Worldwide: Best Interest – Conflict Of Interest: The Fiduciary Rule And Financial Advisory And Financial Planning Services

Last Updated: January 4 2018
Article by Margaret R. O'Sullivan

1. INTRODUCTION

As we look forward in our crystal ball to looming issues on the horizon for 2018 and onwards, one that certainly comes to the fore is the regulation of those who provide financial advice and financial planning services, often offered under the nomenclature of "estate planning" or "retirement planning" advice.

There is a lot of movement afoot as many jurisdictions grapple with how best to regulate those who offer financial advice and financial planning services given the lack in many jurisdictions of a comprehensive legal framework to do so. One of the burning issues is whether a "best interests" standard should apply. Presently, in most jurisdictions there is no express obligation for those who provide financial product sales and advice (as opposed to portfolio managers) and financial planning advice to act in the client's best interests. In many jurisdictions, financial planning as an activity is not subject to a general regulatory framework, and the provision of financial product sales and advice is often subject only to know-your-client and suitability requirements.

However, several major jurisdictions, including the U.K., Australia, and the U.S. have in place or in the process of adopting the best interest standard, referred to as the "fiduciary rule". In Canada, the provinces of Ontario and New Brunswick are considering adoption of the rule, which has created significant controversy in the financial industry.

The primary concern that is the genesis for the rule is that many clients believe, and have the expectation, that the financial advice and financial planning services they receive are based on their best interests with a lack of understanding that their advisor may, in fact, have a conflict and not be providing objective advice, in particular where his or her compensation is a commission or other financial reward based on sales.

2. WHAT IS THE FIDUCIARY RULE?

The fiduciary rule is grounded in the law of fiduciary relations. Professionals such as lawyers, accountants, and others who act as advisors are well-steeped in the obligation to put the interests of their client first, and to ensure there are no conflicts of interest.

One of the fundamental legal requirements of a fiduciary is that he or she not place himself or herself in a position where his or her self-interest might conflict with his or her duty of loyalty to act in the best interests of his or her client, or other person to whom the duty is owed.

Arguably, the societal basis for creating the professions, who enjoy special privileges but also have special obligations, is to place important and essential work into a protected class where the interests of the person receiving the advice must always come first, and the rough and tumble buyer-beware profit-focus rules of the marketplace should not interfere.

Within the context of financial advisory and financial planning services, the fiduciary rule can be seen as a standard to protect investors and those receiving financial advice and financial planning services in fulfilment of an ever-more important need, as ageing baby-boomers are in, or fast-approaching, their retirement years. The need for independent, objective financial advice given its profound impact on important life decisions is seen as a compelling societal objective.

In the U.S., the practical application of the rule would be to ensure the fiduciary rule applies to a broad range of brokers who presently operate under a less strict standard of "suitability".

In Canada, there is a plethora of bodies which regulate financial services and financial planning. Financial advisors provide investment advice and may also be involved in selling life insurance, mutual funds and other investments and may be licensed by several bodies. The term "financial advisor" is not for the most part regulated and many persons, whether bank tellers, financial planners, life insurance agents, brokers and others refer to themselves as a "financial advisor".

Recent controversy erupted for several major Canadian banks when allegations were made by employees that they were subject to strict targets to sell financial products to clients, for products they did not need, including some who held themselves out as "advisors".

In the U.K., investment advice is provided by stockbrokers and financial advisors, and financial planners can be Chartered Financial Planners, considered the "gold standard" qualification.

New standards and changes were adopted in 2013, including a ban on commissions, and creating two categories for advisors: restricted; and independent. Independent advisors must ensure the full range of appropriate products are explained to their clients, and all advisors must follow a code of ethics and act honestly, fairly, and professionally in accordance with the best interests of their clients.

Australia is a leader in the application of the fiduciary rule. Reforms effective from July 1, 2013 have resulted in a ban on commissions for investment products, subject to certain exceptions. As well, financial advisors have a statutory fiduciary duty to place the best interests of their clients ahead of their own when providing advice to clients. A more detailed review of these reforms and comments on the guidance which has been created by the Australia Securities & Investments Commission follows below.

In the EU, the Markets in Financial Instruments Directive II ("MiFID II") will come into effect on January 3, 2018. It is wide-ranging and contains significant investor protection measures, including higher standards for suitability and appropriateness of investments and a complete ban on independent advisors accepting or retaining payments or inducements, including commissions.

Movement for Reform and Impact of Reform

U.S.

In the U.S., the Department of Labour introduced the "Fiduciary Rule" which would apply only to financial advice in respect of certain retirement plans, including defined contribution plans, defined benefit plans, and Individual Retirement Accounts (IRAs). Originally proposed by President Obama in 2015, new regulations to create a best interests standard were introduced in April 2016, with a phase-in to begin in June, 2017. The Trump Administration then proposed to delay the start date for the rule until further review could be done. At the time of writing, it appears a further delay will occur to change the final deadline for compliance from January 1, 2018 to July 1, 2019. At this point, a broader application of the rule has not been advanced by U.S. securities regulators.

Under the Department of Labour's proposals, advisors would be required to act in the best interests of their clients, and disclose fees and commissions to clients by way of a disclosure agreement when a commission structure is used.

There has been strong opposition to these proposals from certain segments of the financial industry, including brokers and financial planners. They argue that commissions will essentially be eliminated, resulting in a shift of fees onto clients, including those who are not high-net-worth but are of modest means, pricing them out of the market. In addition, it is argued it will result in higher compliance costs, which will adversely impact smaller firms, broker dealers and financial advisors, and result in consolidation among the bigger players.

The U.K. experience supports some of this argument, where after it introduced the fiduciary rule in 2011, the number of financial advisors dropped dramatically by almost 25%.

Canada

The Canadian Securities Administrators led a consultation in 2016 to review proposals to increase the obligations of those who provide financial advice, including its proposal to introduce a best interests standard.

In Canada, the government response to adoption of the fiduciary rule has been varied and the issue falls under provincial jurisdiction. A majority of Canadian provinces (including Alberta, British Columbia, Manitoba, and Quebec) have decided to abandon it, and pursue other targeted reforms. Both Ontario and New Brunswick continue through their securities regulators to support the fiduciary rule. Concerns have been expressed that without a uniform standard, there will be a patchwork of varying standards across the country, and resulting confusion in the industry and for clients.

The Ontario government has continued to review recommendations to introduce a statutory best interests standard, as well as to regulate financial planners, including what titles can be used for those who provide financial advice, but there is a long way to go before recommendations might actually result in legislative reform.

U.K.

In the U.K., a qualified best interest standard has been in place since 2007.

The Financial Conduct Authority, or FCA, is the chief U.K. financial regulatory body. It operates independently of the U.K. government, and is financially supported by the financial industry. As a result of the retail distribution review ("RDR") introduced in 2013, the qualifications for advisors were increased, transparency of fees and services was enhanced, and commissions to advisors and embedded commissions in financial products were removed. And as noted above, two categories of advisors were introduced: restricted; and independent.

The U.K. is now trying to remedy the advice gap, given that a significant sector of the population cannot afford professional advice, in order to make advice more accessible and affordable. The initial introduction of RDR resulted in a decline in the number of advisors, but numbers are on the increase. It is generally considered that the bold reforms made in the U.K. have improved the professionalism and quality of financial advice for clients in the U.K.

Australia

Australia introduced a statutory best interests standard for advisors in 2013 that requires advisors to act in a client's best interests, to provide advice that is appropriate, and to put a client's interests ahead of the advisor's where there is a conflict of interest. As well, it placed a ban on conflicted remuneration, including commissions and volume-based payments in the distribution of, and advice on, a range of retail investment products.

The Australian Securities & Investments Commission has provided detailed guidance with regard to the application of the best interests standard and conflicts of interest, including helpful, practical examples for everyday use in many client situations.

Some of the factual examples provide scenarios to illustrate what a reasonable advice provider would believe are likely to leave the client in a better position if the client follows the advice, providing advice that is not product-specific, switching advice, remuneration conflicts, as well as concrete examples where the advice has not complied with the best interests duly, including case examples.

A review of this extensive guidance gives a much deeper appreciation for how the fiduciary rule can operate in practice, and acts as a rebuttal to industry skeptics, including in other jurisdictions who have questioned the ability to realistically apply such a standard.

EU

MiFID II will have far-reaching consequences for the investment industry and deals with the conflict of interest issue by a direct ban on third-party inducements for portfolio managers and those who provide independent investment advice. It also introduces new requirements for disclosure of costs and charges. Investment advice will be classified as independent or not, and independent advice is subject to higher standards, including providing a sufficient range of different product providers to clients in providing investment advice.

Conclusions and the Way Forward in the Evolution of the Role of the Advisor

The developments outlined above with regard to regulation of financial advisors demonstrate further refinement in contemporary society of the meaning of who is an advisor, and who is not.

The need for objective, independent financial advice in an aging demographic where clients need a secure retirement and unbiased investment advice to achieve it cannot be questioned. There is a broad-based lack of understanding within the public of conflicted advice, hidden commissions, the amount of fees charged and that their advisor may not have any obligation to put their interests first. In fact, many investors believe their advisors are required to give advice based on their best interests, which is encouraged by the financial industry, and prominent in their marketing strategies which hold out trusted, objective, reliable advice is provided to the client.

It seems that in an era of strong consumer protection for most products and services, the area of financial advice is one of the last strongholds where contemporary standards still, surprisingly do not apply.

The extensive reforms that have been introduced in several leading jurisdictions, including in particular the U.K. and Australia, and which still may see their way through in the U.S. to some degree for retirement plans – a first step, and at least in two Canadian provinces, hold out hope that these reforms will continue as a broad-based reform movement to other jurisdictions as well.

If they do, it is good news for clients but as well for all advisors, in whatever profession they may be, and a boon to the nature of the advisory relationship in such a key and important sector of modern life.

Originally published by The International Comparative Legal Guide to: Private Client 2018, Global Legal Group.

Margaret has been an expert columnist for Advisor.ca and Advisor's Edge magazine since 2011. You may read her columns here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Margaret R. O'Sullivan
Similar Articles
Relevancy Powered by MondaqAI
O'Sullivan Estate Lawyers LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
O'Sullivan Estate Lawyers LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions