Qui Bono? Who Benefits?

Can you make good rules and fail to define crucial terms?  Unlikely but most regulation follows that style.

The Income Tax Act in Canada is essentially Subsection 1 of section 2.  Everything else is rules, exceptions and special cases.

An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

It would be nice to know what income and resident mean, but sadly they are treated as “matters of fact” and are not defined.  You can learn retroactively that such and such is income or that you are still resident here even though you moved to Australia and inadvertently remained a member of your church or golf club or kept an old bank account. Not good enough.

A good rule should allow you to know beforehand how you will be treated.  Everyone knows that tax law is a bit arcane and we have come to accept it, but the undefined crucial part seems to be a normal condition in other laws now.

Canada is busy regulating financial advice.  The standard of choice appears to be “Client’s best interest” upgraded from “Appropriate” but not so far as “Fiduciary.” The term, “client’s best interest” is, of course, undefined.

That lack of meaning leads to future problems.  All will require lawyers to sort out and at some considerable cost. Uncertainty is the enemy of efficient.

For the moment these problems are obvious.

  1. The client neither knows nor understands their best interest.  The advisor could help but if the client discovers a different best interest later, then what?  Better to avoid the financial illiterates.  But, how well does that serve society?
  2. The client is unwilling to implement the solution.  Is the advisor required to compel the client or will a signed agreement that they are being stupid be sufficient.  Perhaps we could invoke some higher level of persuasion.  Al Capone claims that a .45 and a kind word is more persuasive than a kind word alone.
  3. The advisor is unaware of some product or service that, if known, would be better fitted to the client’s best interest situation.  What if their contract with providers limits availability to that product?  Will proprietary product like London Life Participating Life insurance necessary be available to anyone with an insurance license if it is the “best interest” solution for a particular client?
  4. Will there be a way to sort out incompetent advisors based on performance as opposed to record keeping and courses attended?
  5. Will advisors be required to assess the client’s ability to understand the process, the products and the range of possible outcomes before becoming involved.  How should they do that?  We know that the “know your client” risk profiles are merely paper for the file.  If a client shows up as a 35-year-old very conservative investor, would the advisor be okay if they arranged a bond fund even though the investment is for their retirement and, based on the past 100 years or so of history, clearly not in their best interest.
  6. Times and people change.  How much of that change must be part of the best interest decision?

We should assess the “qui bono” question.  “Who benefits” from the regulation?  The regulators, the regulated, their clients, society at large, or the lawyers who will defend situations where the claim arises on the basis of hindsight?

My instinct is regulators and defense lawyers, but maybe I overestimate how current laws already deal with most of the problems today. I don’t see how clients benefit and that is, after all, the point.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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