Best Interest – Conflict Of Interest: The Fiduciary Rule And Financial Advisory And Financial Planning Services

1. INTRODUCTION

   As we look forward in our crystal ball to looming issues on the horizon for 2018 and onwards, one that certainly comes to the fore is the regulation of those who provide financial advice and financial planning services, often offered under the nomenclature of "estate planning" or "retirement planning" advice.

   There is a lot of movement afoot as many jurisdictions grapple with how best to regulate those who offer financial advice and financial planning services given the lack in many jurisdictions of a comprehensive legal framework to do so. One of the burning issues is whether a "best interests" standard should apply. Presently, in most jurisdictions there is no express obligation for those who provide financial product sales and advice (as opposed to portfolio managers) and financial planning advice to act in the client's best interests. In many jurisdictions, financial planning as an activity is not subject to a general regulatory framework, and the provision of financial product sales and advice is often subject only to know-your-client and suitability requirements.

   However, several major jurisdictions, including the U.K., Australia, and the U.S. have in place or in the process of adopting the best interest standard, referred to as the "fiduciary rule". In Canada, the provinces of Ontario and New Brunswick are considering adoption of the rule, which has created significant controversy in the financial industry.

   The primary concern that is the genesis for the rule is that many clients believe, and have the expectation, that the financial advice and financial planning services they receive are based on their best interests with a lack of understanding that their advisor may, in fact, have a conflict and not be providing objective advice, in particular where his or her compensation is a commission or other financial reward based on sales.

2. WHAT IS THE FIDUCIARY RULE?

   The fiduciary rule is grounded in the law of fiduciary relations. Professionals such as lawyers, accountants, and others who act as advisors are well-steeped in the obligation to put the interests of their client first, and to ensure there are no conflicts of interest.

   One of the fundamental legal requirements of a fiduciary is that he or she not place himself or herself in a position where his or her self-interest might conflict with his or her duty of loyalty to act in the best interests of his or her client, or other person to whom the duty is owed.

   Arguably, the societal basis for creating the professions, who enjoy special privileges but also have special obligations, is to place important and essential work into a protected class where the interests of the person receiving the advice must always come first, and the rough and tumble buyer-beware profit-focus rules of the marketplace should not interfere.

   Within the context of financial advisory and financial planning services, the fiduciary rule can be seen as a standard to protect investors and those...