Advisors urged to tackle controversial issues

(August 16, 2005) Contrary to what you might think or have heard, industry critic Glorianne Stromberg says she has a healthy respect for financial advisors, since they are on the front line, closest to clients. The securities lawyer and former Ontario Securities Commissioner also wants to dispel the myth that she supports “massive regulation,” but is quick to add that the industry’s failure to effectively self-regulate has created many of the problems it now faces.

Stromberg, speaking last week to Advocis members in Alliston, Ontario, says the blurring between product and advice has led to a system where the activities carried on by the various sectors of the financial services industry are “virtually indistinguishable” to investors.

“Regulation varies according to the type of investment product, the institution issuing the investment product and the intermediary involved,” she said. “The ramifications of these differences are not readily apparent to and are not well-understood by most people.”

“That’s why it’s important that the regulatory and supervisory system and structure focus on the functions that are being performed rather than who is performing them and that there be a common regulatory and supervisory regime that extends across the insurance, securities and banking sectors,” she added.

Stromberg said that while Advocis has some fine organizational objectives, there remains a “need to examine whether there is still a gap between what you say you are doing and what you are actually doing.” It is this gap that leads to questions about ethics and professionalism and that raises concerns with clients and regulators, she points out.

“Examples that give rise to this include lack of transparency of what your service offer really is, the sufficiency of your competency skills, the appropriateness of your compensation structure and the existence of conflicts of interest that serve to compromise your objectivity.”

Stromberg was also critical of the advisor association’s moves to “derail attempts to update an outdated regulatory system by opposing virtually every initiative that is brought forward.”

“What troubles me is the fact that you have not come up with constructive viable alternatives or robust self-enforcement measures,” she said.

For example, Stromberg points to Advocis’s staunch opposition to the Fair Dealing Model, now a part of the Canadian Securities Administrators’ registration reform initiative. One of the fair dealing model’s many proposals called for advisors to use letters of engagement and investment policy statements.

“Many of you see these requirements as a needless expense and a major contributor to an overwhelming burden of paperwork that you blame regulators for imposing. Yet the requirements mirror the practice standards recommended by Advocis and the Financial Planners Standards Council,” she said.

Instead of rejecting attempts to set appropriate financial planning proficiency standards, Stromberg says Advocis members should become engaged in identifying and putting these standards in place. “There are lessons to be learned from other service professions, such as completing a post-secondary program … delivered by independent institutions that have been accredited to do so by an independent oversight body.”

Stromberg says the variety of compensation methods in the financial services industry are also problematic, and believes a commission-based system is inconsistent with being a professional. Still, there are circumstances where this is the only feasible method for both client and advisor, she concedes.

“It is in your interest to tackle the issue of compensation. Don’t wait until you have problems with your clients or the courts. I suggest that until you are able to make full, true, plain and transparent disclosure of your fees and charges and the costs inherent in the investment products you use to implement your advice, you have more work to do.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com