Investing 101
Duty to Disclose Conflicts of Interests
A financial advisor must explain their conflicts of interest in plain language to their clients.
This means that the financial advisor must tell their clients if there is anything that might make the financial advisor recommend a certain investment over another investment that might be better for the investor.
For example, suppose a fina
A financial advisor must explain their conflicts of interest in plain language to their clients.
This means that the financial advisor must tell their clients if there is anything that might make the financial advisor recommend a certain investment over another investment that might be better for the investor.
For example, suppose a financial advisor is paid a commission for selling a particular investment. In that case, they might be motivated to recommend that investment even if it is not the best option for the client.
An example is when the financial advisor's dealer only offers branded investments. This is almost always a recommendation of an inferior option. Provincial governments are considering whether this practice should be banned.
In these cases, the financial advisor has a conflict of interest.
To fulfill their duty, the financial advisor must disclose any and all potential conflicts of interest (including incentives such as higher fees or increasing of assets which result in higher fees) to their clients. They must explain in plain language to their clients why they are recommending a particular investment and if there are any potential downsides to that investment.
Another example of common and big conflicts is when private equity, exempt market products, leverage, margin, and commutation of a pension are recommended. These recommendations usually result in large fees for the financial advisor and magnified risks for the investor.
This duty helps to ensure that financial advisors act in their client's best interests and helps clients to make informed decisions about their investments.
It is important for clients to fully understand any conflicts of interest that their financial advisor may have so that they can make the best investment decisions for their financial goals.