: Tom Trainor - Submission

June 17, 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, ON
M7A 1ZI

Via email: Fin.Adv.Pin@Ontario.ca

Dear Members of the Expert Committee,

Re: Financial Advisory and Financial Planning Policy Alternatives

I am the Managing Director of Hanover Private Client Corporation, a multi-family office that manages the personal financial affairs of approximately 30 families. I have been an active financial planner for over 25 years and prior to that spent over 1 0 years in institutional finance and accounting.

By profession I am a CPA, CA and CFA. I am also certified as a CFP and CLU. In addition to being a member of the associated professional and certifying bodies, I am also a member of Advocis and the AI CPA and I am regulated by the Ontario Securities Commission (as a portfolio manager) and the Financial Services Commission of Ontario (as an insurance broker) amongst other regulatory bodies.

While I have been an active member in a number of these organizations, my comments reflect my own personal views and not necessarily those of the organizations of which I am a member.

I commend the Ministry of Finance and its Expert Committee for their efforts to strengthen the framework for protecting consumers in the personal financial advisory space. Financial planning has been all too often misused as an illegitimate part in financial product sales to uninformed consumers.

Regulation of Financial Planning in Ontario

I support the regulation of financial planning in the province of Ontario. It is important that any regulation encompass all those who are actively participating in financial planning and not just those who call themselves financial planners.

An important and integral part of the discussion of policy alternatives in financial planning is the role that the professions have and continue to play in financial planning. CP As and lawyers have been providing personal financial planning services for well over a century. CFAs have been involved for more than 70 years. Each of these professions has a substantial percentage of its members participating in various facets of financial planning and private wealth management. Estimates are that more than 30% of Ontario's 85,000 CPAs and more than 40% of Toronto's 9,000 CFAs are active in this area.

While I have no exact knowledge of the legal profession, and I would defer to the members of the Expert Committee that would have a greater knowledge of this, I would suggest that a significant percentage of the legal profession are involved in estate, tax, trust and elements of business law, amongst many other areas of law, that are all key and integral components of financial planning.

Your recommendations contemplate the use of existing financial regulators for those involved in the financial services industry and a separate new organization, Financial Services Regulatory Authority ("FSRA"), for those who operate outside the current financial regulatory regime. You also mention the need to leverage the existing regulatory framework and avoid regulatory duplication.

I would strongly recommend that the Expert Committee leverage the existing regulatory structure by including the professional bodies, CP As, CF As and lawyers, directly in your framework as professional regulators. The professions have a very long history of rigorous and enforceable regulatory frameworks and codes of conduct that they have used for many decades in the oversight of their members. In many cases, the standards are higher than what we have seen with regulated financial entities.

Members of the professions that are doing both financial planning and financial product sales would continue to be regulated by the existing fmancial regulators and also by their professional body while those members of professional bodies who are providing financial planning but are not involved in financial product sales would be regulated solely by their existing professional body.

I would also suggest that the addition of a new regulatory body, FSRA, would not be necessary as the current financial and professional regulatory regimes would be sufficient to oversee most individuals doing fmancial planning. Individuals that do financial planning and that are not covered by a professional or financial regulator could be overseen by one of the existing financial regulators.

Any regulation contemplated by the Expert Committee should also prevent the regulatory arbitrage that currently exists. Regulation should extend to financial planning done with or through banks, insurance companies, investment finns, mortgage brokers as well as those individuals who offer planning services as a professional service with no product solutions. Consumers have neither the sophistication nor the skill set to differentiate between the large number of options available in the marketplace, let alone understand the subtleties of how they are regulated.

Consumers often feel they are receiving dispassionate, unbiased advice when in fact they are frequently being directed into closed sales platforms with limited options. It is important that consumers in such situations be advised that they are dealing with a restricted number of options and that they have an understanding of how the remuneration associated with the advice model is determined.

Harmonization of Standards

There are a large number of disparate individuals, firms and organizations involved in financial planning. Some, like the professional bodies mentioned above, have been involved in financial planning for multiple decades with stringent rules of professional conduct and in-depth bodies of knowledge created by generations of practitioners. Other specialty designations have a shorter history and often have been created for marketing reasons to take advantage of an incorrect perception of dispassionate advice.

With this in mind, financial planning providers generally fall into five broad categories:

  • regulated professionals including CP As and lawyers,
  • non-regulated professionals such as CF As,
  • non-regulated certifications such as CFPs and CLUs,
  • regulated financial service providers which would include those regulated by the OSC, IIROC, MFDA and FSCO, and
  • volunteer member organizations such as Advocis.

Given the broad nature, breadth and depth of financial planning, no one body or organization can claim ultimate domain over the knowledge base associated with financial planning. While some organizations may claim an overarching expertise in all areas, typically their standards and knowledge level would be deemed insufficient by others.

As mentioned above, the professional bodies of CP As, lawyers and CF As have been active practitioners in financial planning for very protracted periods of time, long before the services were referred to as personal financial planning and long before many specialty designations were established. These professions have established the knowledge, skills and abilities for members that practice in this area.

These professions were and continue to be responsible for the initial establishment, development and thought leadership of the body of knowledge that is cumulatively used today in financial planning. They have standards and bodies of knowledge that have been codified and/or incorporated by professional standards of practice.

I would urge the Expert Committee to strongly consider having these professional bodies lead the standard-setting process. These professions have the expertise, knowledge and are at the forefront of developments in financial planning. While I cannot speak for the legal profession, I can say that both CP As and CF As have benefited significantly by working cooperatively and collaboratively internationally to develop and establish standards and bodies of knowledge.

These professions could cumulatively create a standard-setting committee which can advise and determine the appropriate financial planning standards. This committee would be under the direct oversight and administration of the ultimate designated governmental agency (either the FSRA, if established, or another appropriately designated agency). My concern with having the current financial regulators establish standards is that it is not their area of expertise nor do they have any inherent ability to stay abreast of developments in the area.

Statutory Best Interest Duty

I agree that Statutory Best Interest Duty ("SBID") is critical to ensuring that all personal financial planning advice is provided in the best interest of clients. As mentioned above, consumers have little capacity to identify and understand the differing levels of client standards of care and the labyrinth of regulatory oversight. They often are under the false perception that the advisor that they are working with must act solely in their best interests when in many cases the advisors are not required to do so.

Any individual providing personalized financial advice, regardless of the professional or financial regulatory regime under which they work, and including those who do not work under any specific regime, should be required to adhere to a principles-based statutory best interest duty. The enforcement of this SBID can be done through existing professional and financial regulators. For those individuals providing financial planning who are neither a member of a professional or a financial regulator, oversight could be provided by the contemplated FSRA or a designated existing financial regulator.

The following principles should be present and incorporated into the SBID:

  1. Act in the best interest of the consumer;
  2. Maintain objectivity;
  3. Act with due care;
  4. Provide full disclosure of any unavoidable conflicts of interest;
  5. Obtain client consent if an unavoidable conflict exists;
  6. Maintain confidentiality of all client information; and
  7. Disclose the method of remuneration, including any commissions and referral fees.

In 2013 Australia implemented reforms focused on improving the quality of financial advice which included:

  • acting in the best interests of consumers;
  • providing appropriate advice;
  • warning the client if advice is based on incomplete or inaccurate information; and
  • prioritizing the client's interest.

The Expert Committee may find it of interest to review the legislative interpretation in Australia (Corporations Act 2001- Section 9618) of how an advisor must act in the best interest of the client:

Provider must act in the best interests of the client

  1. The provider must act in the best interests of the client in relation to the advice.
  2. The provider satisfies the duty in subsection (1), if the provider proves that/he provider has done each of/he following:
    1. identified the objectives, financial situation and needs of the client that were disclosed to the provider by the client through instructions;
    2. identified:
      1. the subject matter of the advice that has been sought by the client (whether explicitly or implicitly); and
      2. the objectives, financial situation and needs of the client/hat would reasonably be considered as relevant to advice sought on that subject matter (the client's relevant circumstances);
    3. where it was reasonably apparent/hat information relating to the client's relevant circumstances was incomplete or inaccurate, made reasonable inquiries to obtain complete and accurate information;
    4. assessed whether the provider has the expertise required to provide the client advice on the subject matter sought and, if not, declined to provide the advice;
    5. if, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product:
      1. conducted a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter; and
      2. assessed the information gathered in the investigation;
    6. based all judgements in advising the client on the client's relevant circumstances;
    7. taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances.

Note: The matters that must be proved under subsection (2) relate to the subject matter ofthe advice sought by the client and the circumstances of the client relevant to that subject matter (the client's relevant circumstances). That subject matter and the client's relevant circumstances may be broad or narrow, and so the subsection anticipates that a client may seek scaled advice and that/he inquiries made by the provider will be tailored to the advice sought.

Advice given by Australian AD/s [Authorised Deposit-taking Institutions]-- best interests duty satisfied if certain steps are taken

  1. If:
    1. the provider is:
      1. an agent or employee of an Australian AD/; or
      2. otherwise acting by arrangement with an Australian AD/ under the name of the Australian ADI; and
    2. the subject matter of the advice sought by the client relates only to the following:
      1. a basic banking product;
      2. a general insurance product;
      3. consumer credit insurance;
      4. a combination of any of those products;

the provider satisfies the duty in subsection (1) in relation to the advice given in relation to the basic banking product and the general insurance product ifthe provider takes the steps mentioned in paragraphs (2)(a), (b) and (c).

General insurance products--best interests duty satisfied if certain steps are taken

  1. To the extent that the subject maller of the advice sought by the client is a general insurance product, the provider satisfies the duty in subsection (1) if the provider takes the steps mentioned in paragraphs (2)(a), (b) and (c).

Regulations

  1. The regulations may prescribe:
    1. a step, in addition to or substitution for the steps mentioned in subsection (2), that the provider must, in prescribed circumstances, prove that the provider has taken, to satisfy the duty in subsection (I); or
    2. that the provider is not required, in prescribed circumstances, to prove that the provider has taken a step mentioned in subsection (2), to satisfy the duty in subsection (1); or
    3. circumstances in which the duty in subsection (1) does not apply.

Exemptions

Rather than providing an exemption, it should be recognized that CP As, CF As and lawyers as well as those required by licensing and registration requirements (e.g. portfolio managers) meet the SBID. The only exemption should be for those who are mere "order takers" as you have indicated. It is important that the professionals be viewed as an integral part of a comprehensive group of financial planning alternatives. Exemptions can lead to confusion regarding what entities are being excluded from which regulations.

Referral Arrangements

I agree that there must be complete transparency of compensation and referral arrangements at all times. Too frequently consumers are not aware of the inherent conflicts with such arrangements and cannot comprehend the implications of such.

Titles and Holding Out

Consumers are often confused by the plethora of titles and designations used by those advising them. Many of these are courtesy titles and title inflation can often be significant. I agree that these titles should be monitored through the existing professional and financial regulatory framework.

Central Registry

I agree that a central registry would be helpful to consumers to identify the nature and type of individual that is providing them financial planning advice. As part of that registry, it would be important to identify the nature and type of designations reported by the individual to allow consumers to interpret and understand the nature of the credentials and advice that they are seeking. It is also important that such a registry not be used for marketing purposes as an implied endorsement of those in the registry by the regulator.

Financial Literacy and Investor Education

The responsibility for making sound financial decision ultimately rests with the individual. I support the Expert Committee's recommendation of their support of continued efforts to educate the public. I do, however, wish to identify for the Expert Committee the inherent limitations of the capabilities of individuals to manage their personal financial affairs. While they are ultimately responsible, they will require support and advice at critical times in their decision-making process. It is important that financial literacy be recognized not as a replacement for but as a supplement to prudent independent financial planning advice.

Thank you for considering my views and I look forward to following the developments of the Expert Committee. If you would like to discuss any of my comments in greater depth or have any questions, please contact me at 416-594-3222 or TTrainor@HanoverPrivate.com.

Yours truly,

[signed]

Thomas J. Trainor