Jean (00:01) Hello, Andrew, how are you?

Andrew Auerbach (00:03) I am good. How are you?

Jean (00:05) Wonderful, thank you. So today we are going to be speaking about our Globe column. We've been writing that now for some time, once a month. And today we had an article come out on conflict of interest in the investment management industry. And this is something that with the launch of Delisle Advisory Group has been something we've talked a lot about and we both feel very passionate about.

certainly as bank executives and you as a Chartered Financial Analyst, me as a former lawyer, fiduciary standards are something that we've heard about a lot in all of those roles that we've done and there's certainly an aspect of fiduciary standards as a psychotherapist. It really means at its simplest putting the client absolutely first and foremost.

One of the things that I've been thinking about in the context of fiduciary standards is that most professions, certainly law and banking and I believe the CFA, often have ethics sections to their exams, to their continuing education, and sometimes the little scenarios that they give you, the stories they give you, and then what is the ethical decision and what is not the ethical...

can be very confusing because that is one of the things about ethics and fiduciary standards is it's not always crystal clear what the, you know, quote, right answer is. And certainly that's fundamental to the topic that we wrote about in today's column. Our column kicks off with a discussion of the traditionally two types of investment management. In paragraph two, we talk about

the delegation of investment management where the client usually on an annual basis appoints an investment manager to make the decisions on their behalf and really giving over all the control to manage the portfolio and that is typically called discretionary investment management. And then in paragraph three of the column, of course, we're talking about more of a traditional brokerage relationship in which the broker often very skilled and experienced in

Andrew Auerbach (01:53) you

and then paragraph three of the column.

in which the broker often varies buildings.

Jean (02:22) shares and the economy and the markets suggests on an individual basis often to the client a particular stock that he or she might be interested in gets the approval of the client and then on the basis of that approval for that stock the broker goes ahead and makes the purchase on behalf of the client. Not considered usually a fiduciary relationship in that although they certainly have to act honestly and ethically

Andrew Auerbach (02:22) share them.

dress.

in that.

after the meeting.

Jean (02:52) At all times the client in that situation is really in control. Maybe I'll turn it over to you at this point to talk about how over the last 20 years it isn't quite so crisp the division between discretionary investment management and a brokerage relationship.

Andrew Auerbach (02:58) Maybe I'll turn it over to you at this point.

for sure. And I also really love your set up for this topic around the standard of care, the ethics, whether it's with the CFA Institute or with law or psychotherapy. You know, what I was thinking of is you were describing all those ethics sections that we've studied over the years. When you're faced with two choices,

the answer is always the same. You choose the more conservative choice. You take the choice that is actually the most conservative in application. And I think that's a really good way to look at this, that the way you've described discretionary investment management, when a client is absolutely delegating all of the day -to -day decision -making.

Jean (03:51) Thank you.

Andrew Auerbach (04:07) that requires a level of care at the highest possible level. That level of trust requires the professional to act in a way that is absolutely putting the client's interests always first. And so we were really interested in this particular topic, one, because it's such a strong underpinning for how we've created Delisle and the pursuit of what we're seeking.

in terms of eliminating conflicts wherever possible. And we start this article, as you've pointed out, contrasting the evolution in the wealth management space in Canada. And the way you set it up, when you had two very distinct tracks, you had a brokerage track, which was very much assisted, advice giving, client ultimately making the decision as to whether to execute.

And then you had the investment counseling track, which was a delegated discretionary investment management relationship. Well, over the past 20 years, and certainly in our time in a number of wealth management businesses, those lines have blurred profoundly. And they've blurred as the brokerage industry began offering more and more discretionary products to their clients. so...

the delegation of decision -making was identical, whether it was an investment counseling firm or a brokerage firm for these particular relationships. That blurring has really had a sea change. And as we point out in the article, 60 % of the market share of discretionary relationships now resides in the brokerage firms, which have evolved very differently than the investment counseling firms.

That is sort of the first section of this piece is the fact that the standard of care for fiduciary relationships should be the same irrespective of whether it's in the brokerage business or the counseling firm.

Jean (06:11) Right, right. And then the reason why we specifically wrote about this at this time was recently the journalist in the Globe and Mail, Claire O 'Hara, wrote an article about a firm in Canada that where there was perhaps a question raised as to whether there was a conflict of interest. And as we've noted in the column, that story's not fully been told.

But there was something that Claire felt and I think many readers of her column would agree that was worth exploring as to whether the fiduciary standard, the standard of care was met by that firm in the offering that they did. Perhaps you could say a bit more about the situation.

Andrew Auerbach (07:01) Absolutely. And, and, that really did, kind of peak our interest to, write this particular article. And, know, the first piece about this is if we stand back and look at kind of what, what happened there, we're not on the compliance team. as you point out, it could, turn out to be in fact entirely appropriate in terms of the disclosures, that, that occurred for us though, we found it an interesting piece to illustrate.

the notion of standard of care, fiduciary duties and how we would think about it. And in this situation, you have a situation where there are solutions being offered to clients in a discretionary relationship, meaning a portfolio of holdings, securities of cash, stocks, bonds, perhaps some alternative investments. And so the question of course is what are those investments that go into the

selection and there are a number of very specific requirements related to how you assess the best products for your client in the context of performance, return, comparison across the industry, cost, fees, suitability, a whole bunch of variety of drivers and ultimately you decide these are the appropriate solutions for the client. In this case,

Some of the solutions that were in that solution set in those what we call model portfolios, they were Emerge ETFs where the founder of the firm, Claire had indicated, had an ownership interest in this ETF lineup. There was a disclosure in the conflict section of the disclosure, which is required from a regulatory point of view.

You know, Claire indicated it was one line indicating an employee of the firm. and again, that's not for us to opine on the adequacy of the disclosure. The point really that we would make is back to the fiduciary standards of working for the client in an advisory relationship where your only interest is in pursuit of what is best for the client. And in that context,

We were very purposeful, certainly as we thought about creating Delisle, to not manufacture any products, to not have any embedded conflicts where we have a process to identify the best solutions in the market for the client. We put them in the portfolio. There's no need for a disclosure because we have no interests financially or otherwise in any of the other solutions. And we thought it was a really good illustrator, not

And you've made this point and I've made this point not to throw darts at one particular firm, because I have no doubt that they have carefully reviewed all of this, but to simply indicate the playing field for fiduciary standards should continually evolve. That as an industry, given the amount of discretionary relationships that now exist both in brokerage, as well as investment counseling, a continual challenging

of ourselves within our industry to keep raising the bar, which really should be the fiduciary standard of how do we keep on beyond disclosing conflicts? How do we as an industry recognize the change in market share and how do we respond in a way tactically to really take that fiduciary standard front and center?

Jean (10:50) Right. Yes, I'm reminded of one of the things we talked about when we were building Delisle and before we launched that, you know, good enough is just not good enough when it comes to investment management and, you know, acting on behalf of someone else, the wealth that they've accumulated over the course of a lifetime. You know, it has to be exactly the same way as you'd manage the funds of a beloved aunt.

you know, it's gotta be top notch. And as you're talking about the point that Claire made, that there was disclosure, it was in fine print, and it referred to the founder of the firm as an employee rather than a founder, yada, yada, know, whatever disclosure was done, it reminded me of the comment that we made at the beginning of our conversation today of the exam.

you know, where you have A, B, C or D to choose, whereas, you know, if you have the founder of the firm is also an investor in a fund, A, do you, you know, verbally tell the client, B, do you sell the fund, C, do you put it in fine print in a document, you know, like it isn't for us to grade the exam. We're just making the point that in something as important as people's wealth,

Andrew Auerbach (11:46) I'm

the exam.

Jean (12:15) you know, always go for answer A, and that's what we're doing at Delisle. Just let's challenge ourselves to go to answer A, our view is that there's work to be done, and that certainly was the point of our column. And in the last couple of paragraphs of the article, we make some suggestions as to ways in which we think currently financial services in Canada could look at the...

Andrew Auerbach (12:20) challenge ourselves to go to answer A and argue is that there's work to be done.

in the last couple paragraphs of the article. We make some...

currently.

Jean (12:43) conflicts of interest and maybe you could dive into some of those which I know came from your time in banking, the ideas around that.

Andrew Auerbach (12:45) Maybe you could dive into some of those, which I know I've seen from the time in banking. I think it's around that. Yeah, absolutely. And I think your points are spot on around the fact that the amount of choice around product is incredible right now. And so as it relates to virtually any sector in any country, anything we're trying to achieve, there are

hundreds literally of potential solutions to choose from and so in terms of eliminating the conflict We've been very purposeful as we've said in in your answer rate Which is just not have the conflict at all and as we talk to clients about these things Clients are hiring us Because they don't know these things. They don't have sophistication. They're not in the market every day They're not aware of these potential conflicts how they occur

And I think that's really important. What do you do about it is really where you're going, which was our final section and my observation having worked in a number of different businesses, both brokerage and investment counseling is I think we have to recognize that the discretionary relationship, the standard of care is exactly the same. And therefore I would argue

that we should level the playing field. And let me give you a little bit more context on that. The brokerage business, as we talk about that evolution, has really operated in what's called a commission grid type of context where you're paid a percentage of revenue based on the types of products that are sold to the client. And whether those products are

in a discretionary account or they're in a transactional account, there's a very complex measure of how to go through what this grid looks like. In a counseling world, it's generally different than that. In an investment counseling firm, the compensation certainly at boutique firms is generally a salary and a bonus based on the data we've seen from PMAC, the association that does an annual compensation benchmarking survey.

many of the bank counseling firms also have a percentage of revenue type model, but not as a complex as the, as the brokerage world. And one suggestion we have tactically is disclosure and alignment of these models. I don't believe that in this type of a trusted relationship, the way advisors are paid should be all that different. Whether the client is dealing with a boutique counseling firm.

whether they're dealing with a bank owned brokerage firm or a independent brokerage firm, I would argue that the construct of how you get paid should be the same. It should have a fiduciary standard of how you get compensated. And I think it should be disclosed very clearly to the client in a way that the client understands very specifically how the compensation actually works. And so putting that all together, eliminating complexity, making it a lot.

simpler and frankly a lot more transparent to the client that if they walked into a counseling firm or a brokerage firm, it would be the same. That's part one. That's not the way it is right now. I think it would go a long way if we did harmonize. And part two is, yeah.

Jean (16:23) Can I just jump in here? I have a couple of questions from your part one. What, in your knowledge of what clients know, and I know that in the course of your work in financial services, you loved the client work, you loved conversations with clients, in your estimation, what do wealth clients know about the complexity of the compensation of their advisor?

Andrew Auerbach (16:26) Sure.

Virtually zero, virtually zero and not withstanding that we have made strides as an industry to improve the disclosure documents, people really don't read the disclosure documents. And back to the fiduciary standard, I really feel we're in an industry where there should be real transparency, where people know exactly how their advisor is paid.

it's evolved in a way that it's very complicated. mean, some of these compensation programs could be over 20 pages in terms of how people are paid based on the products and referrals and commissions or direct drive or one -time payments for different products like insurance or wealth management on and on. And clients are not aware. There's a lot of conflicts embedded within these compensation programs.

I'm sure they're appropriately disclosed. We argue we just don't need them though. I think we should really have a much more straightforward approach that is more clearly understood. I believe clients should understand these things, but they don't is my experience.

Jean (18:04) Right, and just on that, in my experience of managing people both in the bank and in other roles, often compensation is structured for very specific reasons of motivation. In other words, you want your employee to sell chocolate -covered donuts or whatever. I have a very dear friend who works in fine dining and

She just shattered my illusions when she told me that each evening there's a special, a few specials, which that doesn't have the meaning that you and I have of specials. It's like if you sell the salmon filet with broccoli, you might win a prize. So what is your sense of the use of compensation schedules in financial services for motivation?

Andrew Auerbach (18:58) Yeah, it's a great point. And the challenge having lived in this world and set many of these compensation programs is it changes every year. So if you're, for example, in a bank, there's 25 different businesses. The priority of the bank is to maximize their profitability, to do it as efficiently as possible, to spend as little money as possible, to earn the revenue that they earn.

And as a consequence of that, the macro environment shifts. Sometimes the priority might be for certain products or businesses, commercial banking or deposit gathering or insurance or on and on and on and on. And so these quote unquote tweaks occur annually where the compensation does drive behaviors of individuals within a firm. And so it changes every year based on the changing priorities.

And that often causes a lot of angst with advisors. It's distracting. It takes them away from clients. They have to recalibrate how they've been thinking about their businesses, et cetera. But it's very prevalent, the notion that the compensation programs change a lot, you know, based on the priorities of any particular year.

Jean (20:18) And again, to your point, the client isn't really part of that discussion. The client is, the interests of the clients are not as paramount as for the tweaking as the interests of the institution to meet its shareholders' expectations, which of course is a completely appropriate thing for it to be motivated by, but...

the client there is not front and center in those changes to the compensation schedules, if I understand correctly.

Andrew Auerbach (20:47) That's exactly, that is exactly right. And why I argue for, kind of pulling the fiduciary compensation programs out of that calculus. And it's what you've just said, Jean, that is, you know, our experience working in big banks is the individuals have high integrity. There's certainly lots of ethics do the right thing for clients, et cetera. The motivation for the compensation program.

That's an underpinning. You know, don't do inappropriate things to clients. think every, every bank would very vigorously nod their head and have all kinds of programs to make sure that that happens. We argue though, that in a fiduciary context, those changes, albeit implemented in a way that's appropriate and ethical and all those things, it's not with a fiduciary standard to the wealth management client. It's with a profit maximization standard to the shareholder. It's a very different calculus and it creates

it creates complexity that i think has really increased given the number of discretionary relationships that now exist within brokerage and and certainly within the banks

Jean (21:56) Right. And I think you also wanted to speak about another type of compensation and that is referral fees. Within large companies with many portfolios, as you call them, different areas of business, to the client it's like one behemoth bank or company, but within that company it's really different businesses.

and there is often motivation through referral fees to, well, refer business. Can you talk a little bit about that?

Andrew Auerbach (22:32) Yeah, absolutely. And our industry has evolved as, you know, Hugh and I talk about a lot that there is an important part of financial planning and wealth management of working in a way that we go broader than the investment portfolio. I mean, certainly we're doing that in many new areas that I think are new to wealth management, like family dynamics. But here's the big difference. If

We are doing planning and we're recommending insurance as a strategy that would make sense for a particular client or perhaps it's a referral to an estate lawyer to further the work that you've had a discussion with the client on. We look for trusted individuals that we've worked with in the past and we're not seeking or taking any other compensation for doing that. It's the right thing to do based on this fiduciary relationship.

we want to make sure it gets done well to refer to professionals that will be, doing it in a way that we would agree with. And that's hugely important, but that's not within the same firm. And within the same firm, a lot of the compensation programs and they do change from year to year. You're paid to make referrals to other areas. So to refer to the insurance group and, perhaps there's a commission formula or.

refer to a commercial banker or introduce another part of the bank and get a referral compensation. And I would argue that we should not have these things within a fiduciary relationship because again, I don't doubt that for example, an insurance strategy would make sense for a client based on the knowledge. What I do struggle with though is additional compensation.

material additional compensation, sometimes tens of thousands of dollars of additional compensation for making that quote unquote referral. Back to your choice A, choice A would be definitely implement that solution and receive no additional compensation. That feels like a better choice and certainly how we've built a

Jean (24:53) Right, right. And it's not to say that the work we do for clients, you know, on my part, taking a look at their review, their will, excuse me, the power of attorney, giving them some comments, making some suggestions that they can speak with their lawyer about, or suggesting an insurance is, it's not that any of that is done for, you know, altruistic or quote for free. But in our view, our management fees, which are very transparent and discussed upfront with the client.

our time for the other aspects are part of that. We're compensated from those fees, not from extra fees or any kind of payment from the law firms or anything like that.

Andrew Auerbach (25:38) Exactly. That's exactly right.

Jean (25:41) Yeah, is there anything else that you wanted to mention?

Andrew Auerbach (25:46) No, just that it was an article that we were both, you know, very happy to write. This is one that I have a lot of conviction on that as we built Delisle, the advantage that we had, and I think this article speaks to it is how do you build a firm that addresses these issues that we've described, whether it's how people get paid or the types of products.

that are sold or how do you raise the bar on fiduciary standards? And so it's an important piece that I hope spurs more conversation, that people should be aware of these aspects and should be asking questions about them.

Jean (26:35) Right. And one final question for you then, our piece ends in the last couple of paragraphs with the suggestions that we have just spoke about. Over the year, as you've been building Delisle Advisory Group, I've been so impressed with the number of

very strong network bonds you've formed with the CFA society, PMAC, the Interior Securities Commission was certainly involved in our application. There's been many and it strikes me as we were writing, it struck me as we were writing that article that like who or where do these types of important changes, important discussions, where do they need to take place? as we very much want to be thought leaders in in Boutique,

wealth management firms. So where do we suggest that these conversations begin and next steps might take place?

Andrew Auerbach (27:29) Yeah, I think that's a great, it's a great point. Spurring more conversations, particularly amongst the boutique firms is what we're trying to foster. And, you know, there are about 300 boutique investment counseling firms that are probably reading an article like this and saying exactly, that is exactly the way.

we think about our role as a fiduciary and how we pay and how we select products, you know, et cetera, spurring more conversation, I think is very important. The regulators, as you point out, whether it's zero, for the brokerage business or, whether it's the various securities commissions, the CSA, certainly PMAC, all of these groups.

are all very aligned. They do a very good job of continually evolving and we talk about that in the article that the client focused reforms that have been introduced over the last few years are probably the most material changes around these topic areas that we've seen in decades, certainly. And so I don't believe that this is for the regulators to be the lead on actually.

I think this is for the industry to work together in a way that this actually is good for the entire industry. The more we put a spotlight on what fiduciary standards mean, how do we look across different types of industries, brokerage firms, bank -owned, boutique, counseling firms, how do we all align in a way that we all agree

that leveling the playing field is actually gonna benefit everybody. It's not gonna benefit any one particular firm. It'll benefit the whole industry. so hopefully we spur more conversations like this.

Jean (29:29) Perfect. Thank you, Andrew.

Andrew Auerbach (29:31) Thank you. Talk soon.