Doing What’s Right for The Client and The Power of Fiduciary Duty
Clients often ask, “How can I be certain that my financial advisor genuinely prioritizes my best interests?”. Although most advisors consistently claim to act in their client’s best interests, stories of individuals sold unnecessary life insurance policies or ill-suited, high-risk investments continue to emerge. To address these concerns, clients must confirm that their advisors have a fiduciary duty.
The Canadian Securities Administration (CSA) defines fiduciary duty as “a duty of a person to act in another person’s best interests.” Fiduciaries have a legal and ethical obligation to prioritize the client’s well-being. The CSA identifies five key elements of a financial advisor’s fiduciary responsibility. They are prioritizing client interests, avoid conflicts of interest, do not exploit clients, provide full disclosure, and perform services responsibly. (source: CSA website)
Don’t all financial advisors have Fiduciary Duty?
Contrary to popular belief, not all financial advisors have to act in their client’s best interests. Canadian regulators have hesitated to enforce a comprehensive fiduciary standard across the industry. The Supreme Court of Canada describes the general duty of insurance brokers as a “stringent duty to provide both information and advice to their customers” (source: CanLII). This means that it only creates a responsibility to deliver information and advice to help the client decide. This principle is known in legal terms as “caveat emptor” or “buyer beware”. This puts the responsibility of due diligence on the client. The agent’s primary duty is to provide information and advice to support the client’s decision-making process.
This inconsistency can lead to a significant disconnect between investors’ expectations and the actual obligations of their financial advisors. Fiduciaries differ from other financial advisors in structure, philosophy, and legal foundation. Advisors who hold the Chartered Financial Analyst (CFA) or Chartered Investment Manager (CIM) designation and register as portfolio managers have a fiduciary duty (source: CFA Institute and CIM website). Likewise, Certified Financial Planners (CFP) who have completed rigorous training and education also have a fiduciary duty (source: FP Canada).
Clients seeking insurance or investment services from an Financial Planner without these credentials should exercise due diligence. If they want to ensure their advisors act in their best interests, they should look for advisors or teams that include CFAs, CIMs, or CFPs. Ideally, clients should work with a CFP who directly collaborates with portfolio managers holding CFA or CIM certifications.