Dale Jackson

Personal Finance Columnist, Payback Time

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If you want to work as an electrician, a plumber, or even a mortician in Ontario, you need a license. It might be shocking to learn the same requirement does not apply for all financial advisors – at least not yet. 

After years of foot-dragging, Ontario has granted the national self-regulatory investment body (Canadian Investment Regulatory Organization or CIRO) the authority to force its estimated 47,000 professional members to earn the title of “financial advisor.”

Ontario, home to the bulk of the nation’s finance industry, was the first province outside Quebec to pass legislation regulating the use of titles in 2019. Saskatchewan and New Brunswick have since followed.

The new rules will require wannabe advisors to meet minimum standards of education and abide by a code of conduct. While that might seem basic, forcing financial advisors to be qualified is especially vital for Canadians 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 2018 survey by Abacus Data 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. 

Other industry advocates, including the Canadian Foundation for Advancement of Investor Rights (FAIR), have expressed concern over allowing licensed mutual fund dealers to call themselves financial advisors.

Obtaining a license to sell mutual funds only requires an entry-level course. Critics say including them under the title would rank them among advisors with more advanced credentials that include investment, retirement, tax and estate planning.

Including mutual fund vendors – who are often bank-branch employees – under the title could also give rise to conflict of interest concerns stemming from the way they are compensated.

At the heart of the 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 that 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.

FAIR Canada has also expressed concern that letting mutual fund vendors and more qualified advisors share the same title could muddy the water for investors already inundated with an alphabet soup of designations.

A survey conducted late last year by FAIR found 95 per cent of respondents support a common standard and regulatory framework for anyone using the title of financial advisor.

According to the same survey, 92 per cent of respondents agreed that anyone using the title should be proficient in all core areas of personal finance and 72 per cent said that “salesperson” should be required in the title if their primary responsibility is to sell financial products.