OSC Reviews Relationship Between Advisors and Clients

OSC – CSA Consultation Paper 33-403 Proposes to Impose a Fiduciary or Best Interest Standard on All Advisors

In response to this proposal we have made the following submission to the OSC

The CSA is reviewing the potential benefits of introducing a statutory fiduciary, or ‘best interest’, standard for securities advisors when they provide advice to retail clients.

OSC roundtable best interest duty investments advisors

The OSC held a roundtable last summer to discuss imposing a ‘best interest’ duty on investments advisors.

The recent report by Laura Paglia of Torys LLP, written at the request of the Investment Funds Institute of Canada (IFIC) and the Investment Industry Association of Canada (IIAC) concludes, “there is no gap in Canada that need be or could be filled by imposing further statutory obligations on investment advisors and dealers.”

In our view, the discussion surrounding investment advisors and their clients has largely ignored the role that capital markets play in enhancing the well-being of the economy.  This role has several objectives, some of which may be in conflict with the objectives of many investors but are nonetheless necessary to allow capital formation and capital allocation to be directed in an efficient manner.

One of the most important roles of the capital markets is to provide a primary market that allows companies to form, raise capital to invest in productive resources.  This function of Initial Public Offerings provides a mechanism that allows the economy to expand.  Companies tend to go public either at very early stages of development or at times when the highest valuation a company can garner in order to expand is available through the public market place.  Secondary issues are also brought to market when management deems that they can get the best value in this manner.  This function often presents a conflict of interest between investment dealers and investors. Investment dealers, which generally include a lead underwriter and multiple other underwriters (also referred to as the sell side firm and the lead “book runner”, with “co-managers”), can take a cut of 3% to 7% of the gross IPO proceeds to distribute shares to investors.  When an advisor calls a client regarding an IPO is she acting in the client’s best interest, the best interest of the company that will receive the funds, or of their employer?

Another role that capital markets play is to provide an efficient market place for investors to buy and sell securities.  In this function, investors have a multitude of objectives ranging from pure speculation to saving for the long term.  It is unfair to categorise investors as one homogeneous group.  Most investment advisors are paid for piece-work; that is, they are paid by the volume of trades that they perform.  Again, this places their interests in conflict with many, but not necessarily all, investors.  Investors have a choice of the type of advisor with whom they can choose to deal.  Many advisors work on commission, but others work on a fee only basis.  Advisor/dealers working on a fee basis may still be in conflict with investor objectives if they are employed by a dealer whose objectives are volume related.

Much of the confusion to the investing public revolves around the fact that many investment industry professionals call themselves advisors or portfolio managers.  The distinction between an advisor/portfolio manager who must sell “suitable” investments and advisor/portfolio managers who meet a fiduciary standard is at best, murky.

There is a set of advisors that through extensive training and examinations, have the ability to manage investor funds on a discretionary basis.  Surely, people acting in this capacity should and must be charged with a fiduciary standard.  They should not be allowed to place themselves in a potential conflict with clients without extensive disclosure requirements.

Current advisors without this extensive training may not always appreciate the nuances of the best interest standard.

In our opinion, a revised regulatory framework should:

  • Make a clear distinction between individuals who meet a fiduciary or best interest standard and those that sell “suitable” investment product;
  • Restrict terms such as ‘advisor’ and ‘portfolio manager’ to individuals with the training and experience to act in the best interest of clients;
  • Prohibit those individual from selling products that present real or potential conflicts of interest, unless very extensive disclosure is present;
  • Indicate that other industry players, including financial planners selling mutual fund products, are selling “suitable” products and are in fact salespersons;
  • Disclose to clients detailed information regarding the remuneration all financial intermediaries.

Financial markets are vital to capital formation and the continued growth of the Canadian economy. The regulatory framework governing financial intermediaries must balance that positive role with the need to protect Canadian investors.

Michael Sprung – Submission Re CSA Consultation Paper 33-403


One thought on “OSC Reviews Relationship Between Advisors and Clients

  1. The OSC has recently announced that it will engage in “mystery shopping” research involving dealers and advisors this fiscal year to gauge the suitability of advice currently being provided by registrants. The purpose of the research is to identify areas of concern that may assist the OSC in targeting future suitability sweeps.

    “Mystery shopping” is a research technique whereby OSC officals pose as potential customers and measure, assess and report on the quality of their ‘shopping experience’ which, in this case, will be on the suitability of the investment advice provided to them by a registrant. The mystery shopper’s specific identity and purpose will generally not be known by the registrant being evaluated.

    The OSC states that once its research is completed, it expects to publish its findings.