CFAs question advisor ethics

The Canadian financial system and capital markets are in fine shape, according to a survey of Canadian CFA charterholders. The confidence of these professionals is the highest it’s been in the past three years, according to the 2010 Financial Market Integrity Index (FMI).

“Based on the comments of Canadian survey respondents regarding the integrity of Canada’s financial system and capital markets, it is evident that Canadian charterholders believe conditions have been steadily improving over the past three years,” said Matt Orsagh, CFA, CIPM, director, capital markets at CFA Institute. “This growing confidence, took place during one of the worst economic meltdowns in recent history.

Canadian charterholders said they have seen significant improvements in accounting standards, corporate governance, transparency, legal protections and shareholder rights.

But they expressed some concern about the ethics of financial advisors.

On a scale of one to five, the perceived integrity of financial advisors to private individuals scored 3.1, just slightly above hedge fund managers, the lowest rated professionals at 2.8. By comparison, pension fund managers were seen to have the best ethics, with a score of 3.9, followed by buy-side analysts, at 3.6.

Unattributed comments point to a perceived misalignment of client and advisor interests.

“In my career the thing that stands out the most is that most advisers are not out for the client’s best interest; instead they are out for their own interests ahead of the client,” said one portfolio manager/investment consultant.

“Clients often don’t understand the risks for themselves compared with the gains for the adviser,” said a vice president of investments.

One assistant treasurer said: “Most advisers are interested in their own bottom lines, which usually coincides with their firm’s bottom line. The individual investor’s bottom line is the last consideration, if a consideration at all.”

Foreign admiration While it’s nice to hear that Canadian CFAs are confident in our system, its even better to hear that foreign charterholders have consistently viewed our markets more favourably than domestic charterholders.

“Clearly, CFA charterholders around the globe feel there is much to be learned from the Canadian experience,” Orsagh said.

The FMI survey found charterholders’ confidence translated into a willingness to invest in Canada, with 82% of Canadian respondents “likely” or “very likely” to recommend investing in Canada. That’s up from 72% in 2009 and 79% in 2008.

If there is one problem with the Canadian system, it’s the regulatory environment, and those CFAs surveyed said the best course of action would be to create a single securities regulator.

The call for a single regulator has been consistent since 2008. This year almost 40% of survey respondents commented on fragmented securities regulation regime and indicated support for a single regulator which could coordinate regulation and strengthen regulatory enforcement mechanisms.

“The regulators in Canada do not do enough to make sure that wrongdoing is punished. I have seen insider trading take place by salespeople who generate too much commission to fire,” said one charterholder in institutional equity sales.

“[We] need stronger enforcement of insider trading…sometimes actually punishing those responsible would be a start,” said a finance manager.

“Weak enforcement raises the risk that unethical people will not feel that the risk of getting caught is high enough to deter their actions,” said a vice-president and chief compliance officer.

The global CFA Institute has supported its Canadian members by endorsing the recently unveiled Canadian Securities Act.

“CFA Institute welcomes the opportunity to participate in this national discussion,” Orsagh says. “We believe that our global experience, investor-focused approach, and expertise in securities regulation will provide a neutral and balanced voice to this issue.”

More than 2,700 CFA charterholders (including more than 570 in Canada) participated in the research for the 2010 FMI by taking the survey either online or by scripted telephone interview between February 1, 2010 and March 9, 2010.

The FMI Index gauges CFA charterholders’ perceptions of the state of ethics and integrity in six different countries around the world (Canada, Germany, Hong Kong, Japan, the United Kingdom, and the United States) and how these perceptions change over time.

To read the Canadian report, click here.

(06/08/10)