Document your clients’ level of financial sophistication

By Rosemary McCracken | January 19 2011 06:20PM

Canadian financial advisors are not subject to a fiduciary duty to their clients by law, which puts an onus on financial advisors to have their paperwork in order.“There’s nothing specific in law that requires an advisor to put a client’s interests ahead of his own,” Ilana Singer, Toronto-based securities lawyer and Deputy Director of the Canadian Foundation for Advancement of Investor Rights (FAIR Canada).
Ms. Singer told Financial Planning Week’s 2020 Vision Symposium in Toronto last October, that Canada’s courts decide on a case-by-case basis whether a fiduciary duty exists. “A court’s determination is based on an examination of the specific facts of each case. Canadian courts have generally found fiduciary duties to exist in client-advisor scenarios where elements of trust, confidence, vulnerability, and reliance on skill, knowledge and advice are present.
“Another factor that courts look to are the professional rules or codes of conduct governing the actions of the advisor,” she added.
Ellen Bessner, senior litigation partner at Cassels Brock & Blackwell LLP in Toronto, said that legislating the formal designation of advisors as fiduciaries is an unnecessary step. “Financial planners need to be honest, trustworthy and put their client’s interest first – and disclose any conflicts of interest,” she said. “The word ‘fiduciary’ doesn’t mean anything.”
Advisors need to document their clients’ level of financial sophistication, Ms. Bessner emphasized. “Paper your file with questions that tell you how sophisticated your clients are. Do they ask intelligent questions that show they’re not asleep at the wheel? Do they read their financial statements? Do they understand them?”
Advisors need to make sure their letters of engagement and investment policy statements clearly outline mutual expectations and the manner in which the advisor is being paid.
And advisors who are only licensed to sell mutual funds and insurance have to tell their clients the parameters within which they can operate, and what their clients’ other options are, Ms. Bessner added.
Because courts look to codes of conduct set by professional associations, these organizations have to set standards for their members’ fiduciary obligations to clients, noted John Murray, Vice President of standards enforcement at the Institute of Chartered Accountants of Ontario.
And the standards need to define very clearly just what putting the client’s interests first means, Mr. Murray added. “Some of the current commission structures could be seen to be violating this principle.”
John DeGoey, Vice President at Burgeonvest Bick Securities Ltd. in Toronto, added that firms that provide financial or other incentives for investing clients in certain products may be causing their advisors to cross the line.