On Regulation of Financial Advisors

The action is heating up on Ontario Bill 157 – The Financial Advisors Act, 2014. Regulation has been a hot topic for some time and until recently, there have been few that openly opposed it. Regrettably, the principal objection now is that the act is providing one organization (Advocis) with an opportunity to become the master of a self-regulating profession.

I am incapable of deciding whether or not Advocis would be good at this role.  I don’t know enough and am only slightly interested.  The bigger question revolves around the efficacy of regulation.

The act is fairly innocuous. Require people that provide financial advice to be registered. Provide punishment for those that breach rules. Provide a way for the public to complain and a few more things.  Seems reasonable.

People promote the act as a benefit to consumers, but that is difficult to see in its words. Troubling.  I think it unlikely that this act can prevent any activity not already prohibited.

An analogy.  One of my accounting firm partners was a big fan of wind-powered vehicles. Ice racer, sail plane, and a 37-foot C&C sailboat.  He once told me that wearing a life jacket on Lake Huron was useless. About the only thing they were good for was to make it easier to find the bodies.

An interesting comparison to regulators and their role.  The paper trail or the absence of it makes it easier to prosecute. That is like the life jacket. It gives people a feeling of security but in fact just makes it easier to find the bodies.

No regulation and no regulator can prevent an individual from committing a criminal act. Given that, what is the purpose of regulation?

  • It reduces the number of occurrences because advisers take more care. A noble idea but, as with registering handguns, the criminals seem not to care.
  • It shortens the time within which an individual can do the deed. That presumes that the overseers will review files and such on a regular basis. That might work but reviews are not frequent and often perfunctory. Besides I have never seen an examiner check to see if the file is even real.

The question becomes, “Do regulations exist for the clients’ well-being or do they exist for the well-being of the regulators?”  The third group, “the regulated” are clearly not better off.

All regulation reduces business efficiency. The good ones are doing the necessary work anyway. Regulation by regulators is different from what honest, efficient businesses use to govern transactions.  Business wants to do it right because it is in their interest to do so.

Regulation is too fussy, less common-sense based, lags current practice and is more paper oriented. And then there is the overhead in upstream entities that have supervisory responsibility.  All costs pass through to the clients.

An awkward to explain sidebar to the regulation question, is that clients are less well served when advisers are regulated this way.

Clients do not see all possible methods and theories. Regulation lags change.  No sane adviser will offer advice, or propose actions that are outside the “standard of practice.” Regulators assume that the rules for both advisers and their clients are correct, unchanging and well known. They are not.

Regulation runs contra to client financial literacy initiatives because some clients believe they don’t need to learn anything. The regulators will save them.

There may exist, but I have not seen, a study or survey of advisors and their clients, that claims they are better for the regulation. If these two groups are not better off, then the regulation exists for the regulators not for the rest of us. Regulation for the sake of the regulators seems irrational.

Here’s a new thought. Responsible and informed clients are the best regulators. As an advisor, try to create those and avoid the ones that don’t fit the description.


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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

2 Comments on “On Regulation of Financial Advisors

  1. There’s a saying that sums this all up “There’s no point shutting the gate after the horse has bolted”. Sure, regulation can make it easier to prosecute individual’s for criminal behavior but its not really going to deter anyone from taking client’s (and their money) for a ride.
    As an Australia based Financial planner we’re a bit ahead of you guys in legislation and regulation.
    It seems that every time a licensee goes down like a sinking ship taking client’s with them, we get a slew of new laws and regulation.

    For the criminal advisers out there, they adjust their paperwork and processes to appear compliant but under the thin veneer continue to defraud their client’s of their savings.

    For good advisers, the new legislation always appears to be business as usual. The advice and methodologies behind the advice remain unchanged. Maybe our wording changes a little or we add some new disclosures but thats it, our clients get the exact same advice as pre-regulation.

    The positive is those few clients affected can sometimes get compensated through the courts a bit faster than previously.

    The negatives, every single client now getting advice pays through the nose for it. Our regulation in Australia probably costs five to six hours in back office work and in justifying our thought processes per client per advice document.

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