What to Know Before (and After) You Hire an Advisor (w/ Matthew Taylor) | #427

25:55And a lot of other professional advisors are automatically fiduciaries. Doctors are fiduciaries. Lawyers are fiduciaries. there's a whole bunch of other categories where that does automatically attach. But when we're in the world of financial and investment advice, it's not something that's as automatic as that, whether people believe it or not. From the client perspective, there aren't really any drawbacks. It can make proving legal claims easier, and it might also provide some level of assurance that they know that the person they're dealing with holds themselves to this heightened standard.

26:27so I know it can be difficult to identify and maybe depending on the geographic area you're in if you want to work with somebody in person the pool might be more limited so I don't know that it should be the only deciding factor but all else being equal there's absolutely no drawback from the client perspective and I would think that you would always want a fiduciary over a non-fiduciary could be higher minimums too absolutely so there could be a lot of other reasons why it doesn't happen or why it's not available to somebody. We touched on some of the characteristics, but if an investor is looking for a fiduciary, how can they identify them?

27:03What should they be looking for? I think realistically, the strongest thing that they can do is look for association with an organization that has some of the standards you were talking about before. Something like the fiduciary pledge that FPAC has. That pledge pretty explicitly incorporates a lot of the elements that we were talking about in that five-part analysis that the courts undergo, it matches up pretty closely to that. I think the first part of the FPAC pledge is to put the needs of the client first ahead of the advisor's own needs. So that's that best interest standard, pretty explicitly incorporated there.

27:41And then I believe it also explicitly says that there is a duty of loyalty that attaches to it. Again, that's one of those core indicia of a fiduciary relationship and minimizing conflicts of interest is another and full and transparent disclosure. So pretty explicitly built into that pledge, which is publicly available, everybody can see it. And I think people advertise their affiliation with FPAC. So that would be a pretty strong indicator if somebody was looking for a fiduciary specifically. For listeners, FPAC is an industry association, the Financial Planning Association of Canada. I'm a member.

28:17I don't know how many other folks at PWLR, but good organization. What types of issues in financial markets typically result in class action lawsuits? So class actions tend to have different components than what we've been talking about. And just to back up a little bit, most of what we've been talking about before would be a fairly standard sort of lawsuit. One client, one or two defendants, the firm and the advisor. You can also group people together. You might have 20 clients of one person and they all come together and they sue together. That's not a class action. That's just a group action, a group of people all deciding to retain one lawyer and sue together to take advantage of economies of scale.

29:00A class action is an entirely different procedure where you can have one person come forward, a single person that is seeking to represent the interests of everybody who's similar to them. It can be thousands of people. It could be hundreds, tens of thousands. There have been a few cases where it would probably affect millions of people if it was a price-fixing conspiracy, something of that nature. As a result, there's really pretty minimal involvement from anybody else who's affected. And a group action, you need to go through all the process of litigation. You need to retain a lawyer. You need to be examined under oath.

29:34You need to exchange your documents. It's quite a big process to engage in, and it comes with a lot of stress and anxiety. And if you lose, you're exposed to adverse costs. You might need to pay some amount of the defendant's legal fees. So there's a very real financial downside. In a class action where you have this one person coming forward, they're effectively always indemnified. The lawyer representing them will agree to pay for that so that there isn't this enormous risk to that individual. And the people who aren't named on the lawsuit, they don't have any kind of exposure at all until the point that they need to participate in the lawsuit.

30:07because of the fact that we're dealing with such a different procedure, you can only do certain kinds of cases as class actions. You can't deal with every kind of legal dispute through that procedure because it sort of falls apart. You need the court's permission to proceed with a class action because it can affect the rights of people who aren't before the court. You can't just file and say this is a class action. Great. It needs to be approved by the court. part of that approval process is are there actually common issues between all the people who are affected by this lawsuit? And if we're dealing with something like the advisor relationship, if you're dealing with somebody that needs to go through a suitability analysis, that's an inherently individualized analysis.

30:50There's an individual conversation that needs to happen between the advisor and the client. There's individual advice being given if things are going accordingly. So it doesn't make sense for those to be litigated as class actions. what you are dealing with when you're in the world of a class action where there's these common problems are two major buckets of claims their disclosure issues with publicly listed companies pick whatever your favorite tsx company is if they're failing to make disclosure of their financial state of affairs if there's some large operational issue you can't work in this space in canada without having at some point a mining claim so if you're dealing with a junior mining company that's misrepresenting the amount of gold that they have or whether or not their operations are in compliance with their environmental permits.

31:35That comes to light. The bottom falls out of it. There's a huge decline in share price. That type of claim is very amenable to class action litigation, and it basically only happens through class action litigation. The second genre would be claims against asset managers relating to how they've managed the assets. So you might have claims against mutual fund managers, ETF managers based on how they've been charging fees, based on whether or not the investments that their funds are holding actually match up with what they've told their investors are going to be under the hood. Those types of things, because it's not this individualized analysis, everybody is buying that mutual fund or that ETF based on what they believe the investment approach is.

32:19That lends itself much better to class determination. I think asset managers, as opposed to financial advisors, are held to a stricter or to a more explicit fiduciary standard. Is that right? Yes. So the Securities Act actually explicitly contains a fiduciary standard attaching to certain kinds of asset managers. So that's literally written into a statute. I believe that's the case in every province. It's certainly the case in Ontario. What are some of the signs that a class action is likely to be successful? So class actions are different in a few other respects, and we're talking more about the business perspective than necessarily the strictly legal, but these are very large, complex pieces of litigation.

33:06If you look at the lawyers who are willing to run them, it's a relatively small group of firms compared to a lot of other areas of law. and there are some firms that will dabble they might do one or two but most of them are run by specialists and the specialists are fairly few and far between so the involvement of one of these specialist firms in and of itself is an indicator because they're taking their time they're taking their capital and they're thinking this is a good investment of their time and capital versus something else that they might be doing and they're willing to take that significant downside risks that I mentioned before, because the lawyers are the ones who are going to be on the hook if things go wrong and the lawsuit is lost.

33:49So if you've got the involvement of a repeatable firm that's had a great degree of success, if they've had good results and other similar claims, that's a pretty strong indicator. With a dabbler or a firm that doesn't do much of these, it gives you less information. Some of those are very well run. I'm not saying that only specialist firms can do these lawsuits. It's just much harder to evaluate. Class actions are large enough and expensive enough, though there's actually a market for funding. There are third party funders, and these are in some cases investment firms that are essentially buying a piece of the litigation, and they're willing to take on the risk of the adverse costs, or they're willing to put up millions of dollars to fund the expert fees and what you need to actually get one of these things across the finish line.

34:36You keep pushing it towards trial or a meaningful settlement. So that's giving you another layer of somebody with a lot of specialized expertise taking a look at this and saying, I'm willing to risk my capital on this. So I think if you've got a funded claim, that gives you a bit more confidence as well, that there are more people that think that this is something that's going to have some degree of success beyond those factors, which are really more business considerations. but I think they give some information. There are certain other things that will suggest this has got some merit or it's going to have a good result.

35:10If there's a regulatory proceeding, if there's a prosecution by a provincial securities commission, let's say, then again, you've got another sophisticated actor saying something went wrong here. We need to take a look at that. And another piece of it is I might give you a source of evidence or information. Some of that might become public and that might be something that you can rely upon if you're representing a class of people. Another strong indicator can be if there's a parallel U.S. class action. That's another instance of sophisticated actors looking at this and coming to the same conclusion.

35:44And there can also be a fair bit of cross-border coordination and collaboration. If one of the lawsuits gets ahead of the other, let's say the Canadian lawsuit is ahead of the U.S. one, then you can share the evidence that comes to light or the information that you get, as long as it's not confidential. and you can share that and that can help drive some synergies between the two of them and it can help push them along or vice versa if the U.S. lawsuit is ahead of the Canadian lawsuit. In that type of scenario, how would it be determined in the asset management example that an asset manager has been a poor steward of their beneficiary's funds?

36:17I think a strong indicator is if they're failing to do what they say they're going to do, there's always some sort of statement out there about this is our investment thesis or this is our approach. And if they start deviating from that, that's a problematic thing. That's a sign that something different is going on than what investors are being told. So that in and of itself doesn't necessarily mean that there have been losses, but it certainly is something that warrants fervor scrutiny if that comes to light. Beyond that, I think it's a very sort of individualized thing, but fees are another big indicator how fees are being charged.

36:57There have been a lot of class actions related to fees. There are certain fees that you can no longer charge them, like they've explicitly changed the law. If let's say there was a fee that was being charged for advice and people were being charged that when they bought mutual fund units or what have you, even if it was a non-advice account, there were quite a few class actions over that. Digging under the hood and seeing what kinds of fees are being charged or how they're being calculated, I think that that's certainly an area where there's going to be a lot of litigation in the future. And I know we're going to talk about private assets later, but I think that's probably a particularly ripe area for private asset managers.

37:34Do class actions come up with pension funds often? They certainly do. So for the disclosure type class actions I mentioned before, pension funds are very frequent litigants. They'll be the lead plaintiff, the representative plaintiff of the law at the time. And the United States, that genre of lawsuit, they actually changed the law for there to be an automatic presumption that the largest loser is the one that should get to lead the claim. And when that happens, there is a lot more activity from pension funds in the United States. We don't have that rule explicitly in Canada, but I do think it socialized a lot of the pension funds to the idea of participating in litigation, particularly the American pension funds, in a way that they wouldn't have before.

38:21Their involvement is pretty common at this point in time, but not universal. What about beneficiaries going after their own pension fund for how it's been managed? So that is certainly a type of claim that can happen. There will be debates about how benefits are calculated or certain cutoff times, or if it's an employment fund, whether or not different categories of employees of different kinds of claims. We do see those kinds of claims occasionally. They are not as common as the others that I mentioned, but they have happened and I'm sure that there will be more of them in the future as well.

38:55For people who are in oversight roles on a pension fund, what do you think they should be aware of or looking out for as they monitor what their asset managers are doing? Obviously, there should be some degree of scrutiny and oversight of compliance, making sure that what their state investment goals are or their state investment approach, so that's actually being adhered to. that's pretty basic and I would expect with pension funds because there's more oversight than for a lot of other asset managers that's probably less of a concern a related concern I think would be whether or not they're taking advantage of all the money that's available to them through settlements and there is a article written in the Stanford Law Review about 20 years ago called letting billions slip through your fingers empirical evidence and legal implications of the failure of financial institutions to participate in securities class action settlements, which is a mouthful.

39:50The basic thesis there was that at that point in time, there were quite a few pension funds or other asset managers that weren't participating in settlements, and they're basically leaving money on the table as a result. And there could be a whole bunch of different reasons for that. It could be failure to maintain the records that were necessary to participate in that. There might have been a philosophical aversion by the people making the decisions to not participate in those. But the upshot of that is that for a lot of the American pension funds, they retain monitoring counsel. They retain counsel that they generally don't pay, that alert them to whether or not there might be claims related to their holdings and figure out if they want to act as the lead plaintiff in them or not.

40:35And they'll also assist with whether or not. There are settlements that they're entitled to participate in and they might help with the filing process there, which has mitigated a lot of this. And my understanding is many of the U.S. pension funds have built into their compliance structure, their committee structure, a decision making process for whether or not they're going to participate in litigation and in what capacity. I don't think there's as much of that in the Canadian space yet from the conversations I've head. So I certainly think that that would be a prudent thing for people to turn their mind to.

41:10And when we're talking about a fiduciary standard, an interest in a lawsuit is an asset. It's something that has potential value. It's something that can be sold. We were talking about funding markets before that selling part of an interest in a lawsuit. From my perspective, at least, it's an asset to be managed like any other. And people should be thinking about that and making decisions about whether or not to participate in what way. And that doesn't always mean that they're going to. But I think from a process perspective, it is something that people should be having conversations about and thinking about if they want to adhere to that best interest standard.

41:43When I look at endowments and pension funds and just asset owners, generally speaking, it's pretty rare to see a very simple portfolio of low-cost index funds. It's always a lot of active management, a lot of illiquid assets. I think my question is how legally defensible would it be for a large asset owner with disperse beneficiaries to just buy index funds? I think that will depend on what their stated goal is. Now, if you had a fund that its whole thing was, we're a risk capital fund and we're looking for a junior gold mining company that we're getting a 20x on, and that's the purpose of this fund existing, they'd be outside of their mandate by doing that.

42:24However, if it was a fund that had a more conservative kind of objective, then I don't see any issue with them basically having the entirety or most of their exposure to low-cost index funds, as long as it's matching the risk profile that they are mandated to take on. I'm curious if you happen to have a favorite investing-related class action story. There have been a lot of interesting ones out there. One of the more notorious ones would be Sino Forest, which was a TSX-listed company that purported to have, I think, three quarters of a million hectares of trees that they were going to harvest in China.

43:02They had a fairly significant market cap at sort of their peak. It was billions of dollars, and I think that they were posting revenue of like a billion dollars a year or something. There was a fraud investigation. The RCMP got involved. It was Ontario Securities Commission got involved. There was a very large class action. It turned out that there weren't any trees in the forest. So there was a short-selling report. They had done some background research, And after that, the value of the company basically immediately collapsed and it went into bankruptcy proceedings and multiple people were prosecuted for fraud.

43:35I think that's probably one of the more notable ones from my perspective that a company reached a multi-billion dollar valuation based on possession of a forest and it turns out there is no trees there. Wild. I think it was a six billion dollar market cap at its peak. Yeah, that sounds about right to me. Pretty crazy. You mentioned this. I want to come back to private assets. What makes private assets problematic specifically for retail investors? I think that there are two umbrella issues and they're related, but right off the bat, there's less information about these assets and there's less regulation.

44:12And both of those things are by design for better or worse. We've been talking a lot about information asymmetries and how that filters through all of this. there is always an information asymmetry when you're purchasing investment product or shares in a company because management is always going to know more than you do. That's just part of separation of ownership and control. But if you're dealing with something in public markets, there are a lot of checks and balances meant to level that out to a pretty significant degree. There's regular disclosure financials. There's audit financials on a regular basis.

44:47So you're having a third party take a look and making sure, okay, yeah, this checks out. So there's oversight to a degree, and there tends to be a greater amount of regulatory oversight as well. When you're dealing with these public market companies too, beyond the legal requirements, there are a lot of market actors that are private entities that follow these investments and they report on them. You've got equity analysts following most major listed companies. And what equity analysts are saying is going to get picked up by reporters. You can open up the Globe and Mail. You can read about the latest quarterly from whatever your favorite TSX listed company is.

45:27So there's a high level of interpretation of that information happening too. Your average person doesn't really know how to read financial statements from a public company, but they can probably figure out picking up the Globe and Mail enough of a rudimentary idea of what's going on, at least. So beyond the lessened information asymmetry, you've also got a lot of people whose job is to digest and disseminate this information too. That's stripped away by and large for private assets. The strict legal reporting requirements are very limited. You don't really have the same degree of sophisticated people like equities analysts that are reporting on them.

46:04The information that would be available to those people is going to be a lot more limited to begin with. beyond that, the structures that you're dealing with tend to be a lot more complex. When people think about investment products from my perspective or what I'm hearing is they usually think about a stock or a bond and they go, okay, I own part of the company or I've made a loan to the company. I can understand in a rudimentary way what it is that I've got in my portfolio. One security is one company. Or they might think about an ETF or a mutual fund. And if it's a broad-based index type of product, they understand, okay, I've just got that at large scale.

46:41It's sliced and diced, so I've got a tiny bit of a huge number of companies rather than a tiny bit of one company. And they can get that at basic level at least. But when you're dealing with a private asset, frequently what's being sold is more some form of a business strategy that they're going to do a roll-up of veterinary clinics, and that's what this fund is going to be, where they've got commercial real estate portfolio and a particular geographic location. What's kind of pernicious is that the investment thesis might sound very easy to understand. But if you look at what's actually under the hood, you might have five, six, seven different entities that are involved in managing this fund in different ways.

47:22You've got the people who are responsible for the actual capital, and then they retain managers who aren't necessarily the individuals. And then there might be property managers, or there might be a management company for the veterinary clinics. and they're all taking a fee. There's a lot of fees that are being paid out built into the structure in a way that's a lot more difficult to understand than an ETF fee that's 0.6 % of the assets under management. But people feel like they can understand it and that can actually be a fairly dangerous thing, I think. A big piece of the difficulty is the price discovery element as well because for pricing, you're beholden to the managers in a way that you're not for a public market product.

48:06Security, if it's well traded, there's very robust pricing information because the pricing is just based on people transacting at any given time, like that is the price. You can be pretty confident if you've got a large listed company or a fairly actively traded ETF. Here, what you've got is management valuing or retaining somebody to value the assets that are under the hood. and I'm like shares in your favorite big Canadian bank. If you've got a commercial loan portfolio, there's not an active market for that. If you've got a portfolio of veterinary clinics, there's not an active market for that.

48:43But the number of purchasers is pretty small and those deals are going to be much more kind of one-off deals. They're going to have fairly complex terms versus I'm willing to buy this share for$50 a share. You want to sell a thousand shares, I'll pay you$50 ,000. That's pretty simple to understand, but the liquidity events that happen in a private asset are not at all comparable. You need some sort of a valuation metric to value these on an ongoing basis, because the value is what affects the number of units people get when they purchase or when they redeem. So you need regular valuation, but you don't have regular price information.

49:24And that can open the door to quite a bit of mischief, I think. And related to that is the way that fund managers get paid. The difficulty of returns is another problem for retail investors, I think. Again, coming back to the common share example, somebody buys a share at$20, they sell at$30, they realized a$10 profit, assuming there's no transaction cost. Everybody can understand that pretty easily. They go, okay, I realized a 50 % return. Private assets tend to be a stream of returns that don't lend themselves to that calculation in the same way. There are different metrics. One of the more commonly reported ones is internal rate of return.

50:08And that tries to give you a percent return accounting for the fact that it's a stream of payments rather than a single transaction return. And it gives you a percent. My belief is the average person looking at it goes, OK, I can compare this percent to what I would get on the common share example. And that's an apples to apples comparison. It's actually an apples to oranges comparison. And those two numbers do not necessarily square with one another very well at all. And there's an anchoring effect that's built into internal rate of return as well, where very early returns can significantly affect that number for years and years down the line.

50:45It's quite difficult for the average person to evaluate how their investment is performing when they're holding these compared to other investment products. and IRR is frequently what's setting the way that managers are being paid as well. So you've got this complex fee structure that's attached to this return metric that's difficult to follow, which is in turn rooted in this pricing information that is not market pricing like you've got with common shares. And all of those layers of complexity add upon one another and they make it much more difficult for the average person to understand what they're holding and somebody's recommending them.

51:24I think it's a lot more difficult for them to explain to their client or have faith in their diligence in terms of the product that they're approaching the client with. Mentioned apples and oranges. There's a paper from Ludovic Filippo, who's been a guest on this podcast a while ago now. He does a lot of research on private equity and his 2026 paper is titled Apples and Oranges, Benchmarking Games and the Illusion of Private Equity Outperformance. Yeah, Ludovic is a very smart guy. I grabbed coffee with him a few months ago when I was in Oxford and we were chatting about some of this, but I think that I've read most of his papers on this topic and I found them very illuminating.

51:58Obviously, I don't have even a tenth the understanding that he does, but I do think that sheds light on a lot of these issues. What additional steps should advisors recommending private assets be taking? Backing up, because this is related to what we're talking about, the liquidity problems that are inherent in these funds, I think should be front and center for advisors if they're going to be dealing with them. And the liquidity piece of this is that basically all these funds can be gate-air locked up. People don't necessarily understand that they won't be able to redeem their funds at any time like they could with a mutual fund.

52:34Normally, you can redeem, you've got the money in your account within a day or two. It's a very straightforward thing. People think, you know, I've got an emergency, I need to repair my house, my roof has gone bad, I need a new car, whatever, I can access that money. That's not the case with private funds. So that's another difficulty for clients to understand. I think it's an extremely important thing for advisors to be talking to their clients about is understanding that there might be a mismatch between their liquidity needs at any given time and what these particular products can offer. I think warning of all of the risks that we've been talking about, all the risks that are structural to these products is a very important thing for the advisor if they're going to be recommending them and papering that they've actually taken the steps to warn them, gone through whatever compliance steps they need to, and making sure that all their ducks are in a row on that front would be very important.

53:25If you're helping to generate a plan for somebody, if it's not just investment selection or investment advice, I think it would be extremely important to ensure that that plan has contingencies in place for the event that anticipated cash flow coming from the private side of the portfolio is not available because gating is all over the news right now. I'm getting more calls than I can count about gating. It is something that is happening right now and will probably be a future for the foreseeable future to some degree. So accounting for that in the plan would be a very important thing. I don't think you can take it as a given that the liquidity event is going to happen or the payments that were supposed to happen are going to.

54:05So if it is going to be part of the portfolio, there needs to be some amount of planning going around what's going to happen if those funds actually aren't available. Placing it within the context of the portfolio as a whole and making sure that it's appropriate, that's a very basic thing, but I think it's particularly important here because of the fact that you can have somebody walked into a portfolio that could become inappropriate and you can't actually really rebalance it in a meaningful way. There's a lot of knock-on effects that come from gating because people are essentially stuck with that position indefinitely.

54:40they're really at the mercy of a fund manager for the most part and can you build around that and get back to a suitable portfolio if something does happen there that's a pretty important question that i think people would need to turn their mind to explaining the differences in returns and how to evaluate returns explaining how fees are calculated i think that's important as well because clients need to be going into this with their eyes open and actually understanding what is that they're signing up for. And the last one is usually these products are exempt market. They're sold through some sort of a prospectus exemption.

55:14It is on you to ensure that the client actually meets whatever exemption you're relying on. You need to be confident that their assets actually meet the requirements that they are able to legally purchase this product at all. Otherwise, that could cause problems for you down the line. What about from a client's perspective, If they're being recommended by an advisor to invest in private assets, what additional steps do you think the client should be taking? I think that they should be asking a lot of questions about that. Part of it might be looking at what's the product shelf that the person has available to sell me.

55:49A lot of the majority of the consultations that I have, these are being sold through somebody who only has an exempt market license. so that's really all that they've got available to them probably is some suite of these kinds of private asset products if you come to somebody who is acting as more of a salesman than an advisor they're going to try and sell you what they have it's like going to a car dealership you walk into a ferrari dealership they're going to try and sell you a ferrari even if maybe what you need is a dodge minivan but they're going to try and make the pitch they're going to try and deal what they've got.

56:22And I think that people might want to know what it is they can actually offer them. I'm not saying private assets are always inappropriate and people should never sell them. But if it's the only thing in your portfolio, I think it's going to be a very exceptional circumstance that that's appropriate. And that might be the situation you find yourself in if that's all the person you're speaking with can sell you. So I think having an understanding of what kinds of solutions they can offer you would be a pretty important one before you're getting into this. And if you've got a complex financial situation or you want exposure for some reason, if there's a percentage of your funds that you want invested in this for whatever reason, that can be a defensible thing.

57:01I can understand that as long as there's the discussion happening around it, it's not happening by default or just because that's all the person can offer you. So I think understanding how the pieces fit together, having a conversation about how this is appropriate and the context as a whole is a pretty important thing in doing your due diligence on the firm that you're working with, the person that's making these recommendations to you, and ensuring that you really understand how this is going to help you meet your financial goals. So how do you think this push into private assets for retail investors will affect future litigation?

57:33I think that there's going to be a lot of litigation over this in the future. We are starting to see more of it. And part of that, I think, is if you look at the incentives to sue. All of this stuff can be reduced to incentives like most other things. Historically, private assets were kind of the domain of the sophisticated entity. They were hedge funds, they might be some pension plans, whatever. Very sophisticated entities that are doing their own diligence in the way that the average person can't, and they're going into it with their eyes open. Or beyond that, they wouldn't have incentives to sue because of the fact that some of the people that work at the fund might have an ongoing relationship.

58:15They don't want to sour that relationship. They're looking at it as, okay, this was a bad deal, but we've had good deals and we'll have good deals in the future. Some people might be looking at it like, I would like to work in private equity, so I don't want to be the person that pulls the trigger on this and affects my own future career prospects. They got a lot of reasons not to sue in these situations. And in particular in the US, binding arbitration has been something that's been forced upon them too. So if they are suing, it's not something that we're seeing. There are a few decisions where people have been forced into arbitration that are public by the courts.

58:48So you can see that all of those considerations for the most bar in Canada, if you're dealing with retail investors fall away. They probably don't care about their ongoing relationship with the fund manager. They're saying this was a bad thing that happened. I never want to deal with this person again. I don't care if I sue them or not. I don't care if that's something that's going to affect this going forward. It's more difficult to force retail investors into arbitration. In Canada, things like class action waivers are more difficult to enforce than in the United States. All of these incentives align in all this context in a way that I think would make litigation much more likely.

59:24And I think that we will see litigation over some of the issues that we've been talking about more and more frequently in the Canadian courts. There's another paper from Ludovic and William Magnuson, who actually has also been a guest in this podcast, where they talk about, I think in a US context, but they say, as a result, asset classes long confined to qualified investors are now being offered to the public, but without the protection traditionally attached to public offerings. This article argues that the retailization of private equity creates a significant regulatory gap, practices normalized in institutional settings, misleading performance metrics, manipulatable valuations, opaque fees, limited liquidity, all stuff that you've talked about, and fiduciary duty waivers become significant litigation risks when ordinary investors enter the picture.

1:00:07I completely agree with that paper. I've read it and I lecture on this topic. That's part of the assigned readings that I give to people. A lot of what they've spoken about in that paper, it's even more true in the Canadian context. For instance, there's a section in the Securities Act that creates a right of action for people for misrepresentations and offering memoranda. So So a lot of the time offering memorandum will be part of the sales pitch for these products. What people think they're buying into doesn't necessarily match what's under the hood. And it's explicitly part of Ontario legislation that you can sue for that mismatch.

1:00:41And I think their retail investor will be much more likely to do that. Man, we've stayed away from private assets, broadly speaking. I want to move on to the final topic we have questions on, which is if influencers are financial influencers, can you talk about the legal and regulatory challenges that finfluencers pose? I think they pose a lot of difficulties. And part of the problem is even knowing who's going to deal with them. That's kind of the first point that we come into. For a regulator, from a regulatory perspective, video is everywhere. Audio is everywhere. We could have listeners when we're done this.

1:01:18Australia, South Africa, wherever. If there's a problem, who's going to address that problem? So that's sort of question number one. And if you're dealing with a more bread and butter market misconduct type of issue, it's pretty obvious. Somebody is hawking products out of their office in Markham or Barrie or wherever. And, you know, OK, we're dealing with the Ontario Securities Commission. Even within Canada, each province has their own commission. So if you got somebody who's recording this content in Manitoba relating to an Alberta company and their transactions happening in Ontario, people need to figure out, hey, who's going to try and deal with this problem?

1:01:55And the different commissions can and do coordinate. But immediately off the bat, you've got, OK, this is a problem. We need to think about it. And that's what they're even dealing with the cross-border or transnational aspects of it. Another issue is private enforcement incentives are limited. And when I say private enforcement, I mean lawsuits. So somebody relies on this bad advice. the incentives to sue are less because of the fact that you don't need to have insurance as a fincelancer. Anybody can make a podcast, anybody can plug in a mic, they can start recording, they can say wherever they want, and they can pretty easily reach a very wide audience over pick your favorite video platform or audio streaming platform if most people can find a way on there, particularly if they've got a listener base.

1:02:43But that doesn't mean that there's actually going to be a reason to sue them in terms of getting your money back if you follow bad advice because they might be completely broke. There's been a few prosecutions of influencers by regulators in Canada and they've actually accounted for the fact that the person has no or very limited assets and the fines that they ultimately levy. For the average person looking to do this, the first part of the conversation is always, can we actually even get you any money back or are you going to be throwing good money after bad by engaging a lawyer and trying to do this.

1:03:16Regulators have a bit more of a headache off the top. There's less incentive for the investor themselves to do something. And you also get into this question of why I'm at your advice. It can be very difficult to ascertain the financial relationships between an influencer and different companies or different entities because of the fact that, broadly speaking, they're not really regulated. They're supposed to be regulated. If you're engaging in promotional activity, you're supposed to make disclosure, you're supposed to engage with the regulators. But there's so much of this going on right now, and regulators are everywhere stretched pretty thin by a lot of internet-related problems.

1:03:56It's not realistic for them to police 100 % of this activity 100 % of the time. So there's a lot of structural difficulties that come up with the Finfluencer-type activity from pretty much every perspective that we expect to normally rein in a lot of regulatory issues. How do you think investors should assess the credibility of a Finfluencer? I think that's a tough one, and going to a trusted source of advice is, again, I think an important thing that they can do. But just looking at it, I think you always want to be thinking about why the person is making the particular recommendations they're making.

1:04:32If there's any kind of disclosure of a relationship, obviously that's something that you would want to account for. And that's part of what should be happening with promotional activities is if there is a relationship, it should be disclosed. From there, I think it's pretty hard. It's the Wild West, frankly. There isn't a lot of good resources in terms of how people can familiarize themselves. They can do things like see if there has been any kind of regulatory action involving them. Google will pick that kind of thing up now. But in terms of diligence, we've got this information asymmetry problem that I've been coming back to a lot.

1:05:08And a lot of the time people are turning to a Finfluencer because they don't have access to a trusted source of advice. So it is self-selecting in a way too, which is part of why I think the educational component that professionals can have is a very important part of this. If somebody is working with a professional, it's an opportunity for them to educate them about this and educate them about a lot of the issues that attach to Finfluencers. How do you think licensed financial advisors should approach that? Educating their clients about what Finfluencers might be saying and the problem, if we can call it that in general.

1:05:45I think the Securities Commission has done a report on this, which is quite good. The Ontario Securities Commission, I would commend it to the listeners if they want to learn more. But they did a study on investor behavior and interaction with influencers, and they came up with a number of things that they found that actually reduced the odds of somebody becoming victimized by a device for a influencer. On the advisory side, preemptively dealing with misinformation was a very powerful thing that advisors could do. So having the conversation before the client comes to you. And they also suggested some pretty specific forms of how that could be done.

1:06:30One of the recommendations they made was inoculation, which was presenting clients with the misinformation that is commonly floating around out there with influencers in a weaker form, and then rebutting it themselves, kind of having a one-person debate to help build resilience against influencer persuasion or whatever you want to call it. That was something that they found to be very helpful in terms of affecting retail investor behavior. Having conversations about how you evaluate your own information to help prevent undue reliance or having conversations about these are the kinds of things that you should be looking for, kind of encouraging critical thinking basically, is something else that professionals can do to help with this issue.

1:07:16What recourse of any do investors have if they've acted on the presumably bad advice from an influencer? Unfortunately, I think to a pretty significant degree, it's limited. If there is reason to believe that there are assets available, then an investor could sue. It would be a different kind of claim from those that we've been talking about a lot. It would be different to prove it. And I'm not really aware of too many of those claims in Canada, but theoretically possible. You can always complain to the regulator. The different securities commissions, I think both the Alberta Securities Commission and the BC Securities Commission have prosecuted influencers.

1:07:53The SEC in the United States has prosecuted some influencers as well. So the prosecutions are happening, but the mandate of a regulator is not necessarily to return your funds. Their mandate is to police the market, levy out fines, or reduce people's ability to participate in the market. It's not actually correctively get the person's money back. If you wish to do that, I think you should go into that process with your eyes open, knowing that the odds that it's actually going to improve your financial position are limited. And this is, I believe, one of the larger issues with this area is the fact that there's this limited recourse as well.

1:08:30I begrudgingly accept the title, but I have occasionally been called a Finfluencer. What do you think licensed advisors like us need to keep mind while making online content and potentially entering into the realm of influencers ourselves disclosure is a very big one if there's any kind of relationship that's absolutely critical that's a legal requirement there is a difference between education promotion and advice and it's the last two the advice and the promotion that can get you into trouble so if you are cognizant of the difference. If you're not promoting particular companies or if you're not advising specific transactions through your online content, if you are sticking in the educational sphere and just trying to help people learn and better understand concepts, you're going to be on the right side of the line.

1:09:22If you stray from that, you do risk regulatory and reputational damage. If you don't differentiate between those things and if you adhere to the law, you can engage in promotional content, but that's going to be pretty obvious when you're doing that. So if that is something you wish to do, being cognizant of it and being very clear about it, transparency is a very important component of this. And in particular, if there's any kind of money changing hands or other benefits, that's something that you absolutely want to disclose in a very clear way. And one of the regulatory decisions actually talked about what kinds of disclosure you need to make.

1:09:59And they said, if you need to expand the box under the video stream and read through like five pages of material to see at the very bottom or somewhere jammed in the middle, actually, there's a financial relationship here that's not going to cut it. I think they suggested it should be above the expansion line or ideally actually displaying on the video feed itself. So blindingly obvious to whoever the watchers are. And since so much content is audio now as well, I think that will want to make an actual statement rather than relying on somebody having the tab open and actively looking at the audio.

1:10:32So the more obvious I think you can make it is a good rule of thumb, the better off you're going to be from a legal and regulatory perspective. Our final question for you, Matthew, how do you define success in your life? The most difficult question comes last, I see. I think being able to adhere to your values in terms of what you're doing is an important indicator of success for me. And obviously making sure that you have the time available for the stuff outside of professional life. There's much more to life than just work is something that is central to any kind of definition of success that I have.

1:11:11It's a great answer, Matthew, and this has been a great conversation. We really appreciate you coming on the podcast. Thank you very much for having me. I've enjoyed this a lot. Yeah, I learned a lot. Thanks, Matthew. You're welcome.

1:11:24That was one incredible conversation. His answer, Ben, to the question, what makes private assets problematic for retail investors? I mean, that's just textbook brilliant and so complete. Kind of blew me away that answer. The whole conversation, I mean, you go right through the topics that we talked about. I thought the section on advisor conduct was super interesting and how a lot of advisors are not looking at risk capacity. Even if you assume that they're doing risk tolerance well, which I think is a big assumption, a lot of advisors just aren't looking at risk capacity, which is like, even if you have a high risk tolerance, so you can handle volatility in your assets, a low risk capacity means that you might need your money soon, basically.

1:12:08And some pretty basic questions, we'll flush that out. And he talked about so many advisors aren't even asking those subsequent questions to find out what their true needs are. It's more about the product hammer time to find a nail. Well, that came up with the private asset section too, where some advisors are only licensed in exempt markets. The only thing they can sell might be private assets as the example that we talked about with Matthew. And then of course, the advice is going to be skewed in that direction. I think we see similar things with insurance. If an advisor is only licensed to sell insurance, well, they're probably going to recommend insurance.

1:12:41Interesting questions around the institutional and pension world too. Depends on what you're promoting effectively can determine whether or not there could be a case against you from a class action standpoint. So it really depends on the mandate, which is what he talked about. If you're a mutual fund manager and you say that the objective of your fund is to do one thing and you do something else, that's a pretty obvious class action. I thought the brief conversation we had around pension funds or endowment funds and what their responsibility is in terms of asset allocation was pretty interesting and whether index funds are a pretty good solution for them.

1:13:16And this whole Finfluencer environment that's going on around the world today. And the highlighting, I thought of his breakdown of the three points, you know, it's about education, promotion, and advice. And you get into trouble, especially in that middle one, if you're promoting something or if it's deemed to be advice. So education is one thing to be really transparent about if there are conflicts of interest to really highlight that. And perhaps even include it in the videos. And this is something you've been thinking about for a long time, clearly with your 100 plus videos you put out, plus all of these podcasts.

1:13:46I do it, especially if I'm talking about a product specifically. I will say, historically, there hasn't been no conflict, but I will say, our firm does recommend these products, but I have no financial conflict of interest. Or in the case of we did the video on the Avantis ETFs or the CIBC Avantis ETFs, and I disclose that we have no relationship with them. This episode is just so good, frankly, for everybody. I learned a lot. I assume you learned a little bit as well. But if you learn a lot from this conversation, just as you go to market looking for an advisor because we know so many people are looking for a new advisor.

1:14:16This is just a good framework on how to think about the fiduciary standard. Who's looking out for you? How do you think about risk? Where do you get your advice from? Do you pay attention online? What conflicts of interest there should you be looking for? It's just nice and complete and tight. His answers were so tight and you can see his experience just comes through. And he knew those papers that you referenced, which I thought was really cool too. Yeah, I loved that. I actually met up with Professor Falapu. It's pretty cool. I love that he knew the papers and that he actually lectures on them, which was cool from a Canadian perspective as well.

1:14:47And he had some interesting comments on that. I did really like the discussion on what fiduciary means for a financial advisor in Canada and sort of which boxes you have to check for the court to consider you a fiduciary. And I'm glad to hear that. I think we do a pretty good job. we often talk about how being a portfolio manager in Canada means you're a fiduciary. As Matthew talked about, that's not necessarily true because the court will look at how you're actually acting. If you're a portfolio manager who is acting like an order taking advisor and not using discretion, you may not be viewed as a fiduciary.

1:15:18But then the other one is that if you're holding yourself out as a fiduciary, or if you're part of an association that requires a fiduciary pledge or a best interest pledge, you're highly likely to be held to that standard by the courts. Or if you're effectively acting from a position of trust. Yeah, that's a big one. We didn't mention in the intro, but one interesting point is that Matthew works with Harold Geller, who's been a guest on this podcast. I don't remember what episode that was. I'm well known in this space. Episode 236, we had Harold on. In some ways, a similar conversation. I thought Matthew brought a different flavor to a lot of the topics.

1:15:54Definitely a complimentary discussion. And we mentioned this to Matthew after we stopped recording. I think his episode, this episode that you're listening to or that you just listened to is a great compliment to two weeks ago where we had Moira Summers and Philippa Hahn talking about financial advisor misconduct. Agree. Great listen. I would argue must listen for anybody. Fantastic conversation. I came away from it pretty energized. Really enjoyed it. As always, everybody, thanks for listening.

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