The Case for a Universal Fiduciary Standard in Finance

A topic of discussion that often comes up in the investment management industry is whether or not there should be a blanket fiduciary duty imposed on investment advisors that deal with the public. Currently, there are many different categories of registration for investment advisors in Canada, some which impose a fiduciary duty and others which only impose a standard of suitability. The standard of suitability does not legally require a registered individual to act in the best interest of the client, and thus some individuals using the “advisor” handle, bear greater resemblance to salespeople. One argument for not imposing a blanket fiduciary duty on investment professionals is that in many instances (for non-discretionary client accounts), the advice of investment professionals is not relied upon or even followed by the client, and thus only a duty of care is suitable. For example, as practicing medical doctors have a fiduciary duty, this would be as if someone with a hernia went to their doctor to receive medical advice and then turned around and performed the operation on themselves.

This article from Abnormal Returns focuses on why there should be a universal fiduciary standard applied to all participants in the financial industry. Using a similar analogy as the one used above, while it might be a noble pursuit to increase education around how to perform a hernia operation, it is not in an individuals’ best interest to perform the operation themselves. The researchers have found evidence that not only does a fiduciary duty not increase the cost of doing business for investment professionals, but that it has the intended effect of directly impacting financial advice. Given the multitude of evidence from behavioural economists that investors tend not to make rational decisions when left to their own devices, the author suggests that “in the absence of a well-educated populace, a true fiduciary standard would, at least, help to level the playing field between the financial services industry and American consumers.''