Professionalization of the investment advisor role

Since the global market crisis of 2007-2008 there have been renewed calls in many jurisdictions for a stronger regulatory presence in securities markets. Even before the crisis though there was a rising expectation that members of the investment community conduct themselves in keeping with the standards of professional excellence that would enhance the ‘duty of care’ being provided to the client.

As both client needs and investment vehicles become more complex, investment advisors are increasingly expected to assume a more professional approach to the management of clients’ assets. The role of the investment advisor is progressing towards one that encompasses a fiduciary responsibility to the client.

Over the last several years, most mature economies have seen an evolution of the responsibilities and expectations of investment advisors and portfolio managers. The role of the “stockbroker” had transitioned to the “investment advisor” and, more recently, has been evolving towards that of the “wealth advisor,” creating a relationship where helping clients meet their life goals is seen as a holistic endeavour, encompassing all aspects of personal financial management.

As part of the transformation of the salesman/broker role to that of the wealth advisor, some jurisdictions are embracing a formal fiduciary relationship between the client and the advisor. The Dodd Frank (2010) passed by the U.S. Congress empowers the Securities and Exchange Commission (SEC) to impose a fiduciary standard upon broker dealers (although what this will look like remains to be seen), while the Australian Securities and Investment Commission has recently recommended that fiduciary duty apply to everyone who provides financial advice. In the U.K., while there are no plans to enact a fiduciary standard per se. Proficiency standards for advisors have been raised and regulators have addressed potential advisor/client conflicts of interest through a plan to separate product sales commissions from advice.

In Canada, National Instrument 31-103 addressed the handling of potential conflicts of interest between the client and the firm and, in the forthcoming enactment of the IIROC Customer Relationship Model (CRM), rules will be expanded in four important aspects of the advisor-client relationship: relationship disclosure, the management and disclosure of conflicts of interest, account suitability and account performance reporting.

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Much of the focus of the CRM will be placed upon the determination of investment suitability, since this issue is the prime source of complaints received by securities regulators. The implementation of this model is intended to shift the basic suitability standard to an “enhanced suitability” standard. Once operational, the CRM model will help raise the professional standards of investment advisors and establish the levels of accountability and transparency that will serve both the industry and the investing public well.

In March 2011, CSI Global Education is introducing a new seminar on the issues of ethics, regulation and the professionalization of the advisor role that will educate advisors on how to align their practice with professional, ethical and regulatory standards.

The first seminar, led by Pete Bresnahan, an experienced financial advisor, consultant on ethical issues in the financial industry and former vice president at two major investment firms, will be offered on March 29th.

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Dr. Roberta Wilton is President and CEO of CSI, Canada’s leading provider of financial services education. Prior to joining CSI, she operated her own company specializing in capital markets education and investor relations.