Financial Advice is a Great Responsibility

Financial Advice is a Great Responsibility

Ontario launched a review of regulations relating to financial advisors and planners to help investors and consumers make informed investment and financial choices, as well as enhance oversight in this sector.   Unlike many financial service sectors in Ontario, financial advisors and planners are not subject to general regulatory oversight, which could leave consumers and investors vulnerable. This review will focus on addressing this gap by examining more tailored regulations.  To conduct such a review, the Ontario government appointed an Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives.  The committee is taking submissions from the public.  Last issue we shared my submission about the possibility of registration to provide “security advice only”.  This issue I will share Efficient Wealth’s submission to the committee, which concerns itself with the need to increase responsibility and obligations for any firm or individual providing Financial Advice.

Advice is a Great Responsibility

Our premise is simple.  The word advice is the issue, not the words financial or planning.

When I am purchasing something, anything, I do not want advice from the salesperson.  I may want features and benefits.  I may want to discuss price, terms and conditions.  I may wish to gather more data on usefulness or suitability to meet my requirement.  I am a willing participant in the sales strategy and the whole sales process. This process, from beginning to closing, should be considered to be just that, a well thought out strategy.  Outcomes are clear.  I am sure of what I possess, the strategy is closed and errors in acquisition are mine.

When I am seeking advice, about anything, I do not want a sales strategy.  I am seeking guidance or another view.  I may want information, an opinion or a suggestion.  I may desire some background on the provider to evaluate capability of the individual.   By establishing their profession, I may evaluate quality and standards of advice.  I am willing to trust and consider what is offered.  Outcome is the acceptance of trust, a dependency.  I must trust the advisor to act on his knowledge and experience, not mine.  What I receive helps me decide whether I wish or need to enter a sales strategy.   Advice to enter should not come from within such strategy.   In a sales strategy, the outcome is the shared result for the participants in the strategy.   In the case of advice, for the outcome to be clear, positive, and non harmful to the recipient, the recipient of the advice must be the focus of the outcome.  Usefulness is only possible if the advice is trusted. 

What is the Difference Between Financial Advice and Financial Planning?

Financial advice is different from financial planning.  Advice encompasses the ideas of faith, trust and confidence that create a dependency when advice is rendered.  Planning encompasses only compilation, assembly and delivery without the acceptance of responsibility by the preparer.  However, financial planning may result in financial advice.  It is the provision of this advice portion that raises the bar.  As soon as a service containing advice is offered, there should be an inherent obligation for the creation of a fiduciary relationship.   Advice creates a much higher responsibility to the recipient than planning or salesmanship.

Financial planning done well is broad reaching, comprehensive, difficult and like all important tasks, would hopefully be conducted by competent individuals with adequate training, education and experience.  As a CPA and CA, most of my work product is non-regulated and able to be performed by any individual that wants to hold themselves out as an accountant.  The use of the term Chartered Professional Accountant is reserved solely for those members of CPA Associations but anyone can call them self an Accountant.  Anyone can perform accounting tasks.  It is our demonstrated professionalism and the marketplace that will work out whom to engage for accounting and tax work.  Similarly, anyone can do financial planning but Certified Financial Planners have demonstrated a commitment to education, training and ethics as expected from a professional.  Again this professionalism and the marketplace will work out whom to engage for the important task of financial planning.

What is to be done?

For financial advice, there is no current regulatory scheme that captures and clarifies the responsibilities and obligations created by providing financial advice.  Regulations in the investment industry are concentrated on the conduct of trades.  The investment industry regulators require no offering or mechanism to accept the obligation to act in the best interest of the recipient of any advice, financial or investment.  The self regulatory organizations that register members for trading activities, currently do not allow the assumption of such responsibility.  Advice, whether it’s good, bad or poorly formed is evaluated only on a commercial basis.

Financial advice should be clarified as an activity that gives rise to a relationship wherein one person has an obligation to act in another’s interest ahead of their own interest.  The obligations accepted by an individual in whom another has placed the utmost trust and confidence to protect them.   This is often referred to as a fiduciary relationship.   Enactment of consumer protection would be welcome.

Financial Planning requires no regulation beyond normal consumer protections.  Titles for individuals providing Financial Planning require no modification or regulation.  However, Sales Representatives should be easily identifiable as such with mandatory disclosure of their position.  Advisors that wish to proceed beyond the sales process and either advertises or offers advice should be immediately flagged until they abide by the standards applicable to the provision of advice.

Financial Advice should be regulated through a requirement to accept fiduciary responsibility for the advice and belong to a recognized professional organization that requires the same.