: CFA Institute - Submission

18 September 2015                                                                                        

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
Email: Fin.Adv.Pln@ontario.ca

Re: Initial Consultation Document

Dear Expert Committee Members:
CFA Institute appreciates the opportunity to comment on the Initial Consultation Document (the “Consultation”) of the Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives (the “Expert Committee”) on behalf of the Ministry of Finance of the Province of Ontario (the “Ministry”). The Expert Committee seeks to increase understanding of the issues relating to the regulation of activities and individuals who offer financial planning, advice and services.

CFA Institute is a global, not-for-profit association of more than 136,000 investment analysts, portfolio managers and other investment professionals, more than 129,000 of whom hold the Chartered Financial Analyst® designation. These members come from 151 countries, and associate with 145 member societies in 70 of these countries and territories. In Canada alone, there are more than 15,000 CFA Institute members associated with 12 societies located in seven provinces. CFA Society Toronto is among the largest CFA society in the world, with nearly 8,800 members and 8,400 CFA charterholders. Our other Ontario-based society, CFA Society Ottawa, has 369 members, including 345 CFA charterholders.

CFA Institute represents the views of investment professionals before standard setters, regulatory authorities, and legislative bodies worldwide on issues that affect the practice of financial analysis and investment management, education and licensing requirements for investment professionals, and on issues that affect the efficiency, integrity and accountability of global financial markets.

Executive Summary

CFA Institute supports the work of the Expert Committee and its goal of providing additional protections for investors and others receiving financial planning and financial advisory services. For more than 50 years, CFA Institute has worked to raise the proficiency and ethical standards of individuals engaged in the investment industry. Our Code of Ethics and Standards of Professional Conduct are an integral part of the CFA examination and require our members to put the interests of their clients ahead of their own and before the interests of the firms for whom they work.

With regard to the Consultation, we believe that any regulatory system established to achieve the goals of the Expert Committee must be transparent in its governance, regulation and operations, and have independent board and regulatory/arbitration panel members to enhance market and investor trust. The best way to achieve these goals, in our view, would be to create an independent standards-setting body for those engaged in financial planning and providing financial advice. This body would create standards for anyone seeking to call themselves financial planners or investment advisers, and could draw on the ethical and professional codes of conduct from various professional organizations, including the CFA Institute Code and Standards. Moreover, CFA Institute believes its members already have proven they have the skills and knowledge needed to be included as an allowed-participant, and granted all privileges or requirements, under any regulatory structure the Expert Committee chooses to recommend. And we support the protection and regulation of certain titles such as adviser and financial planner to ensure that those who use such terms adhere to a standard of loyalty, prudence and care when providing advice to their clients.

We believe gaps exist in the regulatory system, largely due to an emphasis on products to the exclusion of service-oriented regulation. We also support greater protections for elderly clients, and join our colleagues on the Canadian Advocacy Council for Canadian CFA Institute Societies (the “CAC”) in suggesting that any additional rules should be incorporated into existing rulebooks.

The issue before the Expert Committee is one that policymakers throughout the world are seeking to address, as well. Regulators in Australia, the United Kingdom and the United States, among others, have had to consider regulation of financial planning services. While their responses all differed in many technical aspects, each concluded that a new and stand-alone financial planning-based regulatory structure was not needed. Australia, for example, amended its existing regulatory system to increase the standard of care for those engaged in financial planning or financial advice. Regulators in the U.K. eliminated conflicted remuneration schemes and set standards for advisers. In the U.S., a review of the regulatory structure determined that many of the products sold by financial planners already were subject to regulation.

Finally, we do not foresee the need for additional licensing or registration as useful because existing requirements are sufficient to adequately protect investors and oversee products and services used in financial planning and advice. Nor do we support a single required training regimen, credential or curriculum for those engaged in these services, in large part due to the existence of a number of accepted professional designations for individuals engaged in these activities. We do support, however, the idea that financial planners and financial advisers should participate in a central registry such as the National Registration Database.


The Expert Committee has been tasked with providing advice and recommendations to the Ontario government about the advisability, feasibility and the extent to which regulation of financial planning and the giving of financial advice is needed in Ontario. The Expert Committee is considering, among other things:

  • The education, training, proficiency, ethics and enforcement requirements that should apply to those engaged in financial planning and the giving of financial advice;
  • Licensing and registration requirements that should apply to those engaged in financial planning and the provision of financial advice;
  • The legal means, if any, to address conflicts of interest and potential conflicts of interest;
  • The use of titles and designations and whether they should be regulated; and
  • The need for a central registry of information regarding providers of financial planning and financial advice, which could include the ability for consumers to register complaints and have access to the registry.

The Expert Committee also is seeking to consider such factors as investor protections, industry concerns, regulatory efficiency, sensitivity to existing policy initiatives, and enhancing regulatory cohesion and consistency.

Standards of Care for Financial Planning Clients. A key element of any solution to the concerns that have led to the Expert Committee’s creation is the financial literacy of individuals whose savings are at risk. We support such efforts and have an extensive catalogue of materials for individual investors available on our website at at www.cfainstitute.org.

It is improbable, nevertheless, that a majority of current retirees, in particular, and other investors, in general, will learn the fundamentals of investing and finance quickly enough to prevent individual cases of significant loss of savings and investment capital. It is, therefore, imperative, we believe, to develop regulatory structures that increase the standards of care imposed on industry participations. For these reasons, CFA Institute supports the Expert Committee’s review.

For more than 50 years, we have administered the Chartered Financial Analyst program, which has included at its core the CFA Institute Code of Ethics and Standards of Professional Conduct (collectively referred to as the “Code and Standards”). CFA Institute members must annually attest to having adhered to the Code and Standards, which includes a duty of loyalty, prudence and care from members, and requires that they place the interests of clients ahead of their own interests and those of their firms. Our long track record of ethical education is an important reason why we take seriously matters such as those under consideration by the Expert Committee.

Potential Means of Improving Client Outcomes. We believe it is imperative that this effort include a robust regulatory element to address issues in the near term, for the reasons stated above. This is made somewhat easier by the fact that many of the products and services sold by financial planners in Canada are regulated by existing provincial and industry-based regulatory entities already. At the same time, there remain gaps in regulatory coverage that individuals and firms have taken advantage of for the purpose of exploiting certain of their clients. It is these activities that the Expert Committee’s efforts should target.

We are aware that the Expert Committee is considering a set of responses to deal with these kinds of activities. One such option is the creation of a new self-regulatory organization (“SRO”) to address the kinds of activities that fall outside existing regulatory structures. In general, we support SROs as they can be more nimble in responding to new developments in the market. At the same time, if not properly structured, such entities can be used to benefit certain members of the industry, particularly those who establish the SRO. To combat the potential for conflicted interests, CFA Institute has developed a set of recommendations for the governance and oversight of SROs1. Among other things, these recommendations call for the independence of SRO boards and regulatory/arbitration panels as a means of enhancing market and investor trust in such regulatory systems. To further that trust, SROs must be transparent about their financial, governance and regulatory matters, and must be accountable to both statutory regulatory agencies and the public.

One means for achieving this goal we believe would be to create an independent standards-setting body that would create a set of standards necessary for anyone seeking to call themselves financial planners or investment advisers. The Fawcett Report in Australia proposed a similar template in its report to improve the ethical, professional and educational standards of persons providing financial advice. In Canada, we believe, such a body could draw on the ethical and professional codes of conduct from various professional organizations, including the CFA Institute Code and Standards.

As an organization, we stand ready to assist, contribute and participate in whatever structure the Expert Committee proposes. We believe the expertise of our members in the application of our global ethical standards should be useful in addressing the issues currently under consideration.

The Consultation

As part of this effort, the Expert Committee has issued this Consultation. In the pages that follow, CFA Institute provides its responses to the Consultation.

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.

An estimated 30% to 35% of all CFA Institute members are engaged in private wealth activities, and, as a consequence, our organization has a well-established continuing-education program for members related to activities generally included in the definition of financial planning. The Private Wealth Body of Knowledge2 at CFA Institute covers many of these topics, including the following:

  • Planning for cash flow and retirement needs
  • Portfolio construction and revisions
  • Risk management and insurance planning
  • Tax efficiency strategies for estates, gifting, wealth transfers, charitable contributions and education
  • Behavioral finance
  • Management of individual and/or family investment and financial portfolios
  • Asset allocation

Underlying these topics is a comprehensive understanding of the products and services investors can use in the development of a well-considered investment and financial plan. Defining client objectives and risk tolerances within the context of their existing assets and liabilities, cash flows, risks, ongoing obligations, aspirations and future goals, and their willingness and ability to accept the risk of variable outcomes is an important place to start in this process. A best practice is to render a written financial plan that memorializes these dimensions for reference by the client and those s/he may retain to help implement the plan.

Investors, especially individual investors, almost certainly do not recognize a distinction between financial planning and financial advice. There are no regulatory definitions of planning or advice, and it is left to the marketplace to offer services and products that appeal to investors’ perceptions of their needs. Many of those services and products are already subject to regulatory oversight.

2. Is the current regulatory scheme governing those who engage in financial planning and/or the giving of financial advice adequate?

With regard to the current regulatory scheme in Canada, we defer to the insights supplied by the CAC in their submission to the Expert Council. In summary, their views are that:

  • While there are gaps in regulatory coverage, the system has shown improvement in recent years due to the work of provincial regulators and the Canadian Securities Administrators. The Client Relationship Model, in particular, is an important step forward in the protection of retail investors.
  • Current regulation tends to be product-focused rather than service-oriented. This is an important gap since “determining the strategic allocation of an investor’s assets often has a more profound effect on the overall success of a financial plan” than are decisions about specific investment funds or products.
  • There is a recognition about the need for greater protection for senior citizens.
  • The CAC suggests that any additional regulatory proposals and improvements be incorporated into existing regulation rather than within a new and potentially redundant, layer of regulation.

We note that in other jurisdictions, the focus has been on addressing appropriate regulation of financial products and conflicts of interest inherent in the interaction between principals (investors) and agents (financial advisors, brokers, etc.).

Australia. In 2013, the Future of Financial Advice Act reforms were enacted to address a number conflicts of interests. Among the reforms was a ban on conflicted remuneration schemes, including specifically commissions and volume-based payments related to retail investment products. A duty of acting in the best interests of clients was imposed upon financial advisers when providing personal advice to retail clients. Advice providers also were required to renew clients’ agreements to ongoing fees every two years. Annual fee disclosure statements were required, and the Australian Securities and Investments Commission was given enhanced powers to address related issues.

In December 2014, a joint parliamentary committee released a report on its inquiry into proposals to raise the professional, ethical and educational standards for financial advisers, including financial planners. The so-called “Fawcett Report” provided a series of recommendations on how to achieve these improvements, summarized below:

  • Clarify who can provide financial advice by protecting the title and function
  • Improve the qualifications and competence of financial advisers
  • Enhance professional standards and ethics

Both of these efforts had similarities with the review currently underway in Ontario. The first sought to address significant conflicts of interests with financial advisers and financial planners. The Fawcett Report proposed the creation of structures to ensure enhanced ethical, professional and educational standards for those providing personalized investment and financial planning advice to retail clients.

The Fawcett Report would permit different professional associations to seek accreditation and approval from the independent Professional Standards Council. This is a structure that we believe could serve as a template for the Expert Committee as it seeks alternatives to existing oversight of financial advisers and financial planners in Ontario.

Singapore. Singapore requires that anyone holding themselves out as a “financial adviser” be either a licensed financial adviser or exempt financial adviser per the Financial Advisers Act (Chapter 110) enacted in 2001. The scope of regulation of financial advisers is limited to providing advice about investment products, research about investments, sales of collective investment schemes, and life insurance products. The Monetary Authority of Singapore acknowledges that there are other dimensions to financial planning (tax planning, estate planning, etc.) but does not claim regulatory jurisdiction over those services. Licensure involves demonstration of adequate capital, competence, and proving fit for purpose. The MAS maintains a public register of licensed financial advisers and their representatives.3

United Kingdom. In the United Kingdom, the implementation of the Retail Distribution Review took effect in 2013. The main focus has been to eliminate conflicted remuneration schemes, standardize classifications of those who provide financial advice as either independent or restricted. It also set standards of knowledge for advice practitioners that can be satisfied through accreditation by professional bodies and/or independent learning, along with mandatory continuing education.

United States. As a consequence of Sec. 919C in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the US Government Accountability Office conducted a study of the oversight of financial planners. The report, issued in 2011, considered current laws and regulations applicable to financial planners; the frequency of consumer complaints and regulatory enforcement actions against financial planners; and potential changes to financial planner oversight. Below is a summary of the GAO’s findings about current regulation:

  • Investment Advisers. Financial planners providing investment advice about securities, including recommendations and advice about non-securities, owe a fiduciary duty to their clients. These relationships are covered by the Investment Advisers Act of 1940, as interpreted by the courts, and applicable state securities laws.
  • Broker-Dealers. Financial planners making recommendations for the purchase or sale of securities as broker-dealers owe a standard of care to their customers that ensures that advice and products are suitable for those customers. These activities are covered by the Securities and Exchange Act of 1934, the rules and regulations of the SEC and of the Financial Industry Regulatory Authority (FINRA), and state securities laws.
  • Insurance Agents. Financial planners making recommendation for the sale of insurance products are bound by a suitability standard of care similar to that owed by broker-dealers. These are covered by state insurance laws.
  • Variable Insurance Products. The sale of variable insurance products, including variable annuities and variable life insurance, are covered both under rules affecting broker-dealers and insurance agents.

The GAO also considered the frequency of consumer complaints and enforcement actions taken against financial planners. It looked to a number of government agencies and regulators and independent entities for data, including the Federal Trade Commission (FTC), the Better Business Bureau, the SEC, and the North American Securities Administrators Association (NASAA). A summary of these findings is summarized below:

  • The FTC’s Consumer Sentinel Network database found 141 complaints using the term “financial planner” during the five years from 2005 and 2010, though “only a handful” were deemed connected to the financial planning profession.
  • The Better Business Bureau received “relatively few” complaints about financial planners.
  • The SEC received 51 complaints related to financial planners in the year ended October 2010, often related to allegations of unsuitable investments or fraud. The SEC’s Tips, Complaints, and Referrals database indicated 124 allegations related to financial planners in the seven months ended October 2010. Finally, the SEC identified 10 enforcement cases related to financial planning in the year ended August 2010.
  • NASAA, which is an association of state securities administrators, said it lacked a comprehensive database on enforcement actions related to financial planners, but found 36 actions brought by 30 states between 1986 and 2010.

In the end, the GAO did not recommend a new regulatory structure for financial planners and financial planning activities, in large part because a majority of the federal and state agencies, consumer groups, trade associations, academics and financial services firms interviewed said they did not favor an additional layer of regulation for financial planners. The GAO did recommend a concerted effort by insurance and securities regulators to collect information about the extent of problems involving financial planners and financial planning products, and for insurance regulators to study consumer understanding of standards of care with regard to variable insurance products.

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?

The rendering of financial advice, and to a somewhat lesser extent the rendering of financial plans, is susceptible to conflicts of interest. We strongly believe that those who provide financial planning and financial advice owe duties of loyalty, prudence, and care to their customers, and that a best interests duty of care be required of those who provide financial planning and financial advice. The benefit of such a system are that: a) those providing financial planning and financial advice work to eliminate conflicts of interest; b) where that work proves impractical, that such conflicts are clearly disclosed; c) conflicts are resolved in favor of customer’s interests when they cannot be avoided; and d) clear accountability is established for advisers and financial planners so that violations receive appropriate sanction.

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;
(b) Education, training and ethical responsibilities;
(c) Titles and designations of individuals who engage in financial planning and/or the giving of financial advice;
(d) Specific activities that should be included or excluded in a regulatory scheme;
(e) Costs and other burdens of regulation;
(f) Regulation of compensation; and
(g) Complaints and discipline mechanisms.

Financial planning is very rarely offered as a discrete service, and more typically is part of the strategic planning that underpins investment, tax, and estate planning strategies. The financial services rendered pursuant to a financial plan are almost always regulated, and the practitioner who develops and executes a plan is also very likely to be subject to regulation by virtue of the existing regulatory structure that applies to the products and services they offer to their clients. We urge that consideration of any additional regulation take into account the existing robust regulatory structure, and suggest that any marginal benefit to additional regulation of services that fall outside of the current structure is very likely to be outweighed by the costs of harmonization with existing regulations and marginal compliance costs.

We do not view additional licensing or registration requirements as being useful for customers or practitioners. Existing requirements are sufficient to afford customer protection and effective regulatory oversight for the products and services most typically employed in providing financial advice.

We caution strongly against proposing a single training regimen, credential, or curriculum as mandatory for those professionals engaging in financial planning and offering financial advice. Customer needs are diverse and may require expertise in investment analysis, portfolio management, tax planning, estate planning, and risk management (insurance) in varying proportions depending on the customer’s unique circumstances. Customers with more intensive needs in one dimension may prefer a practitioner with training and experience that would be less useful to another client with distinctive needs in other dimensions.

We recognize the value of commitments to professional codes of ethics, including those undertaken by our members to the CFA Institute Code of Ethics and Standards of Professional Conduct. Given the proliferation of professional designations and the difficulty customers may have in discerning differences in the quality of training, disciplinary program effectiveness, and robustness of commitment, we suggest that regulators make attainment of certain professional designations and maintenance of membership in good standing an alternative to other licensing and registration requirements, rather than imposing a requirement for certain credentials or relying on the marketplace to discern between practitioners holding different credentials.

Consistent with our belief in the need for a mandatory best-interests standard of care for those who offer financial planning and advice to individuals, we support regulation of the term “adviser.” We believe that only those who accept a duty of loyalty, prudence and care for their advice to clients should be able to market themselves to customers as advisers. Practitioners whose business models are based on lower standards of care should be forbidden from referring to themselves as “advisers” in the marketplace.

We do not propose a new regulatory regime for products and services rendered as part of financial planning and advice. This reflects our perspective that most financial services are already well regulated, and that a new layer of regulation would impose compliance costs most likely to be borne by customers and offer very little, if any, marginal protection or benefit. We concede that creating a financial plan is not currently regulated, but note that execution of any such plan almost certainly involves products and services that are well regulated.

We believe that mechanisms of redress for investors are already in place, and while there is room for improvement in how these mechanisms operate (see, for example, our report Redress in Retail Investment Markets: International Perspectives and Best Practices) we do not anticipate benefit from imposition of a another new system.

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 the current environment, consumers are most susceptible to harm from conflicts of interest with those who provide advice. Consumers are ill-prepared to discern the different standards of care assumed by their advisers, and find it difficult to identify instances where recommendations and advice are motivated by something other than the consumer’s best interests. In the current environment, those who provide financial advice are not required to refer to themselves in terms that would make it clearer what role they fulfill (i.e. “adviser” vs. “salesperson”) and disclosures intended to identify conflicts of interest are often ignored by consumers as part of “legal boilerplate” language. As a result, consumers often are sold products that are less than optimal for the purpose intended and/or more costly than necessary. In a 2014 survey of CFA Institute members representing a broad cross-section of investment professionals, Canadian CFA Institute members cited “misaligned incentives of investment management services” and “mis-selling by financial advisers” as the two most serious ethical issues facing the Canadian market in 2015.

We are not aware of evidence of more than isolated incidences of harm to consumers from creation of substandard or defective financial plans. Financial planning necessarily involves incorporating uncertainty and even well-crafted plans may ultimately not reflect outcomes that are very unusual or difficult to anticipate. We do not believe that additional regulation would offer additional consumer protection commensurate with the costs of additional regulation that would be borne by consumers.

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?

We see benefit in allowing consumers a single portal to access disciplinary and enforcement information about practitioners. Through our members in Canada, we are aware of the National Registration Database (“NRD”) that currently enrolls all other securities registrants in regard to other Canadian regulatory regimes. Given the existence of a functioning registry for similar activities, we suggest that the Expert Committee look to the NRD as a mechanism to provide investors with relevant information about individuals providing financial advice and engaged in financial planning.

We wish to note that a Register of Relevant Providers was introduced in Australia under the Future of Financial Advice Act. The Register offers consumers a view of practitioner registration information, including education, products that the practitioner may advise on, membership in relevant professional bodies, and details about disciplinary actions taken against the registrant. This, too, may serve as a template for the Expert Committee to employ.

We support the Expert Committee’s research into the issue of whether regulation is needed for those who engage in financial planning and give financial advice. Should you have any questions about our positions, please do not hesitate to contact any of the signatories, below.


Kurt N. Schacht, CFA 
Managing Director, Standards & Advocacy   
CFA Institute 

James C. Allen, CFA
Head, Capital Markets Policy - Americas
CFA Institute

Sue Lemon, CFA
CFA Society Toronto
(416) 366-5755 x222            

Bernhard Eichenlaub, CFA
CFA Society Ottawa
(613) 597-8722


1 See Self-Regulation in the Securities Markets: Transitions and New Possibilities, CFA Institute, 2013.

2 See page 65, title X, Portfolio Management and Wealth Planning.

3 See: http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/
Regulations%20Guidance%20and%20Licensing/Financial%20Advisers/FAQ/ FAQsFAA2May2013.pdf