tasked with the responsibility of managing this SBID.

This discussion consistently puts advisor-client relationship alone in the crosshairs. The current discourse pre-supposes that the relationship is flawed, but never revisits the fundamentals. The client should also be guaranteed an industry and regulator that puts clients’ interests first.

The current SROs are dominated by large, vertically integrated financial institutions whose primary role is to originate, underwrite, syndicate and then distribute financial products. Their vernacular refers to their advisory population as either “sales,” “distribution” or “producers.”

The committee has recommended that an industry that sells and distributes products is in the best position regulate financial planning and advice. This is not a healthy and vibrant environment for unbiased advice. Financial advice is neither a transaction nor a product.

I had hoped that this committee would unbundle the advice function from manufacturing. Financial Advice is a broad and nuanced topic, and deserves a credible framework where clients can meet and be confident that they are optimizing their outcome.

At the meeting on May 20th, the committee indicated that it felt that recommendation to have the existing SRO’s act as regulator for financial advice would “hold their feet to the fire” and promote more even-handed regulation from those existing SRO’s.

After further consideration to the outcome, I propose that this position is tenuous. The SRO’s feet are not being held to the fire; only the advisors feet are. The SRO’s and their constituent members have no motivation (nor downside) to act in the best interest of the consumer, but the advisor is alone burdened with that task.

Over the past couple of months since the interim report was issued, I have heard the phrase “regulation without representation” mentioned a number of times by different organizations. While that rhetoric is decidedly heavy handed, it does provide a quick and easy explanation of the position in which Ontario’s advisors find themselves when facing regulatory oversight, in general.

Please review the profiles of the leadership at the SRO’s. The boards are dominated by executives of manufacturing and transactional capital markets participants. Since the advisor/client relationship is a stated focus of the regulators, it would seem logical that advisors should be sought out for oversight. However, there are not; they are absent from participating in their regulatory oversight1.

To my knowledge, there is no other profession that is subject to the rigor of a Statutory Best Interest Duty, but restricted from self-regulation. Financial advisors are cited as being in need of external regulatory oversight, and yet other professions are deemed perfectly capable of self-regulation, even with ample transgressions of their own. The Law Society Tribunal website will find a count of 52 hearings initiated so far in 2016 against its members. Statutory Best Interest is no guarantee of altruism, but that profession remains firmly confident they can self-regulate.

The “feet to the fire” argument puts the advisor-client relationship in a position where it could remain in conflict (as a result of the actions of its employer, for instance), but does not offer any remedy or punishment if the SRO and or its member firms act in a way that is in conflict with the SBID. The advisor is left to manage the client relationship and its best interests, but there is no external motivation for the SRO members to do so. In its current form, I think the “feet to the fire” outcome as expressed and envisioned will offer very little conviction for the goals the committee is trying to accomplish.

The simple fact of regulation today is that it is guided primarily by a series of institutions that have been founded on the basis of capital market intermediation. It is no longer the case that the primary function of the client-advisor relationship is to advise on clients’ participation in the markets. The role is much more complex and nuanced than that.

The medical profession is also complex and nuanced, but its professionals, technicians and administrators provide world-class healthcare in Ontario. This committee can ensure that Ontarians receive world-class financial advice. But, if the regulation of advice is given to the current SRO’s, it would be the same as allowing the pharmaceutical companies to regulate the provision of healthcare. That analogy is provocative and loaded with rhetoric, but it is logically valid and provides a good contrast to measure the regulation of financial advice here in Ontario.

If the committee does not remediate the clear industry conflicts as well as the proposed advisory conflicts, then it will have simply treated the symptoms, rather than the root cause.

In hearing the committee speak candidly about its goals, objectives and subsequent findings on May 20th, a very clear paradox has emerged that I don’t think has been reconciled by the committee:

  • On the one hand, the Committee sees a flaw in the system, and appears convinced that they are deeply rooted and entrenched in the current ethos of the advisory and financial services community;
  • On the other hand, the Committee seems to prefer an efficient solution that fits within the confines of the current regulatory framework.

Given the considerable experience and expertise on the committee, I would ask that it revisit this inconsistency in their recommendations. Perhaps the project that the Ministry of Finance has embarked upon requires more complexity than efficient solutions that are easily implemented. I believe the committee is highly capable of presenting longer-term solutions that address all industry conflicts.

Before this committee submits its findings to the Minister of Finance, I would ask it to revisit its solution set and recommendations, and pursue the following objectives:

Prepare a recommendation that provides a more competitive and accessible model for competition than the Statutory Best Interest Duty prescribes;

  • Re-examine the long-term effects of enshrining the regulation of financial advice with the current manufacturing-dominant SRO’s;
  • Recommend the creation of a financial advisory profession that is directly involved in its own regulation, beyond and without restrictions from current regulatory regimes.

Thank you very much for your time and consideration.



Jamie List


1 Of note, the legal profession has more direct representation on these SRO’s boards than do financial advisors themselves.