Most Canadians are likely under the impression that all financial services professionals are held to the same obligation of doing what is best for their client. Unfortunately, this is not always the case. There are two “standards of care” for financial advisors: a broker and a fiduciary. It is important to understand the difference between these two terms and how your advisors’ professional standards could impact the advice you are receiving.
What You Need to Know
In Canada, there is a fine line dividing the concept of a broker versus the concept of a fiduciary. Generally, financial advisors in Canada are not under fiduciary duty, but in some situations, they are. The Canadian courts define fiduciary duty as a duty of loyalty on a person who is entrusted to look after the best interests of someone else. Whether that duty exists between a client and advisor is highly situational. Typically, the more complex and expansive the planning that takes place is, the more likely that the advisor will develop a fiduciary duty to the client.
if a client were to come to a financial advisor simply looking to buy a mutual fund, then the advisor would be assuming a broker role. In this role the advisor would suggest the best product they have for your situation. They may not be taking into consideration the bigger picture and are acting in more of a sales role. In this situation, as long as all regulatory procedures were followed, the duty of care would be considered to be the “duty of suitability”. A fiduciary duty would not be applied in this situation.
In accordance with Canadian common law, factors such as the level of vulnerability, trust, reliance, discretion, complexity, and industry standards dictate whether a fiduciary duty is in place. For example, if a senior with little investment knowledge were to come to an advisor and entrust them with the entirety of their retirement savings then a fiduciary may apply. The senior in this situation could be considered to have become vulnerable to an advisor. In this case it is possible that the courts would consider the advisor to have fiduciary duty to a client such as this.
Regardless of what duty of care your advisor is operating under in any given situation, it is always prudent to demand full disclosure on all recommendations that your advisor makes. In most cases your advisor will be happy to take the time to ensure you understand the recommended strategy. While there is a greater sense of security when working with an advisor is under a fiduciary standard of care, most brokers take a personal sense of reasonability in doing the best thing for their client.