Saturday, November 19, 2011


While regulators ponder the complexities of  new rules, investor advocates focus on a quicker solution

IN THE WAKE OF THE GLOBAL financial crisis and assorted financial services-related scandals around the world, the question of imposing fiduciary duties on retail financial advisors has become a hot topic in various countries.

In Canada, the call to hold advisors to a fiduciary duty also has been growing louder. And the Ontario Securities Commission is now studying the issue.

Yet, while requiring advisors to act in the best interests of their clients seems like a logical and appealing concept, actually enshrining this fiduciary duty in law may be no easy task. Experience shows that it often takes years for Canadian securities regulators to agree on seemingly basic reforms; and when this involves possible legislative changes, the process is even more prolonged. So, even though the issue has finally reached the regulators' attention, that doesn't mean such a duty is likely to be imposed soon.

It may be that regulators could effectively achieve the same result as adopting a statutory fiduciary duty by tightening the existing suitability regime without requiring specific statutory change.

Take, for example, the latest effort to tighten suitability rules by the Mutual Fund Dealers Association of Canada. The MFDA has proposed amendments to its "know your client" rules in order to clarify that suitability obligations do apply to strategies involving leverage, and to set minimum standards for firms and reps in assessing the suitability of leveraging.

The proposed amendments raise the bar on suitability with specific requirements that relate to the use of leveraging strategies, including a requirement that leverage suitability must be assessed when certain "trigger events" occur, such as a change in the rep responsible for a client's account or when a client transfers assets acquired with borrowed funds into an account.

This is in line with the latest version of the Investment Industry Regulatory Organization of Canada's proposed client rela!ionship model, which would also require that suitability be reassessed in response to trigger events, and that the obligations apply not just to orders and recommendations but also to overall trading strategies and financing methods.

As regulators take these steps to increase suitability requirements gradually, they are also demanding more from firms.

"Assessing suitability where leverage is involved is more complex," notes Karen McGuinness, vice president of compliance at the MFDA, "as the [dealer] is responsible for not only assessing the suitability of the investment advice but also the suitability of the leverage strategy. This com¬plexity adds additional compliance risk, given the need for additional supervisory requirements."

But the Canadian Foundation for Advancement of Investor Rights argues that regulators should be going even further. FAIR Canada's submission on the MFDA's proposed amendments says the proposed minimum criteria for leverage suitability is still too low. It recommends the amendments he toughened.

The FAIR Canada submission also recommends: there be a pre¬sumption that leverage is unsuit: able for retail investors, and that the onus to prove that leverage is suitable for a particular client be placed on the rep that is recommending it; that investors be required to meet a minimum level of investment knowledge before they are allowed to use leverage to invest, and that both reps and clients be required to certify that the client has a proper understanding of the risks; and added disclosure of any compensation generated by the use of client leverage.

Pushing the envelope of what is required to ensure suitability in this way would enhance investor protection, and drive firms and reps incrementally closer to that holy grail of investor protection - fiduciary duty. FAIR Canada's submission suggests that regulators go one step further and implement what it refers to as a "clients first" model, which would "require that all client recommendations be in the best interests of the client ratter than simply requiring that they be suitable."

As the FAIR Canada submission goes on to explain: "The fundamental principle of the ["clients first"] model would be a general rule Slating thal, in all aspects of their dealings with their retail investor clients, including recommendations, compensation practices. disclosure. management of conflicts of interest and all ongoing aspects of the client relationship (such as performance reporting). financial service providers must put the interests of clients foremost."

Adopting this sort of rule would better protect investors from inappropriate uses of leverage, the submission continues, and it "could be introduced as an element of suitability, which could reduce the amount of time it would take to implement such a standard." As well, this method also would be free of the legal baggage that would come with imposing a statutory fiduciary duty.

Pushing the suitability rules in this direction also could help close the gap between the sort of relationship that many clients believe they have with their advisors and the regulatory reality. FAIR Canada's submission says this sort of change is "essential to remedying the imbalance and misalignment of interests and expectations in current registrant/client relationships."

Resetting that balance by statute could be very demanding. But regulators may find it's possible to accomplish it by stealth. IE


November 2011

Wednesday, November 16, 2011


Only 58% of Canadians are either preparing, or are currently prepared financially in case they get sick

Despite making the connection between health and personal finances, many Canadians are unprepared financially to deal with a serious illness, according to a recent study from Sun Life Financial Inc.

The second annual Sun Life Canadian Health Index found that 90% Canadians anticipate a financial impact if they were to experience a major or chronic illness, with 53% saying that impact would be significant or perhaps permanent.

Despite these high awareness levels, only 58% of Canadians are either preparing, or are currently prepared financially in case they get sick. And only eight per cent of Canadians have a written financial plan that includes insurance and risk management — two elements that address the economic impact that could come with a major health issue.

"Canadians' understanding of the connections between health and personal finances are hard-earned," says Kevin Strain, senior vice president, individual insurance and investments, Sun Life Financial Canada. "We found the majority of Canadians have either personally experienced or have had someone close to them suffer a serious health issue. However, fewer than one in five said they had evaluated or re-visited their finances following the experience."

Overall, many Canadians expect a long life. The average respondent anticipates living 81.5 years, almost a year more than the Statistics Canada reported average of 80.7 years1. Eighty-six per cent of Canadians agree that they will need to purchase health insurance to help fund their health care needs, as the public system will not be able to maintain current funding levels as the population ages and costs rise. Seven out of 10 respondents think they will probably need some form of long-term care as they age.

The 2011 Sun Life Canadian Health Index™ measures the attitudes, perceptions and behaviours of Canadians relating to their personal health. It's based on an Ipsos Reid poll conducted between July 27 and September 12 on behalf of Sun Life Financial. For this survey, a sample of 3,233 Canadians aged 18 to 80 years old from Ipsos' Canadian online panel was interviewed online.

By IE Staff

Nov 16, 2011

Monday, November 7, 2011


In these unsettled economic times, investors may be legitimately asking themselves about the value that a financial advisor brings to the table or, conversely, whether they would be better off trying to invest on their own.

"We have been looking at that very question for a couple of years now," says Joanne De Laurentiis, president and CEO of the Investment Funds Institute of Canada (IFIC).

To find out whether people indeed do better with an advisor than they do without, IFIC consulted an existing Ipsos Reid study of 3,000 households that proved conclusively that yes, you are better off financially when you seek out and heed professional investing advice.

"In terms of experience of those households with advisors, they were in a better financial situation, they had a higher level of savings and investible assets;' she says.

"It basically cut across all demographic levels: If you were young, under 25 or over 65, if the household had an advisor they were in a better financial position:' she explains.

The same advisor-led improvement was found regardless of the , original income or wealth position of those using advisors to guide their savings and investments.

The study also found that advisor guided households also typically had more money saved in RRSPs, RESPs and even new investment vehicles such as the TFSA.

"These millions of advisor-client conversations, whether they be short or long, are really helping with the creation of a savings culture;' Ms. De Laurentiis says.

The IFIC study conducted by Ipsos Reid in 2010 also found that households with advisors were more confident about the future and more comfortable about investing generally. "So the conclusion from that study was that advised households do better than non-advised households:'

Financial advisors are proving more valuable to Canadians as in¬vestment products get more complicated and markets seem even more unpredictable than in prior years.

"The complexity of products, the fact that you are making financial decisions really throughout your life, [means investment strategy] is not just about retirement or buying a house;' says the IFIC president. "You pretty much make financial decisions all your life. When you are making those decisions you have to have thought about whether you are going to use credit or savings, whether you are overextending yourself, and it isn't something that most of us are really trained to do."

The decisions people are faced with and would do better making every day include whether to get in the market and what investment products to buy, what types of insurance to buy and how much to save for retirement to ensure that you do not outlive your savings.

IFIC statistics show that more than 85% of mutual funds are purchased through advisors, and annual surveys conducted for IFIC show that invest¬ors prefer to buy such funds through an advisor rather than selecting the best funds on their own.

IFIC's 2011 Canadian Investors' Perceptions of Mutual Funds and the Mutual Fund Industry 2011 study found that the accumulation of wealth does not precede the process of seeking out professional financial ad¬vice. More than one half of respondents had less than $25,000 to invest when they first sought out advice, and fully one-third had less than $10,000.

The survey also found that once mutual fund investors started working with an advisor, that relationship typically lasted 18 years and the relationship grew to including consultation in other financial areas such as budgeting and planning for the future.

Ian Russell, president and CEO of the Investment Industry Association of Canada, says that the upheavals in the markets and the deep and lasting recession in parts of the developed world have made it tougher on investors and made financial advisors and the advice they provide more valuable than ever.

''You really see the value of something when you really need it," Mr. Russell says. "We are in an environment where there is a great deal of uncertainty, investor angst and stress among all investors:'

"Investors have been impacted by low interest rates, stock markets that are far more turbulent and unpredictable than ever before and which have affected portfolio values. The ... unsettled environment is hitting Baby Boomers particularly hard as they are nearing retirement and are seeking safe and stable returns - exactly the opposite of what markets are delivering," Mr. Russell says.

"People traditionally would turn to things like government bonds and annuities, which are safe and secure and provide an income stream for them," he says.

"Of course, the returns on those products have really evaporated and that provides a challenge for them in finding adequate investment products.

"So people are being challenged to compensate for these lower returns by adjusting either their portfolio asset mix to generate higher returns or change your standard of living," he adds.

"These factors are all putting more pressure on Canadians and more and more people are turning to their financial advisors to cope with these unprecedented pressures."

Paul Brent
National Post