In keeping with industry tradition of backward processes and thinking, I will start with part 2 and then move on to part 1. This is important to reinforce the understanding that the sales discussion is most important and is always front and center. The information component required to make an informed choice will be provided at the end ....for those few who get all the way to the end! Think of it being just like a mutual fund sales conversation where key information is delivered well after the sale is closed.
So let’s get to my main topic: Fiduciary 101:
An advisor is a salesperson. A trusted advisor should be a "fiduciary". What is the difference and why should an investor care?
Starting Premise: For a fiduciary obligation to exist we would need to have a situation where one party has far more expertise, knowledge, access to information, and skill than the second party to a transaction. Now let’s look at the advisor/salesperson relationship with a new prospective investor.
STEP ONE IN SALESPERSON RELATIONSHIP:
The salesperson will:
- proclaim their accreditation and designation from an educational institute (typically Canadian Security Institute ) signifying both knowledge and skill
- explain their experience in the industry and with their current employer to show expertise as an advisor and money manager
- sell their access to current privileged information from company analysts and direct access to mutual fund managers and portfolio experts
The client will:
- Complain they do not understand what happened to their money with the last guy they trusted
- Profess a greater knowledge than they have for fear of looking like a pigeon to be plucked
- Sign whatever they are told to get the process started, regardless of any true understanding of the jargon
- Write a cheque or sign a transfer document
- Abdicate most or all decisions to the new saviour/advisor/salesperson
The salesperson will:
- Prepare a Know Your Client questionnaire to say whatever the salesperson pleases, exactly as they are trained to by their compliance department (department of obfuscation)
- Explain vague terms like “risk” in such a manner as to suggest only morons would claim to be low risk and only vegetables look for conservative returns
- Have the client sign forms to purchase securities being careful to:
o Avoid showing any alternatives that are lower cost
o Maximize the commissions to the salesperson without disclosing amounts or options
o Keep the salespersons employer happy by pushing proprietary securities
o Do everything they can for the client up to the point where an action might infringe on the advisor commissions or the parent company’s profitability
The client will:
- Nod when requested
- Sign where told
- Ignore the poor performance for years before getting frustrated and returning to step one.
WHAT WOULD THE FIDUCIARY DIFFERENCE BE?
- THE ADVISORS FIRM WOULD ENSURE THE ADVISOR HAD PROPER SKILLS AND ACCREDITATION SO THEY WERE NOT EXPOSED TO A LAW SUIT FOR VIOLATING THE FIDUCIARY OBLIGATION TO THE INVESTOR
- THE ADVISOR WOULD REVIEW THE PLANNING NEEDS AND INVESTMENT REQUIREMENTS OF THE CLIENTS SO INVESTMENT DECISIONS WERE BASED SOLELY ON ESTABLISHED CLIENT NEEDS
- THE ADVISOR WOULD STAY UP TO DATE ON PRODUCTS, FEES, COMMISSION STRUCTURES, PERFORMANCE OF SECURITIES AND REGULATORY REQUIREMENTS
- LESS TIME WOULD BE SPENT ON THE ADVISOR STORY AND MORE ON THE INVESTOR STORY
- THE ADVISOR WILL COMPLETE A THOROUGH ASSESSMENT OF THE CLIENT NEEDS, RISK TOLERANCE, AND KNOWLEDGE
- THE ADVISOR WILL EXPLAIN THE K.Y.C. FORMS AND ENSURE EVERY BOX TICKED IS APPROPRIATE
- THE ADVISOR WILL REVIEW THE UNIVERSE OF SECURITY OPTIONS AVAILABLE, DISCLOSE WHETHER THEY ARE RESTRICTED FROM SELLING CERTAIN TYPES OF SECURITIES, AND SELECT SUITABLE SECURITIES FOR THE CLIENTS NEEDS
- THE ADVISOR WILL EXPLAIN THE SECURITIES CONSIDERED, EXPLAIN WHY SOME WERE SELECTED OVER OTHERS, EXPLAIN THE COSTS OF ALL OPTIONS CONSIDERED AND EXPLAIN HOW MUCH THEY PERSONALLY WILL MAKE FROM THE PURCHASE OF THE SECURITIES IMMEDIATELY AND OVER TIME
Conclusion: Oh yeah, I get it now! Being a fiduciary would be a real pain in the butt for a sales person trying to maximize revenue with a quick deal! And yeah, if a client had the full range of product options, profits from hidden fees would be tough to maintain. And of course it costs money to actually train advisors on all the options they need to consider and the licensing they require to sell those other options. In fact, many of the sales persons disguised as advisors would have to spend months and thousands of dollars being trained to meet the new standards.
PART 1: THE CONFERENCE
Based upon the conference discussions, it was clear to me that the usual entrenched positions are still in place. As always, the fiduciary question excites the lawyers who make a living from investor disputes and it excites the investment manufacturers (fund and insurance companies mostly) who make a killing by avoiding fiduciary obligations. The third excited group are the investor advocates and regulators who know fiduciary obligations should be in place but cannot seem to get attention or focus on the issue.
A last comment on the conference would be to lament that the Ombudsman for Banking & Investment is very much an under-funded, under-focused, and under-performing group. The first two “unders” contributing to the third “under”! If an investor was willing to slog through the investment broker/mutual fund advisor complaint process, stick handle through the idiotic Bank employed Ombudsman, and then finally reach the end game Ombudsman for B & I: they would find themselves tired and frustrated from what has been a 3-6 month battle just to get to the starting line.
On the legal front, it was almost embarrassing to listen to the lawyers who work for the big firms. No duty or obligation is so small that it cannot seem far too onerous to enforce on the poor hard working advisor!
Of the distinguished panellists present, Allan Hutchinson of Osgoode Hall was one of the few who seemed to get it! Peter Smith from the U.K. FSA also clearly got it and actually was able to do something about it for U.K. investors. I thank FAIR and the Hennick Centre for making the conference possible. Maybe next time they will find a way to have an independent investor voice on a panel as well as all the official institutions, but overall, a job well done in laying out the size of the opposition faced by investors in Canada!