Addressing implications of the “best interest” standard when determining fiduciary duty of investment advisors

A recent decision of the Ontario Court of Appeal has revived a class-action lawsuit, Boal v. International Capital Management Inc., regarding the fiduciary duties of investment advisors to their clients.

In an interview with Advisor’s Edge, co-head of Torys’ Securities Litigation practice John Fabello commented on the significance of the ruling, particularly because it is one of the first decisions made since Client Focused Reforms (CFRs) took effect in 2019.

In Boal v. International Capital Management Inc., the Divisional Court had previously ruled that regulatory “best interest” standards are not the sole factor in determining the fiduciary duty of investment advisors to their clients; rather, there are five factors that are considered: (1) the vulnerability of the client, (2) the client’s trust in the advisor, (3) the client’s reliance on the advisor, (4) the advisor’s power of discretion over the client’s accounts, and (5) the professional rules or codes of conduct that apply to the advisor.

The Court of Appeal recently overturned the Divisional Court’s decision, ruling that there were additional factors pleaded in the plaintiff’s case that, if true, could indicate fiduciary duty on behalf of the investment advisor.

Read: Court of Appeal finds brokers may owe fiduciary duties to clients with non-managed accounts

John affirms that courts effectively regulate the legal standard of fiduciary duty of investment advisors to their clients. As such, he had previously advocated against including a best interest standard in the CFRs.

“We were encouraging the regulators to leave that [decision] to the court, for fear that if the best interest standard was included in the regulations, it would find its way into the judge-made law and arguably upset that balance the courts had struck,” John said.

“Now, here is an example of that best interest standard being considered and impacting the legal duty. It remains to be seen if it’s a good result for the law that’s applied by judges, but it is certainly impacting it.”

You can read more about our Securities Litigation work on our practice page.

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