Most advisors are not fiduciaries.

All registered portfolio managers (e.g. with Ontario Securities Commission) in Canada are fiduciaries. A Fiduciary has a legal obligation to act in a client’s best interests; client interests are paramount and portfolio managers cannot compromise a client’s interests by considering the interests of the portfolio manager or those of her employer.

In contrast, the vast majority of investment advisors are held to a lower standard. They are only obligated to ensure “suitability” for a client.

The advisors representing mutual fund dealers or bank-sponsored funds have no  fiduciary obligation. Clients of these firms need to be cognizant of real and potential conflicts of interest. Advisors may, for example, be financially incented to direct clients into higher fee paying funds or recommending a client contribute to an RRSP instead of paying the mortgage.

Although many of these firms do have investment management divisions under a fiduciary umbrella, the corporate directors of publicly-traded dealers and banks have a primary duty to their shareholders. Conflicts of interest may arise as shareholder interests often are at odds with client interests. There can be pressure from shareholders on management to maintain fee revenue growth in their quest for ever-growing earnings.

To increase revenue growth, large publicly-traded companies may encourage asset gathering to maintain momentum. This kind of growth can quickly become unhealthy and at odds with the interests of existing clients. As these firms grow, they also tend to diversify their business by adding new funds, as existing funds get larger and larger and can no longer be managed as nimbly as they once were. This practice is rarely in the best interests of clients; but it does make management look good to shareholders.

“Happiness and moral duty are inseparably connected”.
– George Washington