Raising the bar

By Beverly Brooks
Illustration: Cathy Pentland

Financial planning has changed its focus and The proposed fair dealing model could mean more protection for investors

The conduct and ethics of chartered accountants are governed by 10 provincial institutes and one national association. If, however, a CA decides to offer financial planning to his or her clients and is in the business of selling securities or advising clients for a fee, such advising activities are governed by more pro-vincial and national regulators, including 13 provincial or territorial commissions, the Investment Dealers Association and the mutual Funds Dealers Association. In the case of insurance products, advisers must be licenced with the Financial services Commission of Ontario and/ or insurance councils in the other provinces. In addition, in the future a CA who engages in financial planning may be required to adhere to a policy initiative called the fair dealing model (FDM), which will place regulations on the retail investment industry.

The FDM is the Ontario Securities Commission’s (OSC) proposal to bring the regulatory regime in line with the industry’s current advice-driven business model. The OSC regulates anyone registered to trade in securities in Ontario. Although a provincial securities commission initiative, the OSC wants the FDM to be implemented nationally and is working to convince other provincial securities commissions of its merits. The FDM consists of two components: a single licence for all financial service pro-viders (firms or individuals) and a set of business conduct standards. The first phase, which the OSC hopes to im-plement within the next year, will focus on greater disclosure of advisers’ compensation to their clients and require advisers to document and organize their client files in greater detail.

The FDM classifies adviser/client relationships into three categories depending on the amount of advice the investor is seeking:

• a self-managed relationship in which the client places no reliance on the financial services provider other than transaction execution;
• an advisory relationship in which the client is entitled to rely on objective, expert advice from the adviser;
• a managed-for-you relationship where the client relies completely on the representative, who has full discretion and assumes a trustee-level responsibility for all investment decisions.

The conduct standards for advisers become more rigorous as the client’s level of reliance increases. Many other requirements depend on the type of relationship. Proficiency standards vary according to the nature and scope of services provided.

The FDM has three core principles, forming the basis of specific proposals.

• There must be a clear, documented allocation of roles and responsibilities among the investor, the adviser and the firm.
• All dealings with the investor must be transparent. Transparency is disclosure that is understandable and meaningful to an investor and communicated at the time and in the manner most useful to the investor.
• Any conflicts of interest the adviser has must be appropriately managed to avoid self-serving outcomes.

The FDM marks a departure in regulators’ approach to financial planning. For many years, they focused on individual financial products sold to investors, however, as the process has evolved and widened in scope to advice-giving, the OSC has stepped up efforts to regulate the adviser-client relationship. 

Many financial advisers are unaware of FDM reforms and how they will be affected, but advisers should be asking a few questions. 

How will the FDM affect my income and business? Advisers will be required to disclose how they are compensated and the amount of compensation they receive. Such a change is in keeping with the FDM’s main tenets of transparency and disclosure.

One option included in the FDM concept paper, which was released in January, is an outright ban on trailer fees and commissions. This would mean advisers would no longer receive trailer fees and commissions but would be required to charge for their services. Some advisers are concerned such fees would discourage business and would result in adversely affecting commission-based businesses they have worked hard to build. Recognizing these concerns, the OSC has made an effort to reassure advisers that the disclosure of fees is sufficient.

Compensation is a sensitive issue. Many advisers are reluctant to charge fees as clients, unaware that there is a market cost to buy a mutual fund or GIC, may balk at this visible cost for advice.

The FDM may increase financial ad-visers’ administrative costs on a one-time basis because of the more extensive cli-ent documentation requirement, but once that change is made, the adviser’s administrative costs are expected to be virtually the same as they were prior to the FDM. But many advisers would agree that the current Know Your Client form is not very useful, and the new form will provide more investor protection because it will be more reflective of a client’s current financial situation and goals.

What does the FDM mean for the rest of Canada? The OSC, the largest provincial securities commission in Canada, met with many of the provincial securities commissions and industry representatives this summer to explain the merits of the FDM. It is promoting the FDM at two levels — through the chairs of the Canadian Securities Administrators, the umbrella organization that represents the 13 provincial and territorial securities commissions, and through the senior officials of the various provincial securities commissions. Other provincial commissions have, for the most part, shown an interest because this initiative would increase investor protection, a goal of all securities commissions.

Will advisers be required to pass a Financial Planning Proficiency Exam, a concept that was proposed several years ago? The FDM concept paper stresses the importance of increasing proficiency standards but does not address the idea of a proficiency exam. Efforts made several years ago to design and implement such an exam were not successful. A number of professional accrediting organizations already provide professional designations for financial advisers. For example, the Fi- nancial Planners Standards Council offers the Certified Financial Planner designation and has recently released practice standards for CFPs. (Quebec requires that financial advisers have a specific professional financial advisory designation in order to hold out [practice] under the title of financial adviser.) Currently, about 50% of advisers in Canada have no professional designation. Continuing education requirements are, for the most part, viewed as not very demanding. Although many provinces have a minimum requirement in terms of the number of hours of continuing education courses every adviser is required to complete annually, the screening process to determine what constitutes an acceptable continuing education course is not rigorous. For example, motivational speaker presentations qualify as continuing education. One questions how such presentations will improve an adviser’s ability to serve a client better or increase understanding of the economic factors affecting the value of specific financial products. 

Will the FDM change the current registration system? It introduces the concept of a single service licence provider, which replaces the current model of registering financial service providers on the basis of the products they offer. One licence would apply across all relevant business activities. The OSC is not planning to implement this licensing initiative as part of the first phase of the FDM. Instead, the current plan is to release a second paper, probably as a Canadian Securities Administrators policy paper, that will explain how firms and individuals would be licensed under such a system.

Presently, when an adviser registers with the provincial/territorial securities commission, the standards and categories of registration differ from province to province. Except for Quebec, advisers are not required to have specific financial planning designations.

A more rigorous licensing system will increase consumer protection and is expected to be welcomed by those who already have higher standards of education and wish to have financial planners seen as professionals.

Will licensing requirements be broadened to include those in financial planning, not just those selling securities and those providing advice for a fee? It is not clear at this stage whether licensing requirements will be broadened. Changes in licensing requirements will depend on ongoing discussions with the CSA.

How will the FDM affect financial advisers’ existing client files? Files will be required to include more details concerning  an investor’s goals and current financial situation.

Do advisers have an opportunity to provide input to the FDM initiative? The OSC has organized six working groups, which started focusing on different aspects of the FDM last spring. Participants from the financial services industry and the investment community are members of these working group committees. The results of these committee discussions are being taken into consideration by the OSC when deciding which FDM recommendations to implement.

How much will the FDM cost? It’s difficult to estimate costs. The OSC will be preparing a cost-benefit analysis, which is required for every initiative it introduces.

Why is the FDM needed? It will provide greater protection to investors. The FDM takes into consideration that the nature of financial planning has changed from selling financial products to focusing on wealth management and longer term client/adviser relationships. Although the FDM will result in more information being distributed to the client, it does not necessarily mean investors will read and absorb the information.