The Suitability Standard | Summary and Q&A

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August 24, 2017
by
Ben Felix
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The Suitability Standard

TL;DR

Financial advisors in Canada are obligated to offer suitable advice, but not necessarily in the best interest of the client, as conflicts of interest and compensation models can influence their recommendations.

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Key Insights

  • πŸ₯Ή Most financial advisors in Canada are held to a suitability standard, which may not align with the best interest of the client.
  • ❓ Conflicts of interest, often related to compensation models, can impact the advice given by financial advisors.
  • 😘 High-management fee products may be recommended due to the commissions and incentives offered to advisors, while low-cost index funds may be overlooked.
  • βœ‹ Advisors licensed to sell insurance may recommend segregated funds, despite their higher fees, because it is the only product they can sell.
  • πŸ‘‹ Due diligence performed by advisors may include finding actively managed funds with good past performance to justify higher fees.
  • πŸ‘ˆ Academic literature and data consistently point to low-cost index funds as the best option for most investors.
  • πŸ‘‹ Despite conflicts of interest, there are trustworthy financial advisors who strive to provide good advice.

Transcript

When a financial advisor tells you what to invest your money in, what do they base their recommendation on? Unfortunately it’s probably not as scientific as you might like to think. Through their regulatory organizations, most financial services professionals are obligated to offer their clients an investment that is suitable. Suitability is a broa... Read More

Questions & Answers

Q: What standard do most Canadian financial advisors follow when providing investment advice?

Most Canadian financial advisors follow a suitability standard, which means their advice only needs to be suitable for the client, rather than in the client's best interest.

Q: How do conflicts of interest affect financial advice?

Conflicts of interest, often related to compensation models, can subtly influence the advice provided by financial advisors, potentially leading to recommendations that align with the advisor's interests rather than the client's best interest.

Q: How do commissions impact the recommendations of financial advisors?

Financial advisors licensed to sell mutual funds receive commissions, which can incentivize them to recommend high-management fee products that offer upfront commissions, rather than low-cost index funds that do not provide large upfront commissions.

Q: Why do advisors sometimes recommend segregated funds?

Financial advisors who are only licensed to sell insurance may recommend segregated funds, even if it may not be the best option for the client, because it is the only product they are authorized to sell.

Summary & Key Takeaways

  • Most Canadian financial advisors operate under a suitability standard, meaning their advice only needs to be suitable for the client, rather than in the client's best interest.

  • Conflicts of interest, often related to compensation models, can subtly influence the advice provided by financial advisors.

  • Advisors licensed to sell mutual funds may receive commissions and incentives that can affect their recommendations, potentially leading to high-management fee products being prioritized over low-cost index funds.

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