Conflict of Interest Management
“Client’s best interest” is a fundamental concept with regard to the ethical standards and obligations that advisors must comply with. Advisors must always keep this in mind and never forget that all of their actions must be in the best interest of the client.
While performing their duties, advisors must also act with honesty and loyalty and stay independent at all times in order to avoid entering a conflict of interest.
Broadly speaking, a conflict of interest arises from an irregular situation where, in the course of an advisor’s general duties, the advisor has personal interests that conflict with the mission assigned to them by their client. In any activity with a client, the advisor must ensure that their own interests are clearly separated from the client’s so that there is no conflict of interest between them. If the advisor’s discernment or freedom of action is not safeguarded from influence or conflict of interest of any kind, the client’s best interests risk being compromised.
The client-advisor relationship is based on trust. The advisor must not take advantage of this special relationship for their own benefit. In performing the general tasks their client assigns to them, the advisor must make decisions and give recommendations objectively and independently, with no regard to their personal gain.
Conflict of interest situations
IMPORTANT: The situations described below and the information provided regarding advisors’ obligations are for general information purposes only.
Advisors should consult the “Insurance and financial planning” and “Mutual funds and scholarship plans” sub-sections depending on their registration as applicable legislation may change (new rules, specific obligations, etc.).
In addition, some brokers and firms may employ stricter rules than those outlined below. It is the advisor’s responsibility to be familiar with these rules and follow them.
Described below are a series of situations and behaviours that carry a significant risk of conflict of interest with a client.
The advisor mandate expires when a client passes away, and there are consequences for advisors who retain their advisory role when handling the client’s estate.
If the advisor agrees to become the liquidator, they may need to take on a double role with regard to the estate: that of both liquidator and advisor. In the choices the advisor will be called on to make, the interests linked to each of their responsibilities could come into conflict, as the advisor would have full freedom to act without having the necessary distance to do so.
Even if the advisor sincerely believes that they are acting in their client’s best interest by agreeing to be the liquidator, they could cause a conflict of interest and risk being called before the CSF’s Disciplinary Committee.
Even if the client requests it in their will and the family consents, and regardless of whether the advisor receives compensation for handling the estate, advisors who act as advisor and liquidator for the same client still risk entering a conflict of interest.
Exceptions
- In some circumstances, it may be appropriate for an advisor to act as liquidator for a client. For example:
- If they do not act in the capacity of advisor for the client’s estate.
- If they agree to also act as advisor but do not receive any direct or indirect compensation in this capacity.
- If the client is a family member and the advisor is their sole heir.
The advisor should analyze the situation carefully before accepting to take on these roles. If the advisor role involves receiving compensation for investment transactions, the advisor could, for example, assign the client’s estate file to a different advisor and focus solely on the role of liquidator, or vice versa.
Caution is strongly recommended as each case is unique, and the syndic and the Disciplinary Committee will consider the specific facts of each situation in the event of a complaint.
A client may want to thank their advisor for their services, or following a particularly complex transaction. Are advisors allowed to accept gifts from clients? The general rule is that advisors may accept gifts, subject to certain conditions.
- The gift must not be construed as something that could influence the advisor’s mandate.
- It must be in the form of a good or service (i.e., not cash).
- It occurs on an exceptional basis (i.e., receiving gifts from a client is not habitual).
- It does not violate the rules of the advisor’s firm, company or broker.
There is no official limit to the value of a gift that an advisor may receive. A gift’s value must be assessed in view of the circumstances and the policies of the advisor’s broker or firm.
Frequency of gift-giving must also be taken into account. A single large gift or repeated instances of small gifts can both result in a conflict of interest.
Potential or foreseeable conflicts of interest
An advisor could be exposed to a potential conflict of interest if:
- They feel pressured to “return the favour” to the client who offered the gift.
- The gift is perceived as inappropriate.
- The advisor gives preferential treatment to the client who offered the gift.
- The gift influences the advisor’s actions, whether or not these actions cause harm to the client.
- The advisor requested the gift.
For information about giving gifts to clients, see the Marketing section.
- The advisor becomes their client’s mandatary in the event of incapacity (i.e., the person in charge of managing the client’s affairs while they are incapacitated).
In such cases, advisors may be called on to act simultaneously as mandatary and advisor. As a result, the advisor risks making decisions that involve conflicting responsibilities, generating a conflict of interest. - The advisor signs an agreement or contract or executes a transaction on behalf of a client who is manifestly unable to manage their own affairs, unless accompanied by a person who is legally empowered to make decisions for the client.
For example, an advisor may not conclude a contract with a client who has been declared incapacitated or displays signs of incapacity. In such situations, the advisor must deal with the client’s mandatary.
- The advisor signs an agreement or contract or executes a transaction on behalf of a client for whom they are a dative tutor, curator or advisor as defined in Quebec’s Civil Code.
Even if done in good faith, and even if the client does not suffer financial losses or any other disadvantages, this is considered ethical misconduct because the professional independence of the advisor is compromised.
- The advisor becomes trustee for a trust set up by their client and takes on an advisory role in this capacity.
- The advisor sits on a company’s board of directors while simultaneously acting as advisor to the same company (i.e., the client).
If the client requests the advice, and if this service compromises the advisor’s ability to serve the client’s best interests ahead of their own, the advisor should refuse and provide an explanation.
There are, however, certain situations in which an advisor may act as a director for a client company without placing themselves in a real or potential conflict of interest.
- The advisor launches a business venture with their client or invests jointly with their client in a company.
- The advisor offers their client investments in a company in which the advisor has a direct or indirect interest, even if they act with no ill intent. This principle applies even when the client initiates the request.
- The advisor recommends a particular product to a client in order to earn a higher commission even though the product is not appropriate for the client.
- The advisor offers a product with deferred sales charges in order to rapidly earn a high commission on a client who has a short-term investment horizon.
- The advisor recommends a leveraged investment strategy to a client who does not have the appropriate investor profile for this type of recommendation.
- The advisor occupies a role with authority or influence, for example:
– Participating in the activities of certain professional associations.
– Volunteering for certain organizations.
In the event of uncertainty, or in situations that are not described in the regulations or on these pages, the advisor should refer to the rules established by their firm or broker and observe appropriate principles of conduct (objectivity, professional independence and integrity) at all times. Advisors must ask themselves the appropriate questions, based on the situation, in order to avoid any potential conflict of interest. For example:
- If I accept the gift offered by my client, will this have an impact on the objectivity of my advice?
- Could a third party believe that I am acting in my own interests rather than those of the client?
- Would my recommendation to the client have been different if the sales incentive did not exist?
- Could my professional independence toward the client be compromised even if I have no direct interest in the transaction?
If the answer to any of these questions is “yes”, the advisor risks entering a conflict of interest.
Advisors should be familiar with the specific rules regarding conflicts of interest established by their firm or broker and follow them.
Circumstances are a determining factor when evaluating a conflict of interest situation. By avoiding situations where conflicts may arise, advisors can help protect the credibility of their profession while maintaining the public’s trust and earning respect for their professionalism.
Advisors should always err on the side of caution. Even if they act in good faith and their intentions are noble, and even if the client suffers no financial losses or other disadvantages, there is still a risk of an ethical breach.
If in doubt, advisors should consult with an independent third party or obtain legal advice in order to protect themselves.