When clients ask financial planners about investments

This article appears in the November 2021 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

“Is this the best bank stock to hold?” a client asks, presenting their investment statement to you.

For certified financial planners (CFPs) who aren’t licensed to sell securities, resisting the urge to provide product advice could be part of everyday practice, given clients’ exposure to financial marketing and the rise of do-it-yourself investing.

When a client asks for advice about specific securities, “while it may be tempting to offer support, planners who do not hold the appropriate licence must not engage in this type of advice,” said Damienne Lebrun-Reid, head of the FP Canada Standards Council, in an emailed statement.

Even suggesting to a client that they buy, sell or hold “a bank stock” is “too close to the line,” said Sean Sadler, a partner with McCarthy Tétrault LLP in Toronto.

Clients can be confused about what financial planners offer compared to stockbrokers and investment advisors, Sadler said, and regulators and certification bodies want to prevent that confusion.

“It would be a good first step for financial planners […] to make sure their clients understand the different roles and services” they perform, he said. The same goes for a licensed CFP acting strictly as a planner to a client.

Joan Yudelson, head of the FP Canada Institute, said in an emailed statement that CFPs and qualified associate financial planners must “work with their clients to define and agree on the terms of the financial planning engagement, including the scope of financial planning services the planner is proposing to offer.”

The engagement document can also include the planner’s qualifications, which will help clients understand which products the planner sells, Lebrun-Reid said.

Unlicensed CFPs are allowed to discuss investment strategies as they relate to a client’s holistic goals, needs and investment objectives, she said.

Sadler said planners can explain products to clients in the context of asset classes, with the planner helping the client understand the role of, for example, fixed income, stocks, real estate and insurance.

If a planner suggested to a client that they invest with a certain type of firm — a robo-advisor or full-service broker, say — the planner shouldn’t couple the suggestion with advice to buy certain products, he said.

Suggesting that a client use a discount broker isn’t appropriate for the client who needs investment advice and who will subsequently look to the planner to provide it, he said.

Sadler added that planners owe a duty to clients, and should examine their own motivation in suggesting that a client use a discount broker. The suggestion represents a conflict if it’s made to avoid losing the client to another professional.

Often, CFPs have referral arrangements with licensed advisors. In such cases, the CFP must take reasonable steps to ensure the advisor is qualified to provide the services for which the referral is made, Lebrun-Reid noted.

The planner must also “exercise due care in gathering relevant and appropriate information to help the client make an informed decision around implementation, including the possible use of robo-advice,” she said.

In addition to advising on investments, unlicensed planners should also avoid furthering a trade. This includes helping a client with paperwork to open an account; distributing comments, recommendations or research reports about securities; and recommending specific securities to trade at specific investment firms.

Such acts aren’t defined in securities law and are generally broad, Sadler said, so “there’s a much higher risk of a financial planner stepping into some difficulty there.” Licensed professionals should also ensure their unlicensed staff don’t advise on securities or further a trade, he said.

If planners are in doubt about registrable activity, they should consult with compliance and legal staff, he said.

Otherwise, potential consequences for unlicensed registrable activity include monetary sanctions imposed by regulators and suspension or revocation of CFP certification.