While the daily walks on my desk treadmill don’t get me far geographically, I have had the chance to become a virtual adventurer this year, collaborating with a number of Canadian advisors who share my passion for advancing evidence-based investing (formerly known as “passive”). I’ve found it fascinating to learn more about the common values we share, as well as some of our differences. For example, aside from our Canadian friends’ proclivity to pronounce “about” like it’s hiking footwear, did you know:
“Fee-only” vs. “Fee-based” – NAPFA controversies aside, in the U.S., we refer to advisors as “fee-only” when their sole source of compensation is client fees, with no third-party incentives. “Fee-based” generally means an advisor is receiving fees as well as other possible payments. Watch your wording in Canada! There, “fee-based” refers to advisors we think of as fee-only here in the U.S., while a Canadian “fee-only” (or “fee-for-service”) planner offers hourly financial planning and little else.
Where the Wolves Go To Hunt – In the U.S. Wall Street is our favorite industry pejorative, as in, “Watch out for the wolves of Wall Street.” In Canada, the wolves are seen prowling Toronto’s Bay Street.
Indices – For better or worse, it would seem everything from market performance to baby’s first step is benchmarked against the S&P 500 Index here in the states. In Canada, you’re more likely to see the S&P/TSX (Toronto Stock Exchange) Composite Index serving as the most familiar market proxy.
Testimonials – I’m so used to the “no testimonials, no how” rule, it was a shocker to learn that it’s okay to tell the world how much your clients love you farther north. “So that’s why you guys are so cautious about LinkedIn endorsements,” said one Canadian advisor as we compared notes.
Transparency/Disclosures – Here’s another area where Canada may have a leg up on us. (I say “another,” because I’m not convinced that prohibiting testimonials does all that much to safeguard U.S. investors’ interests, while wasting regulators’ time that could be better spent.) It’s not getting huge coverage here, but the Canadian Securities Administrators has been quietly rolling out a series of transparency and disclosure rules under the “Client Relationship Model,” with full implementation scheduled for 2016. As described in this Financial Post article, “The real poop hitting the fan will be two years from today on July 15, 2016 when there will be mandatory full disclosure of product costs and advisory costs.” It’s something we all would do well to keep our eyes on, as a potential model for improved, more transparent financial disclosures worldwide.
Other Compliance Quirks – I am also told that Canadian compliance focuses more on principles- versus rules-based compliance, with less of a “check the box” mentality and more of a tendency toward subtle settlements. One Canadian advisor suggested, “As a whole Canada is less litigious that the US – or so we believe.” On the one hand, this may allow for improved ability to enforce against an advisor who is up to no good. On the other hand, it may be more challenging to clearly define what “no good” entails and consistently apply prescribed sanctions.
In a world where the vast majority of financial products are actively managed or otherwise ill-suited for an evidence-based investment approach, Canadian advisors face an even higher hurdle in finding available solutions. Dimensional Fund Advisors certainly has a relatively seasoned and growing presence in Canada, but with fewer available funds, so far.
ADVISOR ROLES & REGULATIONS
I’ve saved the best for last. We know how difficult it can be for U.S. investors to differentiate advisors who are truly acting in their highest financial interests from look-alike sales people in disguise. As in the U.S., Canada has designations and regulatory bodies that can help investors differentiate the fiduciary from the foul. But also just like here, there are plenty of caveat emptors blocking the view.
Portfolio Manager Firms – The closest equivalent to a Registered Investment Advisor firm is the Portfolio Manager (PM) firm. A PM firm is:
- Fee-based (according to the Canadian definition, which is to say fee-only).
- Typically discretionary
- Regulated by the appropriate provincial or territorial regulatory agency (which are also united under an informal cooperative body, the Canadian Securities Regulators)
- Staffed by advisers who must obtain Advising Representative (AR) registration. This calls for relatively robust professional credentials including EITHER a CIM® plus four years of experience, OR a CFA® plus a year of experience
Other Professional Intermediaries – Then there are the others. In Canada, there are several types of financial professionals, policed by a variety of SROs.
- Securities/Fund Brokers – Securities investment advisors are licensed to sell securities and/or mutual funds and seem to most resemble the broker/dealer role here in the U.S. Typically commission-based, they are self-regulated by the Investment Industry Regulatory Organization of Canada (IIROC).
- Fund Brokers – There also is a designation for those who are licensed to only sell mutual funds. They operate in a commission-based environment and are self-regulated by the Mutual Fund Dealers Association of Canada (MFDA).
- Insurance Agents – Insurance agents are registered to sell insurance products (often with investment components), by the Canadian Accredited Insurance Broker (CAIB) program.
- Multiple Roles – As in the U.S., it’s possible and common for an advisor to be dually registered with multiple sources of compensation. For example, many PMs are insurance brokers as well, a scenario we see here in the U.S. as well.
If you’re not yet confused, here’s one more point to muddy the waters further: I am told that IIROC-regulated firms can also have discretionary advisors on staff and, if they do, they are called Portfolio Managers … not to be confused with a Portfolio Management firm (even if they probably often are)!
MY OVERVIEW OF NORTHERN VIEWS
If we were taking score, whose financial system is “better”? Where Canada’s approach seems to accommodate greater flexibility, it may be harder for individual investors to navigate through the various players and differentiate the good guys from the bad. Where the U.S. may offer clearer guides (to a point), it’s possible that we may be overly fixated on rules and regulations that may or may not actually advance investors’ highest interests.
We’ll call it a draw. Regardless of any grand conclusions reached, it’s always a good idea when we learn from one another. As naturalist Alexander von Humboldt (1769–1859) once said, “The most dangerous worldview is the worldview of those who have not viewed the world.” In that spirit, I thought it might be worth sharing the view up north.