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Lack of regulation impacts consumer protection

By Rosemary McCracken | December 19 2011 04:39PM

An unregulated financial services industry and its current compensation structure present barriers to consumer protection, according to Emmanno Pascutto, executive director of the Toronto-based Canadian Foundation for the Advancement of Investor Rights (FAIR Canada).

“Advisors who are compensated on the sale of financial products face a serious conflict of interest,” he told the Vision 2020 Symposium held Oct. 19 by the Financial Planning Standard Council at Toronto’s Old Mill Inn.
Consumers face two main risks in the current system, John Lawford, legal counsel for the Ottawa-based Public Interest Advocacy Centre, a national non-profit organization that provides legal and research services on behalf of consumer interests, told symposium delegates: “Being put into investments inappropriate for a consumer’s age or position in life. And spending too much on fees.”
Mr. Pascutto said FAIR Canada has slightly changed its focus from fiduciary duty to clients to the idea of acting in clients’ best interests. “The concept of fiduciary duty is a bit difficult for many people to get their heads around,” he added.
But Cary List, the FPSC’s Toronto-based president and CEO, said “the client’s best interest” can be just as unclear to consumers. “The focus should be on putting clients’ interests ahead of your own.”
Fiduciary duty
But there is nothing specific in Canadian law that requires an advisor to put a client’s interests ahead of his own, and Canada’s courts decide on a case-by-case basis whether a fiduciary duty exists. But they have generally found that fiduciary duty exist in client-advisor relationships where elements of trust, confidence, vulnerability and reliance on skill, knowledge and advice are present.
Mr. List said financial planning needs to be regulated as a distinct professional service. Many activities that financial planners engage in are not regulated.
Denzil Feinberg, a financial planner with Assante Wealth Management in Winnipeg, noted from the floor that financial planning won’t become a proper profession as long as practitioners keep calling it an industry. “Let’s act as professionals and think of ourselves as such,” he said.
William Rice, chairman and CEO of the Alberta Securities Commission, said securities commissions have limited powers over financial planners because much of their work does not involve securities trading.
Choosing a suitable product is a big part of acting in the client’s best interests. “How can you tell a client that a product is suitable but it is also so loaded with fees that it is not in his best interest?” Mr. Pascutto said.
The current emphasis in Canada is on full disclosure of all fees and commissions the client pays.
Consumers realize that financial advisors have to make a living, Mr. Lawford said. “But they also want to know what fees they are paying. You need to give them that information and then let them make their decisions.”
“You make it clear to the client that there are so many hours of work that go into creating a financial plan,” Mr. List added. “Then you say that you also sell investment products and receive compensation from the sales. You add that that you will make sure that your compensation is commensurate to the value of advice the client is getting.”
In another session, Ursula Menke, commissioner of the Ottawa-based Financial Consumer Agency of Canada, noted that a few days earlier the G20 finance ministers agreed on 10 new principles to boost financial consumer protection. These include the idea that financial firms and their employees should work in the best interest of clients, be responsible for upholding financial consumer protection and that remuneration structures be designed to avoid conflicts of interest. The G20 leaders were slated to discuss the principles at their Nov. 3-4 summit.
“A real conflict of interest exists with the current compensation model,” she told symposium delegates. She asked how advisors should deal with “that not very savvy small investor” so he understands exactly what he is paying.
Commission-based model
But panelists for the session that Ms. Menke moderated did not acknowledge that the dominant commission-based model presents conflicts of interest. Gabe Kalmar, principal at Toronto-based management consultancy Greenshire Consulting, said that KYC or know your client, the standard process of engaging new clients in a verbal and written dialogue to assess individual situations and needs, is a preventative measure.
John Novachis, Mississauga, Ont.-based executive vice-president, corporate development, at the Investment Planning Council, a wealth management firm with more than 1,000 independent financial planners across Canada, added that point-of-sale fund facts provide plenty of material to inform clients.
He added that better policing in the past would have brought more credibility to the industry. “We have been marginalized by a few bad apples,” he said. “If we had weeded out the people who were not serious about this industry, it would have raised awareness of the good that many of us are doing.”

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