Trust us (almost)

Completely The Flawed Approach to the Financial Advisors

Fiduciary Duty in Canadian Law

Mark Donald

12/10/2011

*Note: This paper was a prize-winning course submission while the author was completing his law

degree in 2011. This article is a general survey of the law and expresses Mr. Donalds personal

views on the subject matter discussed at the time. It is not a substitute for, nor does it constitute

legal advice. Viewing this article does not create a lawyer-client relationship.

Mark Donald is a litigator in Toronto Canada who focuses on commercial, fiduciary and

media/defamation disputes. He can be reached at: mark@mf-law.ca

To learn more, visit:

http://mf-law.ca/lawyers.php

https://www.linkedin.com/in/markdonald1

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Introduction

In a March 2009 episode of the television series South Park, Stan Marsh, one of the shows 10-

year-old protagonists grudgingly agrees to place $100 of birthday money into a long-term

savings account at his fathers request so that it can grow over the years. The banks financial

advisor applauds the young boys decision and begins furiously typing on his computer,

announcing that he has placed birthday cash in a Money Market Mutual Fund and then

reinvested the earnings into foreign currency accounts with compound interest.

After a momentary pause, the advisor declares that the money is gone. When the young client

remonstrates that he had one hundred dollars, the advisor responds: Not anymore you

dont..poof!

South Park has increasingly fashioned itself as voice of social discontent and this scene vividly

illustrates the growing malady affecting the Securities market and investors, both in Canada and

around the world. The financial advice industry that has become a charlatan, publicly

proclaiming its unsurpassed trustworthiness and sense of responsibility towards its

unsophisticated clientele, while at the same time cavalierly exposing them to substantial levels

of risk. Under these circumstances one might think that the financial advisor-client relationship

would be the archetypal model for an automatic, per se fiduciary obligation one which is

assumed by the court and must be rebutted by the defendant advisor. And yet, Canadian law on

the fiduciary status of financial advisors has arrived at a place where the financial advisor is not a

per se fiduciary, but rather an ad hoc fiduciary one who is established on the facts of each case.

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The result of this misguided legal approach is the creation of a system in which the

apportionment of risk in the financial services sector is wholly misaligned. Having held

themselves out as trustworthy professionals, financial advisors are able to gamble with their

clients money, safe in the knowledge that if their conduct is impugned, it is the unsophisticated

client and not the well-heeled investment house that must bear the financial costs of proving the

existence of a fiduciary relationship. This is an inefficient solution to a pervasive problem that

could be better addressed by asserting a per se fiduciary duty over advisors and thereby placing

the onus on the advisor to prove that the assumed fiduciary relationship was circumscribed out of

existence.

The author shall argue that the courts in Canada continue to take a flawed approach to the law of

fiduciary duties as it pertains to financial advisors. A review of the theoretical underpinnings of

the fiduciary relationship, present regulatory schemes defining the duties of the advisor, and their

present socio-economic preeminence in Canada, will demonstrate that financial advisors as a

group are now, and have always been fiduciaries to their clients.

Financial Advisors as Fiduciaries: Trust in a Time of Risk

The first point of reference for this discussion is the undeniable reposing of trust that is an

essential element of the fiduciary relationship. The venerable Blacks Law Dictionary describes a

fiduciary as:

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[O]ne who owes another the duties of good faith, trust, confidence, and candour ... one

who must exercise a high standard of care in managing another's money or property 1

The financial advisor-client relationship includes by its very nature a reposing of trust by the

client. In a recent study by the Investment Advisor Panel of the Ontario Securities Commission,

the Panel concluded that investors already perceive (albeit incorrectly) that their financial

advisors are automatically obliged to act in the clients best interests. The Panel stated that:

Participants reported that they place unconditional trust and confidence in their

financial service provider. This finding is consistent with past research studies which

have similarly found that investors rely on guidance from their advisors. Once the notion

of fiduciary was explained to the focus group participants, most believed that their

advisor owes them a fiduciary duty already. As one of the participants commented,

[i]snt that their job?

Such a belief is unsurprising given the rapidly changing nature of the financial services sector.

As the industry deals with increased competition, advisors have resorted to selling increasingly

complex and risk-laden financial products and packages with the promise of substantial profit.

The inherent peril of this development has been well observed by securities regulators in

Ontario. Referencing its discussions with investor focus groups, the OSC lamented that clients

and perhaps their advisors do not understand what is being bought and sold.2

1 Blacks Law Dictionary, 8th ed, sub verbo fiduciary. 2 Ontario Securities Commission Investor Advisory Panel, News Release, Draft Statement of Priorities OSC letter (27 April 2011) online: .

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The Law of Fiduciary Duties in Canada: Ad Hoc vs. Per Se

The Supreme Court of Canada has held that the concept of fiduciary duty can be separated into

two distinct facets: per se fiduciary duties, in which the fiduciary relationship is assumed as a

result of the of the relationship itself, and ad hoc fiduciary duties in which the duty will be

accepted or denied based on the presence or absence of a number of indicia in each specific case.

Per se or traditional fiduciary duties were described by the Court in Lac Minerals:

When the court is dealing with one of the traditional relationships, the characteristics or

criteria for a fiduciary relationship are assumed to exist. In special circumstances, if they

are shown to be absent, the relationship itself will not suffice.3

In Frame v. Smith, the Court indicated some examples of these traditional relationships:

In the past the question whether a particular relationship is subject to a fiduciary

obligation has been approached by referring to categories of relationships in which a

fiduciary obligation has already been held to be present. Some recognized examples of

these categories are relationships between directors and corporations, solicitors and

clients, trustees and beneficiaries, agents and principals, life tenants and remaindermen,

and partners.4

In contrast, ad hoc fiduciary duties, and are not deemed to be fiduciary as a matter of course.

Instead, they depend on the presence of certain indicia within each discrete relationship in order

to reach a fiduciary standard. The Supreme Court of Canada has cited with approval the Ontario

3 International Corona Resources Ltd. v. Lac Minerals Ltd., 1989 CarswellOnt 126, 2 SCR 574 (WLCan) at para 130 [Lac Minerals]. 4 Frame v. Smith, 2 SCR 99, 1987 CarswellOnt 347 (WLCan) at para 57 [Frame].

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Court of Appeals position that the relationship between clients and their financial advisors

belongs in this category, opining in Varcoe v. Sterling:

The relationship of broker and client is not a per se fiduciary relationship[I]t depends

on the circumstances of the individual case. Where the elements of trust and confidence

and reliance on skill and knowledge and advice are present, the relationship is fiduciary

and the obligations that attach are fiduciary. On the other hand, if those elements are not

present, the fiduciary relationship does not exist. While the broker may have obligations

in contract or negligence to the client, there is no fiduciary duty. The circumstances can

cover the whole spectrum from total reliance to total independence.5

In Hodgkinson v. Simms, 6 LaForest, J. laid out a set of five indicia to be considered when

determining the existence of a fiduciary duty between financial advisors and their clients. These

factors were clarified and summarized by the Ontario Court of Appeal in TD Securities v. Hunt,

1. Vulnerability the degree of vulnerability of the client that exists due to such things as

age or lack of language skills, investing knowledge, education or experience in the stock

market.

2. Trust the degree of trust and confidence that a client reposes in an advisor and the

extent to which the advisor accepts that trust.

3. Reliance whether there is a long history of relying on the investors judgment and

advice and whether the advisor holds himself or herself out as having special skills and

knowledge upon which the client can rely.

5 Varcoe v. Sterling, 1992 CarswellOnt 888, 7 OR (3d) (Ont Gen Div) (leave to appeal refused) at para 87 (WLCan) [Sterling]. 6 Hodgkinson v. Simms, 1994 CarswellBC 438, 3 SCR 377 [Simms].

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4. Discretion the extent to which the advisor has power or discretion over the clients

account.

5. Professional Rules or Codes of Conduct help to establish the duties of the advisor and

the standards to which the advisor will be held.7

To this formulation, Cromwell, J. of the Supreme Court added, that in all cases of fiduciary duty,

the alleged fiduciary must have undertaken, explicitly or impliedly, to act in the clients best

interests.8

The practical difference between the ad hoc and per se designations is the placement of the onus

of proof. While the plaintiff seeking to establish an ad hoc fiduciary duty must prove the

existence of that duty on the facts, in cases involving the traditional/per se designations, the

plaintiff has benefit of a presumption that the defendant must rebut. Note, that this onus is not

impossible but requires proof that the defendants role and scope of authority was so limited,

circumscribed and proscribed by the client that the so-called fiduciary represented a mere order-

taker for the client, offering no advice and exercising no discretion.9

The Social Genesis of the Fiduciary Duty: The Other Half of the Story

While the per se/ad hoc dichotomy is useful in delineating the broad scope of fiduciary

relationships, the aforementioned foundational cases give limited indication of what principles

unite and separate per se and ad hoc fiduciary duties. Indeed, many commentators have observed

7 Hunt v. TD Securties Inc., 2003 CarswellOnt 3141, 66 OR (3d) 481 at para 40 (Ont CA), (leave to appeal refused) [Hunt]. 8 Galambos v. Perez, 2009 SCC 48, [2009] 3 SCR 247 at para 77 [Galambos]. 9 Kent v. May, 2001 CarswellAlta 721, 298 AR 71 at para 52 (Alta CA) [Kent].

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the Courts historical unwillingness to attempt to fashion any sort of definitive tests for the

rationales behind fiduciary duties. This, in turn, impedes the judiciary from considering the

meaning of the term fiduciary in a fulsome and theoretically sound way. By examining

different trust-based relationships through the prism of their importance to Canadian society, one

can better define and understand what a fiduciary is and therefore conclude that the financial

advisor-client relationship has been historically mislabeled as an ad hoc fiduciary duty, when it

should instead be viewed as part of the per se/traditional grouping.

To say that the fiduciary relationship is born of trust is to tell only half the story. As members

of a functioning society, we place our trust in close associates and passersby on a daily basis. It

is only when the reposing of trust creates a relationship that society perceives as essential to its

wellbeing that a fiduciary duty is created. As several authors have indicated, the genesis of a

fiduciary duty is dictated by the value which society places on that relationship. Legal theorist

Tamar Frankel has opined:

Fiduciary duties are imposed when public policy encourages specialization in particular

services, such as money management or lawyering, and when the entrustors' costs of

specifying and monitoring the fiduciaries' functions threaten to undermine the utility of

the relationship to entrustors.10

Similarly, Leonard Rotman has described the fiduciary relationship in this way:

10 Tamar Frankel, The New Palgrave Dictionary of Economics and the Law, sub verbo "fiduciary duties". online: .

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The fiduciary concept is primarily a public policy tool designed to regulate important

social and economic relationships that arise from human interdependency in

contemporary society.11

i. The Solicitor-Client Relationship

A per se duty such as the solicitor-client relationship illustrates this point. In a society like ours,

premised upon and perpetuated by the Rule of Law, it is not surprising that the solicitor-client

relationship should ascend to the status of per se fiduciary duty. Indeed, a survey of the history

of lawyers elevation to fiduciaries to their clients has its roots in an English desire for a fair and

efficient trial system:

The first fiduciary rules applicable specifically to lawyers appeared in the Statute of

Westminster I, Chapter 29, enacted during the reign of Edward I in 1275, which

criminalized ambidexterity the act of taking retainers from opposing sides in a case

as well as deceit or collusion of the court or a party at court... The ordinance also

expanded the Statute of Westminsters prohibition against taking money from both sides

in litigation to include representations adverse to a former client In 1729, an Act for the

better regulation of Attornies [sic] and Solicitors was passed. Together with the

formation of the Society of Gentleman Practisers in 1739, this Act affirmed that lawyers

should hold themselves to the standards of gentlemen, which meant above all the

acceptance of moral as well as legal obligationslawyers should aspire to the kind of

chivalric standards that had historically been applicable to positions of feudal trust most

11 Leonard I. Rotman, The Fiduciary Regulation of E-Commerce (2004) 29 Queens LJ 739 at 762.

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importantly, to a duty of loyalty. Although the statute and cases did not yet use the term

fiduciary, that concept was implicit.12

The Supreme Court of Canada placed a modern interpretation on this point in 3964920 Canada

v. Strother when it held:

[F]iduciary duties provide a framework within which the lawyer performs the work and

may include obligations that go beyond what the parties expressly bargained for. The

foundation of this branch of the law is the need to protect the integrity of the

administration of justice.It is of high public importance that public confidence in that

integrity be maintained.13

ii. The Director-Corporation Relationship

It is instructive to discern the apparent similarity in public policy goals that underlie the financial

advisor-client relationship and another important fiduciary corporate bond: the director-

corporation relationship. The common law fiduciary duty owed by corporate directors to the

corporate body goes back as far as a 1747 decision of the English Lord Chancellor in Charitable

Corporation v. Sutton.14 Indeed, the existence of the fiduciary nature of the relationship has

since then become embedded in Anglo-Saxon jurisprudence. According to Ellis Fiduciary

Duties in Canada:

12 Sande L. Buhai, Lawyers as Fiduciaries (Loyola Law School Legal Studies Paper no. 2008-14, April 2008) at 8. 13 2007 SCC 24, 2007 CarswellBC 1201 (WLCan) at para 34 [Strother]. 14 Mark Ellis, Fiduciary Duties in Canada, loose-leaf (consulted on 21 November 2011), (Scarborough: Carswell, 2008), ch 15 at 3 [Fiduciary Duties].

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[A] director is a fiduciary to his company upon appointmentit is therefore difficult to

envisage a directorship scenario where a fiduciary relationship has not arisen.15

Ellis goes on to characterize the directors designation as fiduciary as a sort of historical

accident owing itself to directors originally being misnamed as the trustee of the corporation.

Nevertheless, this would appear to be a case in which a bad case has made good law. The

ultimate societal benefit to be gained is the financial confidence and economic growth that

accrues from good corporate stewardship. The same rationale can be applied to the relationship

between financial advisor and client. And yet, while the former relationship is the beneficiary of

a blanket, per se fiduciary duty, the latter is not. It seems paradoxical that the corporation an

entirely fictitious legal person is afforded the benefit of a per se fiduciary duty, while the very

human client of the financial advisor is not.

iii. The Agent-Principal Relationship

Perhaps the most incongruous oversight by the Courts is their historic acceptance of an analogy

between agents and financial advisors, but not to have attached the same per se nature of

fiduciary duty that customarily comes with the agent-principal relationship. Canadian courts

have acknowledged this similarity as early as 1910 when, Riddle, J. of the High Court of Ontario

ruled in Johnson v. Birkett that a stockbroker had breached a fiduciary duty to his client by not

strictly following the clients instructions. In reaching its conclusion, the court held that the only

way to circumvent the breach was to offer full disclosure to the client and obtain their assent.

15 Fiduciary Duties supra note 14 ch 4 at 2.

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Most important, is the fact that the court viewed this liability through the prism of the agent-

principal fiduciary relationship:

[I]t has neverbeen doubted that the agent may sell to his principal property of his own,

if it be proved that no advantage was taken by the agent of his position, and that the

transaction was entered into in perfectly good faith and after full disclosure. But the onus

of proving all this lies upon the agent.16

More recently one author made the same observation:

Regarding IAs [Investment Advisors] and their clients, although since at least 1935 the

Canadian courts have recognized that an IA client relationship may be fiduciary in

nature, the relationship between them has always traditionally been one of agency.17

To be sure there is a long line of jurisprudence in Canada predating the per se/ad hoc

dichotomy - that establishes the agent-principal relationship as one of a presumptive fiduciary

nature that may be rebutted based on the specific facts of the case. The Saskatchewan Court of

Appeal put the state of the law most bluntly in Lafrienere v. Bouffard:

The relation is of a fiduciary nature, wherever the principal reposes trust and confidence

in the person whom he selects as his agent. This is so in all cases of general agency, but

where the agency is not a general one, its fiduciary nature depends upon the

circumstances of the particular case.18

More recently, the Supreme Court of Canada explicitly held in Lac Minerals that:

16 Johnson v. Birkett, (1910), 21 OLR 319 at para 29 (Ont HC) (WLCan). 17 Geoff A. Clarke, Liability and Damages in Unsuitable Investment Advice Cases, Background Paper, (August 2005: Fasken Martineau DuMoulin LLP) at 34. online: investorvoice.ca < http://www.investorvoice.ca/Research/LIABILITY_AND_DAMAGES.pdf>. 18 Lafrienere v. Bouffard, [1929] 4 DLR 183 at 12 (WLCan).

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[T]here are certain relationships which are almost per se fiduciary such as trustee and

beneficiary, guardian and ward, principal and agent, and that where such relationships

subsist they give rise to fiduciary duties.19

Given this similarity in historical-theoretical underpinning between lawyers, corporate directors,

agents and financial advisors, a per se fiduciary duty for the financial advisor-client relationship

would seem to apply as a matter of course. After all, in line with the aforementioned dicta on the

link between fiduciary duties and societal importance, the Supreme Court of Canada in

Hodgkinson v. Simms commented as follows on the importance of sound financial advice to

Canadian society (emphasis added): By enforcing a duty of honesty and good faith, the courts

are able to regulate activity that is of great value to commerce and society generally.20

LaForest, J. went on:

The desire to protect and reinforce the integrity of social institutions and enterprises is

prevalent throughout fiduciary law. The reason for this desire is that the law has

recognized the importance of instilling in our social institutions and enterprises some

recognition that not all relationships are characterized by a dynamic of mutual autonomy,

and that the marketplace cannot always set the rules. By instilling this kind of flexibility

into our regulation of social institutions and enterprises, the law therefore helps to

strengthen them.21

While the Supreme Court, speaking through Justice La Forest appears to have recognized that

the question of value to society as a primary foundation of fiduciary duties in Simms, they do

19 Lac Minerals, supra note 3 at para 90. 20 Simms, supra note 6 at para 45 21 Simms, supra note 6 at para 48.

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not take this revelation to its logical conclusion. Instead of engaging with the implications of this

principle, the Court appears to treat it as a mere point of legal history, when it is in reality, a

powerful conceptual tool for discerning the scope and meaning of a per se fiduciary duty. The

next major decision on the subject - The OCAs 2003 decision in Hunt cites Hodgkinson with

approval, but only insofar as it seeks to clarify the five indicia for a fiduciary duty laid out by

Justice LaForest in that decision.22 The conspicuous absence of any reference to value to

society as an indicia of a per se fiduciary duty is, in the authors opinion, a fundamental flaw in

the jurisprudence on the subject.

By relying exclusively on the factors set down in Simms/Hunt, the court has practically barred

itself new additions to the traditional/per se list of fiduciary duties. The author readily admits that

while there are not that many that could be plausibly added to the existing list, the financial

advisor-client relationship is surely one of them.

While the 5 Hunt factors are useful in discerning individual, ad hoc duties, they are of little

assistance to classifying per se duties. Discrete concepts like trust, discretion and vulnerability

are much more easily applied to a relationship between two discrete parties than to a type of

relationship that is significant to an entire society. Through the Hodgkinson/Simms test

therefore,, Canadian courts have created an analytical framework that is biased towards findings

of fluid, ad hoc duties and thereby hinders the finding of per se duties.

A genuine inquiry by the Court into the financial advisor-client relationships overall value to

Canadian society would go some way to redressing this imbalance. Were the Courts to embark

upon such an exercise, it is the authors contention that they would find sufficient support for

22 Hunt, supra note 7 at para 37.

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holding that the financial advisor-client relationship fits appropriately into the per se grouping of

fiduciary duties.

Financial Advisors Today: Selling Freedom 55 to Canadians

Historical-theoretical rationales aside, the author asserts that the increasingly aggressive public

marketing undertaken by financial advisors over the past two decades has given them an

unprecedented level of influence over societys financial wellbeing. Therefore, a situation exists

where, for the good of Canadian society, a per se fiduciary designation for financial advisors is

more essential than ever before

The recent growth in financial services and increasing adventurism of financial advisors has

turned the financial services sector into a far larger and more economically dangerous animal

than ever before. This new reality underscores the point that not only is there a compelling

historical argument to be made supporting the application of a blanket fiduciary duty to the

industry, recent developments provide ample justification in and of themselves.

It is important to note that the value of various relationships will change with time as societal

demographics change and mores shift. One author put fiduciary duties into this historical

perspective:

[F]iduciary duties evolve over time according to changes in societal norms and values

of society, and to a degree, technological and market changes. It is, for example, very

unlikely that paying equal wages to men and women or subsidizing public transport for

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the poor, elderly or disabled would be regarded as breaches of fiduciary duties in the 21st

century but all were so regarded not very long ago.23

And so it is with the financial advisor-client relationship. Ours is a population that has come to

rely on sound personal investment as the backbone of personal financial security and wellbeing.

The number of Canadian retirees dependant on nest eggs, and of Canadian families expecting

to send their children to university is larger than ever before. Investment in the stock market is a

common means for many to secure the quality of life that they have come to expect. Indeed,

much of the national economys growth owes itself to investment speculation, with Statistics

Canada estimating in 2006 that some 288,000 people were employed in financial and investment

advisory businesses.24 This explosion in the industry has generated greater expectations of

personally-tailored, high quality service and yet, has also precipitated increased reports that

financial advisors are falling below that publicly-stated standard. The Federal Ombudsman for

Banking Services and Investments (OBSI) reported in 2010 that the vast majority of investment

complaints were based on the suitability of investments and investment advice offered by

financial advisors. While 2010 saw a slight dip in the number of Investment case files opened by

OBSI, the overall trend is unmistakable, with the number of files rising from 220 in 2007 to 562

in 2010 and 462 of those relating to claims of flawed investment advice.25

There can be little argument that for better or worse, the prominence of financial advisors in

Canadian society has increased over the past two decades to the extent that their level of

23 Jeffrey Bone, Corporate Environmental Responsibility in the Wake of the Supreme Court Decision of BCE Inc. and Bell Canada (2009) 27 Windsor Rev Legal & Soc Issues 5 at 25. 24 The Investment Funds Institute of Canada, The Value of Advice: Report (July 2010) at 1. 25 Ombudsman for Banking and Investment Services, Annual Report, (Ottawa: OBSI 2010) at 25-26.

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importance has crossed the Rubicon into per se fiduciary territory. One Canadian financial

consultant emphasized the social ramifications of this development:

[Financial advisors] promote the idea that investing with them will lead to the good life

(the Freedom 55 image). For about the last 20 years there has been an aggressive

marketing campaign to convince retail investors that only by using an advisor will we

safely meet our retirement and other savings goals. Advisors are the primary interface

with retail investors and thats where the risk lies.26

Risk & Efficiency in a Broken System: Ideological Criticism v. Factual Reality

There can be little doubt that the higher public profile of financial investors has created

increasing competition in the industry and a corresponding reckless adventurism. The core

problem with the present legal system is that it has not addressed the misalignment in the burden

of risk between advisors and clients, encouraging the public to engage in market speculation - a

vital tenet of market economy renewal - but at the same time, ignoring the increasing

complexity, asymmetric access to, and understanding of, pertinent information. The inaugural

Chair of the Ontario Securities Commission's Investor Advisory Panel, Anita Anand, had this to

say about risk in North American securities market and its link to the current global recession:

Many would agree that the US financial crisis of 2008, a crisis that reverberated throughout

global capital markets, arose from a multiplicity of factorsAt the heart of the crisis, and

relevant to many of these factors, were information asymmetries between issuers of complex

26 Ken Kivenko, Advisor Risk, Canadian Money Saver (June 2011) online: Canada Fund Watch .

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securities, on the one hand, and investors in those securities, on the other Furthermore,

some information about risk was simply unknown, given the complexity of the chain of

securities and the way in which they were interrelated.27

Writing in 2009, the President of financial advisory house Fidelity International lamented the

pervasive lack of investor confidence in the markets, illustrating the gulf between societys

expectations for financial advisors and their actual performance:

The confidence of savers and investors has been badly shaken in two ways during the

financial crisis. It is natural in the wake of a bear market to question whether investment

markets can help us achieve our financial aspirations. But, more importantly, the events

of the past two years have cast doubt on the integrity and motives of parts of the financial

services industry itself.

The challenge today is to restore our customers faith in the risk assets that history

suggests are most likely to help them meet their goals but also in the industrys

willingness to put the interests of its clients first.28

The key to fixing this imbalance is the creation of a more predictable system that inspires the

trust and confidence of investors. The stock market will never be entirely risk-free. Indeed, its

growth is entirely fueled by speculation. The imposition of a fiduciary duty represents the best,

most efficient way to balance societys desire for entrepreneurial risk-taking with the need to

protect investors.

27 Anita I. Anand, Is systemic risk relevant to securities regulation? (Fall 2010) 60 U Toronto LJ 941 at 947. 28 Robert Higginbotham, 5 Steps to Restoring Savers Faith in Risk, Financial Times (15 November 2009) online: Financial Times [5 Steps].

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i. Fiduciary Status as the Most Efficient Method of Regulation

Some critics have countered that it would be inappropriate to assign a blanket fiduciary duty to

financial advisors as to do so would add significant cost and inefficiency to the relationship.29

According to this argument, the mere presence of some sophisticated investors in the

marketplace employing their advisors as mere order-takers is enough to render superfluous the

entire notion of a per se fiduciary duty due to the increased costs in time and effort that it would

foist on financial advisors.

Respectfully, it is trite to say that along a spectrum of fiduciary duties, there will be some

relationships that are so formal, defined and perfunctory that the duty will be defined out of

existence by the client. This is a reality for any professional relationship. For example a solicitor

retained by a client to write a single letter with language set-out by the client would not ascend to

fiduciary status, notwithstanding the traditionally per se fiduciary nature of the solicitor-client

relationship. The true measure of whether to assign an ad hoc or per se duty is essentially a

question of fact: to what extent can it be said that the group of presumptive beneficiaries of a

fiduciary relationship require fiduciary protection?

The empirical evidence illustrates an almost willful ignorance by critics of the factual realities of

the advisor-client relationship in Canada, namely, that the vast majority of Canadian investors

are unsophisticated by fiduciary standards and therefore whether they are willing to admit it

or not require their financial advisors to act in a fiduciary capacity.

29 Joseph Groia, Extending a Fiduciary Duty to all financial advisors: will it make a difference?, Background Paper, (25 March 2010) 4. Online: Groia & Company [Groia].

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In addition to the aforementioned findings of the Investment Advisor Panel of the OSC, in a

recent global survey by the Chartered Financial Analysts (CFA) Institute30 members found that

financial advisor misconduct is the most serious ethical issue facing the Canadian market.

Concerns about advisors were cited as the top worry by 32% of respondents - double the next

biggest concerns.31 That investors generally rely upon and expect a fiduciary standard from their

advisors is unsurprising given the increasingly complex nature of products in the financial

services market. In February 2010 research by TNS Global Markets concluded that a mere 13%

of Canadians were able to answer three basic questions dealing with financial risk thereby

indicating that the vast majority of them have minimal or no understanding of the fundamental

principles of financial risk.32 The overwhelming evidence therefore suggests that the

sophisticated investor, the very person whom the ad hoc duty is designed to assist, is in fact, a

myth.

With this in mind, it becomes clear that the charges of inefficiency made by critics of a per se

fiduciary standard for financial advisors are fundamentally flawed. In treating the financial

advisor and client as equals in their access to, and understanding of risk, the critics measure the

efficiency strictly in terms of the speed through which transactions can be made. Such an

approach is fundamentally at odds with the equitable roots of the fiduciary concept. While a

purely economic view of efficiency judges its goal by the financial benefit accrued from any

single transaction, efficiency in fiduciary terms means fostering broad, societal confidence in a

30 The CFA Institute is a global, non-profit organization of investment professionals from over 100 countries worldwide. 31 CFA Institute, Financial Market Integrity Outlook, (January 2011) online: at 18. 32 Canadian Consumers do not Understand Financial Risk, Canada Newswire (4 February 2010) online: Canada Newswire < http://www.newswire.ca/en/story/601763/canadian-consumers-do-not-understand-financial-risk>.

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certain relationship/activity that is deemed to be of fundamental importance. As Professor

Leonard Rotman writes:

It may be plausibly suggested that the fiduciary concepts focus on the preservation of

important relationships is efficient, even in contrast to the notion of efficient breach,

insofar as it maintains the viability of necessary relations in interdependent societies by

preserving the trust of those who engage in them. The fiduciary concept instills a greater

degree of predictability in these interactions by instituting norms that strengthen the

parties confidence in the continuing integrity of the relationship in question (and its

consequences).33

This does not mean to say that economic arguments have no place in the application of a per se

fiduciary duty to financial advisors. As has been demonstrated, the evidence illustrates that a

clear informational imbalance that exists between advisors and their clients regarding financial

products and the associated risk. In light of this reality, it makes sense that it is the

knowledgeable financial advisor who should shoulder the financial costs of having to legally

discharge the onus that comes with a per se fiduciary duty. Given the clear importance of the

relationship to society, and the equitable imperatives on which fiduciary law is premised, it

seems inefficient that the unsophisticated client should bear the financial costs of having to

legally prove the existence of a fiduciary relationship.

33 Leonard I. Rotman, Is Fiduciary Law Efficient? A Preliminary Analysis (Paper delivered at the Remedies Discussion Forum held in Aix-en-Provence, France, June 5-6, 2009) online: at 20.

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ii. Missing the Forest for the Trees: The Professionals are the Problem

The supposedly practical concerns held by critics of such a per se fiduciary duty for financial

advisors are largely misplaced. Having opined on the apparent inefficiency of a per se fiduciary

duty, critic Joseph Groia writes:

A fiduciary duty will also not help victims of boiler room fraud, ponzi schemes,

unregistered representatives and unregistered products. We are amazed at how little real

regulatory work is being done to prevent these schemes and how ineffective the

regulators are in helping injured investors received [sic] compensation for their losses. If

there is one area of the marketplace, above all others, in which there should be a renewed

effort, it is here.34

Respectfully, the primary lesson of the economic earthquakes of the recent past is that it is

foolish to treat all securities fraud as the result of dishonest quasi-criminals when in reality, a

great proportion of the damage done to retail investors and the economy as a whole arises from

professional advisors acting in an official capacity who have ignored all notions of reasonable

risk-assessment in their sale of securities. The author does not wish to trivialize the importance

of the securities regulatory regime in policing securities fraud, but argues that this is a separate

problem from the issue of the systemic risk imbalance in the professional financial services

industry.

Practically speaking, the imposition of a per se fiduciary duty would be the most efficient means

of regulating the profession. Self-regulation would by all accounts be less costly than the

expansion of Canadas securities regulation enforcement apparatus, demanding only that

34 Groia, supra note 30 at 4.

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financial advisors have a more circumspect approach to their sale of financial instruments to

clients. There can be no doubt that this would add certain opportunity costs to the advisor-client

relationship, but this charge must be viewed in the context of an industry run amok over the past

few years. Justice La Forest pointed out the social utility of the fiduciary duty as a regulatory

mechanism in Simms:

The law of fiduciary duty has always contained within it an element of deterrence ... In

this way the law is able to monitor a given relationship society views as socially useful

while avoiding the necessity of formal regulation that may tend to hamper its social

utility.35

As the SCC acknowledged, the occupation of financial advisor is one in which the nature of

their position is such that specific regulation might frustrate the very function they have to

perform.36 With this in mind, it would seem that the most effective course of action to protect

investors is not a more elaborate system of rules and regulations, but rather a single, clear,

fiduciary standard that simply asks the financial advisor to make a concerted effort to ensure that

their advice is in their clients best interests. Indeed, one can argue that it is exactly because the

present regulations are so unclear, that financial advisors have so brazenly pushed the envelope

in suggesting security purchases that are disastrously inappropriate for their clients. Indeed, one

practitioners prescription for the rehabilitation of the investment sector was a greater emphasis

on explaining the duty of the financial advisor:

[O]n which side of the fence their adviser sits: is the adviser acting as the agent of the

consumer or of a product provider? This question matters because it forms the basis of

35 Simms, supra note 6 at para 95. 36 Simms, supra note 6 at para 45.

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the relationship between an intermediary and their client. Consumers need to know

whether they are dealing with an adviser or a salesman.37

In addition, critics of a fiduciary standard complain that such an imposition will deprive financial

advisors of traditional civil defences such as contributory negligence on the part of the investor,

or that the losses are attributable to market events rather than negligence. Unlike claims of

negligence or breach of contract, remedies for breach of fiduciary duty are grounded in equity

and therefore likely to be much more substantial for victorious plaintiffs. In tort for example, a

plaintiffs damage award is limited by forseeability, contributory negligence and the duty to

mitigate, while an equitable breach is bound only by the Courts discretion. As Ellis notes in the

Supreme Courts decision in Cadbury Schweppes Inc. v. FBI Foods Ltd, and Strother:

The law takes a hard line against faithless fiduciaries. The object of the exercise is to

correct the wrong done by rendering a judgment that achieves a broadly equitable

resultthe Supreme Court of Canada has often noted that equitable remedies are always

subject to the discretion of the court.38

With respect, this criticism smacks of cynical self-interest. The author asserts that the best and

indeed only way to create greater certainty in this respect is the acknowledgement of a per se

fiduciary duty for financial advisors. The complaint by critics at the prospect of higher damages

awarded for breaches of fiduciary can and should be met with a simple refrain: Its an important

job. Try harder.

37 5 Steps, supra note 28. 38 Fiduciary Duties, supra note 14 ch 20 at 6.

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The Present Regime & OSC Rule 31-505: The Ready-Made Fiduciary Standard.

The proliferation of various regimes of regulatory provisions and codes of conduct would appear

to raise the threshold of duty required of financial advisors to an unprecedented level. Seen in the

context of the courts dictum in Hunt that the existence of a fiduciary duty for advisors will be

informed by professional rules or codes of conduct, it may be argued that the sheer weight of

these various instruments alone are enough to render the other indicia largely superfluous.

i. The Present Regime

The management and standard of conduct of financial advisors across Canada is relatively

uniform, with each provincial Securities Act containing provisions providing that all persons

acting as advisors must be registered.39 In addition, the Investment Industry Regulatory

Organization of Canada (IIROC) acts as a self-regulator of the financial services industry by

setting and enforcing rules regarding the proficiency of individual advisors and their firms as it

pertains to all business, financial and ethical practices within the industry.40

In addition, different varieties of advisors may be registered with bodies various self-regulating

organizations including the Canadian Securities Institute and the Mutual Fund Dealers

Association of Canada,41 each of which have their own regulatory requirements that advisors

maintain high ethical standards:

39 Legal Liability for Financial Advisors in Canada, Background Paper, (January 2011) online: Dolden Wallace Folick LLP at 4 [Dolden Wallace Folick]. 40 Dolden Wallace Folick, supra note 39 at 9. 41 Dolden Wallace Follick, supra note 39 at 12-14.

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IIROC Rule 29.1 requires that investment professionals observe high standards of ethics

and conduct in the transaction of their business; not engage in any business conduct or

practice which is unbecoming or detrimental to the public interest; and be of such

character and business repute as is consistent with the standards of the rule. The MFDA

has the same requirements, but also states explicitly that investment professionals under

its jurisdiction must deal fairly, honestly and in good faith with their clients.42

Moreover, amendments to National Instrument 31-103 have set out know your client and

suitability obligations, as well as conflict of interest management, identification and disclosure

which are designed to strengthen the duty owed to retail investors by their financial advisors.

While there can be no doubt as to the quantity of different actors and bodies regulating financial

advisors, serious questions remain as to the quality of the present system. In holding themselves

out as qualified professionals in a complex industry, who are dedicated to their clients financial

wellbeing, financial advisors surely expect, and surely are inviting, indeed demanding that a

certain level of trust be reposed in them by their clients. As Ed Waitzer, former Chair of the

Ontario Securities Commission - a proponent of a fiduciary or best interests standard for

financial advisors pointed out:

Many argue that its the buyers responsibility to do due diligence and shop around for

the best price. But should caveat emptor apply when buyers think they are hiring a

professional to do the shopping?43

42 David Di Paolo & Kara Beitel, No Fiduciary Standard Needed in Canada, Advisor.ca (12 May 2011) online: Advisor.ca . 43 Ed Waitzer, Make Advisors Work for Investors, National Post (14 February 2011) online: National Post .

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ii. Calling the Relationship what it is: OSC Rule 31-505

It would appear that the Ontario Securities Commission has used its Rules to take a vital first

step in imposing a fiduciary duty on financial advisors. Ontario Securities Commission Rule 31-

505 provides at Part 2.1(1) that A registered dealer shall deal fairly, honestly and in good faith

with its clients.44 Some practitioners, have already argued that this construction of statutory

language already amounts to a fiduciary prescription for financial advisors:

Although our courts have not yet recognized that it does so, this rule arguably imposes a

fiduciary obligation on Ontario registrants with respect to their clientsIt is also difficult

to understand how an advisor who fails to provide advice that is in the best interests of its

client would be acting fairlyIn light of OSC Rule 31-505, one might wonder whether

the debate in Canada is as much about labels and attitudes as it is about legal

obligations.45

The notion that the language employed by OSC Rule 31-505 creates a new statutory fiduciary

duty is strengthened when one considers that the same language has been employed by the

Supreme Court to explain the scope and content of fiduciary duties owed by financial advisors to

their clients. In Hodgkinson v. Simms, La Forest, J held (emphasis added):

Apart from the idea that a person has breached a trust, there is a wider reason to support

fiduciary relationships in the case of financial advisors. These are occupations where

advisors to whom a person gives trust has power over a vast sum of moneyBy

44Conditions of Registration, OSC Rule 31-505 (18 September 2009). s 2.1(1). 45 Phillip Ainsworth, Existing Rule Requires Good Faith, National Post (15 February 2011) online: National Post < http://opinion.financialpost.com/2011/02/15/fp-letters-to-the-editor-existing-rule-requires-%E2%80%98good-faith%E2%80%99/>.

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enforcing a duty of honesty and good faith, the courts are able to regulate activity that is

of great value to commerce and society generally.46

Similarly, as far back as 1959, in Burke v. Cory, the Ontario Court of Appeal rested its finding of

a fiduciary duty between the advisor and client on the basis of a relationship that required the

defendant advisor to Advise fully, honestly and in good faith when undertaking to either give

advice or proffer recommendations.47

The same court was more explicit in Maghun v. Richardson Securities of Canada when it held

that:

The duty resting on a stock broker or commodities future trader who stands in the

position of fiduciary to his client is to advise the client, carefully, honestly, fully and in

good faith and to carry out the clients intention.48

Taken together, these assorted rulings and statutory provisions would seem to satisfy the Ontario

Court of Appeals requirement in TD Securities v. Hunt that professional Rules or Codes of

Conduct may help to establish the duties of the advisor and the standards to which the advisor

will be held. Far from informing the content of a fiduciary duty, the unequivocal language

contained in OSC Rule 31-505, when viewed in the context of over half a century of Canadian

jurisprudence indicates that industry practice does not suggest, but rather requires that financial

advisors be privy to a blanket fiduciary duty to their clients. With this in mind, it is useful to

return to the place at which this paper started, with the definition of fiduciary from Blacks Law

Dictionary, this time with emphasis added:

46 Simms, supra note 6 at para 45. 47 Burke v. Corey, (1959) 19 DLR (2d) 252 (Ont CA) at 258. 48 Maghun v. Richardson Securities Canada Ltd., (1985), 18 OAC 141, 34 DLR (4th) 343 (Leave to SCC refused) at para 18.

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one who owes another the duties of good faith, trust, confidence, and candour ... one

who must exercise a high standard of care in managing another's money or property ...49

Conclusion

Top financial advisory firms in Canada incorporate words like Fidelity and Assurance in

their names and adopt slogans extolling their commitment to focus solely on their clients

interests. It has become, in short, an industry that markets itself on trust. And yet in spite of this,

financial advisors are not backing-up their promises. By trumpeting the virtues of trust without

assuming a fiduciary duty, financial advisors are essentially saying that you can trust us

(almost) completely.

This approach creates an oxymoron. In the fiduciary context, trust is a binary concept: it is either

present or it is absent. The equivocation on the part of financial advisors on this point is

unacceptable on several fronts. The Supreme Court has acknowledged that financial advisors

have played and continue to play a vital role in Canadian society. The courts have on several

occasions drawn parallels between the financial advisor-client relationship and other, per se

relationships leading one to believe that as a matter of course, financial advisors would be per se

fiduciaries to their clients. That they have not can be put down to several factors, not least of

which are conceptual flaws within the five Hunt/Simms factors which make a finding of a per se

fiduciary duty almost impossible. Whatever distinctions may be drawn in these analogies, the

fact remains that the importance of financial advisors is growing by the day as securities

speculation becomes a more ingrained part of our market economy and our lives. Clearly,

49 Blacks Law Dictionary, supra note 1.

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theoretical principles aside, the finding of a per se fiduciary duty for financial advisors relating to

their clients is now a practical imperative.

It has been demonstrated that host of prominent Canadian lawyers, policymakers and regulatory

organizations have all thrown their weight behind the notion of a blanket fiduciary duty for

financial advisors. Moreover it has been demonstrated that such a move would be the most

efficient way to reign-in the excesses of financial advisors. Indeed, regulatory bodies such as the

OSC have gone so far as to create rules that could function as ready-made fiduciary duties if

only the Courts would avail themselves of a century of Canadian jurisprudence which has

interpreted the tenets of good faith, trust, and confidence as the foundational principles of the

fiduciary relationship.

In light of these arguments, the continued inertia on the issue is especially perplexing. In the

final analysis, if the Canadian legal and judicial communities wish to have an appropriate and

workable standard of duty for the advisor-client relationship, they must re-examine the historical

basis for our conception of the nature of fiduciary duties and take into account the recent events

that have caused a sea-change in the way Canadians perceive financial advisors and their place in

society. And if these arguments, and the support of influential stakeholders in Canada are not

enough to convince the legal community of the wisdom and necessity of a blanket fiduciary duty

for all financial advisors, then perhaps they should just watch South Park.