: Ontario Pension Board - Submission

Via email to Fin.Adv.Pin@ontario.ca

September 21, 2015

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

Dear Ms. Anand and Messrs. Heins, Bates, and Haber,

Re: Financial Planning/Advice Consultation

This letter is in response to the initial consultation document Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives published by the Ministry of Finance on June 24, 2015. OPB previously commented on this topic at the January 10, 2014 roundtable discussion of stakeholders involved in the financial planning and advising sectors as well as through written submissions to the Ministry of Finance dated February 11, 2014. We thank the government for continuing to reach out to stakeholders and for giving us the opportunity to provide our input on the consultation paper.

OPB is the administrator of the Ontario Public Service Pension Plan (PSPP), a defined benefit pension plan sponsored by the provincial government. Our membership consists of certain employees of the Government of Ontario and its agencies, boards and commissions. With $22 billion in assets, 42,102 members, 35,855 retired members, and 5,574 former (deferred) members, the PSPP is one of Canada's largest pension plans.

In our role as PSPP administrator, we have direct contact with the retail wealth management industry. It is this experience that informs our thinking of this topic. We are strongly in favour of increased regulation of Financial Planners in Ontario and believe the recommendations set out below are necessary to protect the retirement security of our plan members and of all Ontarians.

We see the regulation of Financial Planners as a consumer protection issue. There is confusion in the general public about the roles, responsibilities, and loyalties of those who call themselves "Financial Planners", "Financial Advisors", and a myriad of other titles used interchangeably in the industry. We believe individuals whose business is the sale of financial products, rather than the provision of genuine comprehensive financial advice in the client's best interest, thrive in this confusion, often to the client's detriment.

We believe there must be a legal distinction made between those permitted to hold themselves out as "Financial Planners" and who have a fiduciary duty to act in the client's best interest (discussed below) and all other individuals purporting to provide financial advice to the public. This distinction must be clear and must be disclosed to all clients, whether of a Financial Planner or other provider of financial advice.

In the interest of full disclosure, please note that I currently hold the position of Public Director of the Board of Directors of Financial Planning Standards Council (FPSC}. OPB supports my position on the Board of FSPC in part because our organizations align in our belief that further regulation in the industry is necessary. At OPB, we have launched a new Advisory Services program that provides our clients personalized financial advice at critical milestones, such as termination or retirement, and ensures members, former members, and retired members understand how the pension decisions they make will affect their personal financial picture in retirement. We fully support the submission made by FPSC and would like to add the following points from the perspective of a pension plan administrator.

What activities are within the scope of financial planning? Is the provision of financial advice different from financial planning?

We see important differences between the provision of financial advice and financial planning. We consider the services of a financial advisor to relate to a variety of discrete financial issues and, in particular, to the sale of financial products, such as life insurance, mortgages, mutual funds, and securities. Financial advisors in each of these areas often have different skills, competencies, and qualifications specific to that field of expertise.

Financial planning, on the other hand, is a comprehensive service intended to maximize the client's overall financial well-being. While many Financial Planners also sell financial products and can advise on discrete issues, the role of a Financial Planner is significantly broader and more complex than that of a financial advisor. Financial Planners consider the complete picture of a client's financial circumstances and craft personalized strategies to help the client achieve their financial goals. These strategies include investment planning, retirement planning, tax planning, insurance and risk management, and estate planning. Effective financial planning is an ongoing process in which strategies are regularly re-evaluated to account for changing circumstances.

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

There is currently no regulation restricting who can hold themselves out as Financial Planners in Ontario. As noted above, we believe this lack of regulation has led to significant confusion in the general public as to the roles of Financial Planners and financial advisors. We believe there are three main reasons why greater regulation is urgently needed for Financial Planners in Ontario, all driven by an increasing demand for financial planning services.

The aging population

Individuals age SO and above are vulnerable when it comes to organizing their financial affairs; they have limited or no human capital left to generate income from a mistake or a loss. From our experience speaking with our members, it is clear many do not have a proper understanding of financial planning nor what they should expect from a financial plan. They do not know what questions to ask, simply because they do not know what they do not know. Accordingly, there is a large (and growing) need in Ontario for objective and comprehensive financial planning expertise for those in the SO and above age bracket.

The decline in defined benefit pension plan coverage

Defined benefit pension plan administrators are subject to what amounts to extensive consumer protection legislation and regulatory oversight. Defined benefit plan coverage, however, is declining in favour of defined contribution plans. This transformation results in a transfer of risk from employers to employees, a move from collective risk pooling to individual risk bearing, and an increased need for financial products and advice for the decumulation/retirement phase. This means a vacuum in consumer protection coverage is emerging just as the need to protect retail financial consumers is rising.

The need for a minimum level of knowledge and the avoidance of conflicts of interest

Managing retirement planning and finances over a lifetime is so complex that expertise across a wide range of skills and behavioural competencies is a prerequisite to successful outcomes. Without increased regulation, there is no set minimum standard of professional competency required for those holding themselves out as Financial Planners. Without such standards the public cannot be confident that the financial advice they receive is based on sound financial principles.

As noted above, financial advisors primarily provide advice related to specific financial products, whereas Financial Planners are purveyors of comprehensive financial plans. Financial advisors often earn fees based on the volume of assets gathered, regardless of the product's performance or its appropriateness for the client. Such arrangements necessarily create a conflict between the interests of the financial advisor and those of the client. Without enhanced regulation there is nothing preventing advisors operating solely under these arrangements from holding themselves out as Financial Planners. This leaves the client vulnerable to individuals calling themselves Financial Planners whose financial incentives may not align with their own.

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?

Individuals holding themselves out as Financial Planners should have a statutory fiduciary duty to act in the best interest of the client and to avoid conflicts of interest. Further, Financial Planners should have a duty to use all relevant knowledge and skill that the Financial Planner possesses or ought to possess by reason of their status as a Financial Planner. Such legal duty would be similar to that of pension plan administrators under the Pension Benefits Act (Ontario).

The fiduciary duty must extend to instances where the Financial Planner is providing advice related to specific financial products. To permit individuals holding themselves out as Financial Planners to have different loyalties to the client depending on whether they are wearing the hat of Financial Planner or a financial advisor would defeat the purpose of regulation. Any potential conflicts of interest must be required to be disclosed to the client.

To what extent, if at all, should the activities of those who engage in financial planning and/or giving financial advice be further regulated?

While we believe greater regulation is warranted to resolve the public's confusion surrounding the roles and competencies of all individuals providing financial advice, we recognize that such wide-ranging regulation would be a massive and complex undertaking. We see establishing the regulation of Financial Planners as an excellent first step towards alleviating the confusion in the industry and providing some much-needed consumer protection. For that reason, our comments are directed primarily at the regulation of those seeking to use the title of Financial Planner.

Licensing and registration requirements

Licensing and registration requirements for individuals holding themselves out as Financial Planners should be set by the professional body (discussed below) established to oversee Financial Planners. The requirements should address market needs, existing regulations, and international best practices, including initial education requirements, competency assessment mechanisms, practice requirements, ethical conduct standards, and a requirement for continuous professional development.

Education, training and ethical responsibilities

Financial planners should possess the knowledge, skills, competencies and professional judgment required to capably provide objective financial planning guidance at the highest level of complexity required of the profession. Financial Planners' education and training should include public and private pension plans and all of their possible variables with respect to plan and benefit design.

Titles and designations of individuals who engage in financial planning and/or the giving of financial advice

A single, unified set of standards and qualifications should exist for any persons holding themselves out as Financial Planners, so that it is obvious to the public that anyone using the title has the necessary professional competencies and obligations to act ethically and with the best interest of their client in mind. We agree with FPSC's recommendation that these standards match those already in place for Certified Financial Planners in the province.

Costs and other burdens of regulation

Financial Planners should be accountable to a professional oversight body that represents the public interest. The professional body would establish and administer standards of competence, practice and ethics for Financial Planners, which would include the legal obligations set out above.

We support the recommendation of FPSC that the suggested regulation be accomplished by codifying in law the professional structure, governance and oversight mechanisms that already exist in practice for Certified Financial Planners in Ontario, making them a requirement for everyone looking to use the title of Financial Planner. The body would be similar to the self-governing bodies currently in place for lawyers, medical doctors, nurses and dentists in the province. Since this model is self-funded by Financial Planners, there would be no added cost to the Province.

Regulation of compensation

As discussed above, compensation arrangements whereby an individual is compensated by way of fees based on the volume of assets gathered lead to conflicts of interest for the individual between their own well-being and that of their client. As we discussed above, we believe it important that Financial Planners be legally required to act in the best interest of the client at all times; however, if the regulation does not include such a requirement, strict disclosure requirements must be imposed where a Financial Planner sells financial products. We believe the Financial Planner must be required to disclose clearly and in detail how they are being compensated in relation to the client's business.

Complaints and discipline mechanisms

The professional regulatory body should be responsible for taking action against Financial Planners who do not meet the profession's standards, in a way that promotes public confidence in the designation and its oversight system.

What harm(s) or benefit(s) do consumers experience in the current environment?

While our comments have focused on how the regulation of Financial Planners as a profession would help alleviate consumer confusion, there is one issue close to home that we believe urgently demands broader regulation.

Financial advisors frequently press our members to cash out their defined benefit pension plan benefits, with the financial advisor then earning a fee on the assets. Members who withdraw their defined benefit pension plan benefits are at risk of outliving their savings in retirement. We believe such dangerous decisions are often the result of the client not understanding the role and duties of their financial advisor and, accordingly, making decisions driven not entirely by their best interest.

Pensions are highly complex. Our experience suggests that many financial advisors do not have an adequate understanding of the risk-reward trade off they are urging their clients to make and are unable to evaluate the decision solely from the perspective of the client's best interest. We recommend the regulation make advising pension plan members on such defined benefit commuted value withdrawals a restricted activity that only Financial Planners be permitted to perform. Otherwise, we suggest financial advisors unable to provide conflict-free advice be required to advise their clients of same. As a comparison, there is significant disclosure regulation to protect investors who buy $10,000 of a public offering, but there is no regulation to protect similarly vulnerable defined benefit pension plan members from financial advisors who would have them withdraw their benefits from the plan and expose them fully to capital markets risk.

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 believe consumers should have access to a central registry of information regarding those holding themselves out as Financial Planners, including their complaint or discipline history. Ontarians currently have access to such registries for Certified Financial Planners and for professionals such as lawyers and paralegals (the Law Society of Upper Canada), medical doctors (the College of Physicians and Surgeons of Ontario), nurses (College of Nurses of Ontario), and dentists (Royal College of Dental Surgeons of Ontario). Given the impact that financial advice can have on consumers' well-being, its providers should be subject to the same level of transparency as these other professionals.

We believe proper wealth management advice is as important as proper medical advice in terms of social importance. Without proper advice and financial management, these individuals run the risk of outliving their savings in retirement, and putting considerable strain on government social programs in old age.

We appreciate the opportunity to share our views on this important issue. If you would like to discuss anything covered in this letter, please contact me directly at 416.601.4050 or at peter.shena@opb.ca.


Peter Shena
EVP and Chief Pension Officer