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Objective Advice … may not exist.

Economics and finance, at its root, is the study of incentives. Most actions taken by CEOs, or by hedge funds and most investment bankers, can be explained by their compensation structure. If you understand that, you can predict things”. – Hanif Mamdani, Head of Alternative Investments, Phillips, Hager and North.

Does Objective Advice exist? Advice without bias? Where there is alignment of interests between the investor/client and the advisor?

For the Institutional investor, the answer isn’t clear as consultants now manage money and actuaries provide investment consulting. A ‘pure-play’ is rare.

The Individual investor is advised to make their way through the multiple titles, designations and various securities registrations in the search for Objective Advice.  (But there are few restrictions on what Advisors can call themselves, few Individuals understand the difference between designations and securities registration simply means registered to sell securities).

To evaluate if Advice is Objective, however, one must understand compensation. How does an Advisor get paid? Compensation drives behaviour and determines objectivity.

Institutions recognize that there is always potential for conflict of interest and therefore they build processes to manage them. (For example, having different firms provide actuarial versus investment consulting services. All part of good governance).

What can the Individual investor do?

One of the first questions for an Advisor (any Advisor) might be ‘How are you paid’?

1 – The fee-for-service model some financial planners offer to Individual investors is not always a pure-play. (With one exception. See

The fee-for-service model for financial planning is the ‘professional’ alternative. (Professional meaning fees are charged like those of a Lawyer or Accountant. Advice is independent of product). Most fee-for-service planners, however, have added some sort of money-management services to complement their planning business (likely out of necessity because Individual investors don’t see value in, and won’t pay for, planning). Nevertheless, investors should to understand potential conflicts.

2 – The fee-for-service Investment Counsel Assoc. (now Portfolio Management Assoc. of Canada (PMAC)) get’s full marks for objectivity.

Investment Counsellors charge fees-for-services as a percentage of the investment assets managed. Thus, portfolio manager interests are aligned with those of the client.

3 – Look to pension funds as a guide.

Institutions keep a close eye on fees, costs and expenses. Individual investors should demand full disclosure of all ‘costs’ and understand what value they receive for those costs.

Total costs for the CPP are about 0.43%. (Pages 50, 94, 95 – Operating, investment management and transaction). Individual investors can pay 2.5% plus for some mutual funds, about 1% to 1.5% for some index funds and about 0.09% to 1.5% for ETFs. A diversified portfolio can be managed using ETFs for less than 0.25%. If your costs are vastly different, why?

(Further, Institutions are required to have an investment policy (by law). Individual investors should demand the same. Institutions diversify. Individuals should be sceptical of any proposed portfolio that isn’t. (Use PIAC as a guide)).

 4 – In terms of managing potential conflict of interest, ‘THE’ job for the Individual investor is to find the right Advisor. Hunt for the Advisor that will meet your requirements (any can sell product). Acknowledge Advisor compensation (and therefore better understand and expect skewed behaviour). Look for common ground that results in a win-win.


As regulators in the U.S. and U.K. (re)write governing rules, objectivity and fiduciary duty is what they have in mind. The duty of the Investment Advisor is, at all times, to place the interests of the client first. A fundamental obligation is to act in the best interests of the client and engage in no activity that is in conflict with the client.

(In the U.S., the SEC will shortly extend fiduciary duty to anyone who gives investment advice … beyond simple so-called suitability. In the U.K., by 2012, Investment Advisors must be called ‘restricted’ if they can only sell certain products or ‘independent’ if they have no such restriction. But the most significant change is that Advisors will no longer be paid by commissions. All commission will cease and be stripped out of all products. Imagine).

Individual investors in Canada can only dream of such changes. Canadian securities regulators, all 11 of them, aren’t even close to thinking about Individual investor interests as yet.

To learn more about what other jurisdictions are doing to enhance the individual investor experience search ‘fiduciary duty’ at

Other resources include the B.C. Securities Commission sponsored

Next time:

Dividend reinvestment … just got harder

Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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