Ontario Securities Commission Considers Imposing ‘Best Interest’ Standard on Brokers

Ontario Securities Commission Considers Imposing ‘Best Interest’ Standard on Brokers

Ontario Securities Commission roundtable best interest duty investments advisors

The Ontario Securities Commission held a roundtable to discuss imposing a ‘best interest’ duty on investments advisors.

Last week, while investors were focused on US Fed Chairman Ben Bernanke’s comments about ‘tapering’ or reducing QE—and the market turmoil that followed, the Ontario Securities Commission held a roundtable to discuss imposing a ‘best interest’ duty on investments advisors. The Investment Industry Regulatory Organization of Canada (IIROC) that represents advisors, is against imposing a duty on firms and their representatives to act in the best interest of clients. Instead, IIROC suggests improving compliance with the existing ‘suitability’ standard.

To understand the difference between a ‘suitability’ and ‘best-interest’ standard, imagine you are looking to purchase a new laptop. You visit an electronics store looking for advice. The salesperson recommends a $1,200 model with an expensive extended warranty. This package generates the highest commission for the salesperson. The laptop is suitable—i.e. it will satisfy your needs—but it is likely not the best solution for you. Imposing a disclosure obligation is not likely to stand in the way of a motivated salesperson. On the other hand, if the salesperson were bound by a ‘best-interest’ standard, he or she would likely recommend a $500 or $600 laptop that would meet your needs.

You may not think the same thing can happen in your investment account, but consider mutual funds. The management expense ratio of mutual funds in Canada varies between 1% and 3% or more. (MER is the sum of the management fee plus trading commissions, marketing and legal expenses and other costs.) Imagine two funds that meet your investment objectives, one has an MER of 1.5% and the other 2.7%. The one with the 2.7% MER pays advisors more.   Both would pass a “suitability” test, but only the one with the lower MER would most likely meet a best interest standard.

The core of the problem is that financial sales people in Canada can call themselves advisors, regardless of their professional designation. Investors assume they are compensated for providing advice. In reality, most are paid commissions either by their employers or fund managers to sell products, rather than for providing advice. That is exactly why IIROC is resisting the imposition of a ‘best interest’ duty on investment advisors. Not only would it reduce advisors incomes, it would curtail the ability of firms to direct advisors to sell highly profitable products.

With IIROC opposed, it will likely take a number of years for the OSC to impose a ‘best interest’ duty on investments advisors.  How can investors protect themselves now?

It is a source of pride for us that we are discretionary investment managers, not brokers. Sprung Investment Management is committed to meeting a best interest or fiduciary standard. A fiduciary standard (already the norm for accountants, lawyers and some other professionals) is a legal requirement that an adviser must put the client’s interests first. We have no hidden relationship with any broker or fund manager. We receive no fees or commissions from any broker or fund manager.

Read more about our investment management approach here>>

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One thought on “Ontario Securities Commission Considers Imposing ‘Best Interest’ Standard on Brokers

  1. You have hit the nail right on the head. In the future, compelling a feduciary responsibility for professionals in the industry will be critical to ensuring investor confidence. But, as for now, the void of clearly defined agency is an enourmous flaw in the system – permitting FI staff financial motivation acting for both the client and the product provider… but the providers pay better. This leads to over traded accounts, under performing investments and generally puts the client in a situation exposed to institutional risk.

    The only short term solution prior to well drafted and well enforced regulation is knowing your representative and how well they personally treat their clients. Like you, certain advisors are well recommeded for their client focused ways. But, engaging with a broker whose name is found just in passing, without any real knowlege of the person and his firm, continues plague this industry and makes for bad stories about the profession.

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