Opinion: Whither independence?

I recently had the opportunity to hear from a senior member of management of the Canadian Investment Regulatory Organization (CIRO). Over the course of the conversation, I was struck by the self-regulatory organization’s (SRO) seeming indifference to two important items:

• the definition of “independent”; and
• advisors’ opinions being overridden at the discretion of member firms.

The senior SRO representative opined that there are multiple definitions of “independent” within wealth management, with the most common being “not owned by a bank.” I cannot think of any industry that is allowed to govern itself while freelancing on some of the most critical nomenclature used by the industry. That there are many definitions of “independent” in the marketplace is an acknowledgment that the word can mean whatever the speaker wants it to mean.

If different firms can use “independent” to mean different things, then consumers are at risk of being misled. They may think they are working with one definition, while a firm is using another. Meanwhile, the SRO is doing little to provide needed consistency and clarity.

My dealer, Designed Securities Ltd., has repeatedly opined that, as a working definition, “independent” should mean “not offering proprietary products.” Everyone in the industry knows that proprietary products offer higher margins that boost earnings and create clear conflicts of interest for financial advisors, who act as the intermediaries between product manufacturers and consumers.

Yet, it is all but impossible to find an investment or mutual fund dealer in Canada that does not use “independent” when holding out to the public. Even bank-owned firms will suggest their advisors are independent in their investment decisions.

As the CIRO executive noted, most investment professionals agree that Canadian banks are not independent. In addition, dealers controlled by large non–bank, publicly traded financial institutions, private equity firms, or U.S. parent companies all claim to be independent. Moving along the continuum, we find dealers with advisors who are “encouraged” (read: required) to promote proprietary products despite the inherent lack of independence that comes with dealer-branded products.

The lack of independence in many cases is readily perceived by advisors, if not clients. Dealers owned by publicly traded companies are raising fees and minimum production volumes to raise their share prices. Enhanced know-your-product rules have also created pressure to support proprietary products.

It also seems that many dealers are shifting from a focus on assets under administration to a focus on assets under management. Dealer firms are looking more and more like fund companies.

The concept that clients’ interests come first has been compromised because the word “independent” has been allowed to exist under many variations.

The Canadian Securities Administrators have a mandate to ensure the fair and efficient functioning of capital markets, yet they cede day-to-day operations to the industry SRO, and the SRO, in turn, hasn’t addressed the primary mandate to protect the public from willfully obtuse language.

The second challenge to independence is no established dispute settlement mechanism exists for member firms and their registrants. As my chief financial officer might ask, “Show me the CIRO rule that is being contravened.” That approach is the test that both registrants and firms should apply when disputes arise between them. In stark contrast, the CIRO executive said the matter resides in the ambit of corporate decisions involving culture and commerce.

The closest thing to a rule involving independent commentary is CIRO rule 3600, “Communications with the public” (formerly IIROC rule 29.7(1)). To the best of my knowledge, I’ve never contravened this industry rule but have still been dismissed three times because my so-called independent employers didn’t like my editorial stance. I have had over a dozen articles rejected on the premise that what I had written was non-compliant.

One past employer alleged non-compliance even when I submitted peer-reviewed articles to support my position, which related to active management. The evidence against active management, by the way, is as close to metaphysical fact as is possible in finance. Yet, my then-firm not only refused to approve the article but also dismissed me for having the temerity to submit it in the first place! I’ve had similar experiences at other “independent” firms. My practice has suffered; my clients have suffered.

Around the time I was dismissed, I asked a senior regulatory representative what recourse I had and who has jurisdiction to offer a dispute resolution mechanism when a registrant and their dealer disagree on how a rule should be interpreted. I was told I had two options: sue the firm or leave it. Well, if you sue your firm, you’re leaving. The interpretation and enforcement of industry rules and regulations is the sole purview of member firms.

Firms can and do run roughshod over the rights and privileges of registrants, and there is nothing registrants can do about it. Even if a registrant were to leave, the negative repercussions would be far greater for the registrant than for the firm. Registrants are ideologically indentured to their firms’ marketing departments, who hold all the cards due to their ability to manufacture career risk out of thin air for those who take positions that are entirely compliant but not, however, commercially expedient.

CIRO waves away disgraceful firm conduct by deferring to corporate decisions involving culture and commerce. The regulator has done nothing to address the importance of independence and its lack of definition in the industry, and takes no interest in doing so.