Ontario court case sparks fiduciary responsibility debate

(September 5, 2003) Just what is a fiduciary relationship? That’s the question advisors are asking in the wake of a recent court ruling. The Ontario Court of Appeal reversed an earlier decision against a broker who was accused of breaching his fiduciary responsibility by engaging in the unauthorized trading of shares.

Mark Schram of TD Evergreen was initially ordered to pay $60,000 plus interest and court costs to two clients, Melville and Marion Hunt. In overturning the ruling, the appeal judge Eileen Gillese wrote that the relationship that existed between Schram and the Hunts was contractual, not fiduciary.

“I am of the view that the trial judge made a palpable and overriding error in concluding that Schram stood in a fiduciary relationship with the Hunts,” she wrote. “This clear error arose when he found that Schram had the discretion or power to unilaterally affect the Hunts’ interests. While Schram was in a position to be able to conduct an unauthorized sale of shares, this ability did not characterize the relationship between the parties.”

Because the Hunts’ account with TD Evergreen was non-discretionary, Schram did not have the authority or power to act on his own accord, Gillese added. Still, she agreed that Schram did commit a breach of contract by selling some of the Hunts’ shares without authorization and said the elderly couple is entitled to damages resulting from those trades.

The judge cited similar cases, suggesting that the difference between a fiduciary and contractual relationship hinges on the question of financial advice. Cases where the broker makes all the decisions are fiduciary, whereas a broker who simply acts as an order-taker for clients is in a contractual relationship.

However, that’s just one legal opinion and it may be something of an aberration. “The law in this area is heavily weighted toward the client,” Ottawa lawyer Harold Geller wrote in the For Advisors Only online forum. Geller cited a Supreme Court of Canada decision against an insurance agent who was held liable for negligent advice, despite the fact that the relationship with the client appeared to be focused strictly on sales.

“Until the law has clearly changed, a financial advisor in most circumstances will be considered to be a fiduciary,” Geller said.

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In general, the courts appear to hold all financial intermediaries, whether they offer advice or not, to a higher legal standard, says Jim Bullock of the Peel Institute. “A salesperson who does not give advice does not necessarily avoid liability,” Bullock wrote in the online forum. “In fact, their liability might be created because they did not give advice and they should have.”

Still, though the Ontario appeal court did not define financial advice, it does suggest that some judges are starting to differentiate between sales and advice.

Jim Rogers of Rogers Group Financial in Vancouver says that anyone who holds out as an advisor of any sort, including lawyers and accountants, will likely be held to a fiduciary standard. “On the other hand, a salesperson, who held out as such, would not be seen to be in [specifically a] fiduciary relationship with his or her customer.”

Geller concurs. “Perhaps the pendulum is swinging back to a more reasonable analysis of duties.”

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What do you think of the Ontario court ruling? Are judges now drawing a line between sales and advice? Or should advisors adopt a “safety first” attitude and assume all client relationships are fiduciary? Share your thoughts in the “Free For All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(09/05/03)

Doug Watt