Finance 101

What the heck is a fiduciary?

May 10, 2017


What the heck is a fiduciary?

Finance 101

What is a fiduciary?Fiduciary definition. “A person to whom property or power is entrusted for the benefit of another.” (via In the context of the Canadian financial industry, this essentially means that the financial adviser acts in the expressed interest of their client.

Fiduciary duty and the advisor vs. adviser divide

You want a financial adviser you can trust, not a financial advisor who might just want to sell high-commission financial products.

The financial advisers at WealthBar, for instance, are regulated and must act in a client’s best interest. They are fiduciaries. These professionals have a fiduciary duty to the client. They don’t receive any extra commission or trailing fees from investment companies. The adviser and the client’s interests are aligned.

Here’s the big issue: financial advisors, like many of those working at the big banks, have no such duty. Most advisors that are not fiduciaries have no such duty. Many even receive extra compensation from the investment funds they sell. This raises concerns about potential conflicts of interest.

That’s a major problem for Canadian investors these days. Recent news reports show employees at the 5 big Canadian banks are under huge pressure to boost their own earnings, while duping customers.

The Canadian Foundation for Advancement of Investor Rights (FAIR) recently wrote a scorching open letter to Canadian Securities Administrators highlighting the issue. Note some of our own highlights:

Many of the employee revelations and subsequent consumer complaints deal with banking related issues – such as moving clients to higher fee bank accounts, and increasing consumers’ credit limits on personal lines of credit and credit cards without their knowledge and consent. These complaints have led to questions about adequacy of the regulatory structure governing Canada’s banking sector…

However, what has received less attention, but is of at least equal importance, is how these sales practices have also led bank employees – who are registered to sell securities – to improperly recommend mutual funds or other securities that are under the regulatory jurisdiction of provincial securities regulators and the associated SRO’s, the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Authority of Canada. 

Many Canadians who have counted on the banks for guidance on investing just weren’t dealing with a fiduciary. They probably had an ‘advisor’ who was focused more on earning a commission or keeping their job than acting in the best interests of their client.

What you need to know about fiduciaries (and people who aren’t fiduciaries)

Why do Canadian investors need fiduciaries?

Up to 96 percent of financial advisors in Canada are really salespeople, according to a recent study by the Small Investor Protection Association (SIPA). Many have no specialized education or training beyond what they need to know to sell products, says SIPA President Stan Buell.

That leaves a tiny minority of qualified professionals who are compelled to look after their clients first.

In some cases, the problem goes far deeper than poor recommendations on investment portfolios and can carry over to outright fraud. “I dug up a letter from 2005 and I could have written the same call to action today, but could have just included a different financial fiasco,” Buell said. This has real consequences for ordinary people.

“I remember the lady who was cheated by her former broker. The broker called her into the office and told her that her money (about $1 million) was just gone and that there was nothing they could do about it.” Or there was the case of the professional getting close to retirement. He took his first vacation in 15 years. Then he got a call while he was away telling him that his money was all gone. It’s a buyer beware situation out there.

Why are there different (and perhaps weak) standards for fiduciary duty in Canada?

There are conflicting views between self-regulating bodies such as the Investment Industry Regulatory Organization of Canada (IIROC) and MFDA as well and the various provincial regulators.

Also, many large players in the investment industry have fought against improving the official standard of fiduciary duty. Advisors and lobbyists fear raising the common standard of fiduciary duty from suitability with a client’s profile to ensuring their best interests are looked after. Such critics suggest investors who suffer any losses could sue their advisor. They worry that it could happen even if loss came from a market downturn, instead of negligence or fraud.

Ken Kivenko, an investor advocate for recently put the case for improving standards plainly in Moneysense:

“The fact is, many of the arguments that are put up against a fiduciary standard, or a best interest standard, are dubious,” says Gross. “Why would you want to be out there arguing that it is not a good idea to act in your client’s best interest? The arguments are almost laughable.”

What are signs that a financial advisor is not doing their fiduciary duty 

FAIR lists six potential warning signs that your financial advisor is not doing their fiduciary duty and may even be engaging in fraud:

  • Unrealistic returns
  • Guaranteed returns
  • Pressure to borrow
  • High-pressure sales
  • “Inside information”
  • Ponzi schemes

My financial adviser is a regulated fiduciary. Do I still need to pay close attention to my investments?

Yes! The truth is that some financial advisers who have a fiduciary duty sometimes will break the rules. Lawyers can get disbarred. Doctors can lose their license through malpractice. Just like that, some fiduciaries will use their position of trust to wreak immense damage on investors. Whether your adviser is a fiduciary or not, you also need to pay attention to your investments.

Finance 101 Lesson Review: What is a Fiduciary?

A fiduciary is an adviser who will act in the interest of the client. Canadian investors may wrongly assume that the person they go to for financial advice is under some form of regulation in that regard. In truth, only a tiny minority of financial advisers, like the ones at WealthBar, fall into that category.

Whatever your situation, we advise Canadian investors to be aware of common warning signs. That way, they can keep their hard-earned money safe.

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