You need a licence to drive a car or earn money as an electrician, a plumber and even a mortician.
Now the province of Ontario - home to bulk of the nation’s finance industry - says you must have a licence to make a living as a financial advisor or planner.
Actually, not now. After decades of heel dragging and consulting, the province will phase in title requirements over a period of two years for financial advisors and four years for financial planners who were in the business before 2020.
Those who have hung out their financial advisor shingles since then are required to obtain their credentials immediately.
Quebec and Saskatchewan are currently the only provinces with title regulation in place.
The new rules require wannabe advisors to meet minimum standards of education, and abide by a code of conduct. While that might seem pretty basic, investors who currently retain advisors could be shocked to learn that just about anyone could call themselves advisors.
It’s especially shocking considering Canadians are having to take more and more responsibility for financing their own retirements as guaranteed company pension plans - and workplace pension plans in general - have been drying up since the 1980s.
The push to regulate advisors has been coming from the advisors themselves. The Financial Advisors Association of Canada (Advocis) has warned for several years that the lack of regulation for financial advisors puts investors at risk of not only receiving poor advice, but also falling victim to fraud.
To underscore just how vulnerable most investors are, Advocis commissioned a survey by Abacus Data in 2018 that found only 24 per cent of respondents were aware that anyone, regardless of education, training or membership in a professional governing body, could legally call themselves a financial advisor.
The research also found that younger people between 18 and 30, and those with lower incomes, place the highest levels of trust in the financial advisor title.
It is yet to be seen how the stricter regulations for advisors would impact fees. Even without the requirement for formal accreditation, investment fees for Canadians are among the highest in the developed world.
At the heart of the fee issue are annual trailer fees imposed by mutual fund companies to reward advisors who sell their products. A trailer fee is baked into a bigger annual fee called a management expense ratio (MER) based on a percentage of assets invested in the fund. MERs generally range from two to four per cent on segregated funds. A trailer fee is typically one per cent, which could add up to thousands of dollars for long-term investors.
Technically, a trailer fee is for ongoing advice but there are concerns an advisor’s recommendations will not be based on the best interest of the client, but rather the mutual fund that pays the best trailer fee.
There have been calls from the investment industry and consumer groups to go further than licensing requirements by requiring advisors to be fiduciaries; a designation that legally requires advisors to act in the best interest of their clients.
While “acting in the best interest of the client” seems like common sense, requiring a fiduciary designation is probably a long way off considering it was only this week that securities regulators imposed rules to prohibit discount brokerages from collecting trailer fees.
Discount brokers, including those owned by the big banks, are not even allowed to offer advice. They collect the fee at the lift of a finger.