Matthew represents investors, policyholders, beneficiaries, and families who have suffered financial loss. His practice focuses on investment losses, professional negligence, securities litigation, and financial misconduct. Before becoming a lawyer, Matthew worked as a protein biochemist conducting HIV and cancer research. His scientific background gives him a unique ability to analyze complex evidence and understand sophisticated financial and technical issues.
He is particularly skilled at helping clients understand situations that are often difficult to navigate. Matthew has extensive experience representing plaintiffs in complex litigation, including investment and securities matters, professional liability claims, product liability actions, and institutional abuse cases. He has been involved in numerous trials, certification motions, summary judgment motions, and other significant proceedings.
Matthew is a frequent writer, speaker, and lecturer on securities litigation. He writes a securities law column for Investment Executive and regularly presents on issues affecting investors and developments in securities law and investor protection.
In this episode, we’re joined by Matthew Taylor, a litigation lawyer with Sotos Class Actions in Toronto who represents retail investors and pension funds in securities class actions. We take a deep dive into what makes a successful negligence claim against a financial advisor, how courts assess fiduciary relationships in Canada, and what investors should look for when evaluating the people managing their money.
We explore the evidence that can strengthen or weaken a negligence claim, from one-size-fits-all portfolios and unexplained trades to poor communication and failures to account for changing life circumstances. Matthew also explains the distinction between suitability and fiduciary standards, the factors courts consider when determining whether a fiduciary relationship exists, and why professional affiliations and explicit fiduciary commitments can matter.
The conversation then turns to class actions, including how securities claims differ from individual negligence lawsuits, what makes a claim suitable for class proceedings, and why regulatory investigations, specialist law firms, litigation funding, and parallel U.S. proceedings can provide important signals. We also discuss pension funds, their role as plaintiffs, and why monitoring potential claims and settlements can be part of managing beneficiaries’ assets.
Finally, we examine the growing retailization of private assets and the risks created by limited information, complex structures, opaque fees, illiquidity, and manager-determined valuations. Matthew explains what advisors and clients should consider before investing in private funds—and why he expects more litigation in this area. We close with the legal and regulatory challenges created by financial influencers, and how investors and advisors can build greater resilience against misleading financial content.
Key Points From This Episode:
(0:01:04) Advisor errors leading to negligence claims—KYC, KYP, suitability failures, plus warning signs like one-size-fits-all portfolios, unexplained trades, concentrated positions, churning, and double dipping.
(0:02:20) Why evidence matters: the gap between what people know and what they can prove in court.
(0:04:08) How investors can recognize poor advice—changes in communication, failure to address life circumstances, or lack of transparency.
(0:06:41) Importance of checking an advisor’s regulatory history before entrusting significant assets.
(0:07:51) Investor vulnerabilities: age, education, language barriers, or sudden wealth.
(0:11:27) Steps after negligent advice—seek a second opinion, adjust the portfolio, and consider legal recourse quickly due to limitation periods.
(0:13:30) Risk capacity vs. risk tolerance, and overlooked risks such as liquidity, sequence-of-returns, and withdrawal risk.
(0:16:34) Advisors’ uneven understanding of risk, shaped by firm/product-provider education and low industry entry barriers.
(0:19:48) Courts’ five fiduciary factors—vulnerability, trust, reliance, discretion, and professional standards—and how fiduciary duties differ from suitability standards.
(0:28:28) Individual lawsuits vs. group/class actions, with securities class actions focusing on disclosure problems and asset-manager claims.
(0:42:45) Case studies: Sino-Forest fraud and challenges of private assets—opaque structures, layered fees, liquidity risk, and valuation issues.
(1:01:00) Regulatory challenges of finfluencers, difficulties in enforcement, and how advisors can inoculate clients against misinformation by teaching evaluation skills.
Read The Transcript:
Ben Felix: Welcome to episode 427 of the Rational Reminder Podcast. I'm Ben Felix, Chief Investment Officer at PWL Capital.
Cameron Passmore: And I'm Cameron Passmore, Chief Executive Officer at PWL Capital.
Ben Felix: Today we're joined by Matthew Taylor, a litigation lawyer with Sotos Class Actions in Toronto who represents retail investors and pension funds in securities class actions. He also works with Harold Geller, who's a guest on this podcast in episode 236.
Cameron Passmore: And today we discuss what makes a successful negligence claim against an advisor, the fiduciary standard in Canada and what retail investors need to know about private equity and finfluencers.
Ben Felix: And stick around to the end to hear our thoughts on the conversation. But for now, let's get into the conversation with Matthew Taylor. Matthew Taylor, welcome to the Rational Reminder Podcast.
Matthew Taylor: Thank you for having me.
Ben Felix: Very excited to be talking to you. I think we're going to have a great conversation here. Matthew, what are the most common financial advisor errors that result in successful negligence claims from their clients?
Matthew Taylor: For there to be a successful claim, there basically always has to be some form of failing in the suitability analysis. That might be failure to accurately gather and know your client, KYC information. It might be failing to understand the products you're recommending, a KYP failing.
But just because there's been some sort of a failure there, that doesn't mean an investor is actually going to be able to prove their claim. So that's a very big element of all of this. A lot of the outcome of any kind of lawsuit turns on what evidence is available to you.
There's what people know, and there's what people can prove. And very seldom do those two things perfectly overlap. And so what you can prove is the question that's going to drive the analysis at the end of the day.
In terms of things that are helpful and what you can prove, something like an advisor taking a one-size-fits-all approach. If you know there's a lot of people that have identical portfolios, but very different life circumstances, very different needs, that's very powerful evidence. If you move away from a he said, she said, to a he said, she said, she said, he said, they said, you're in a much better position.
And that's something that's going to move a judge quite a bit compared to just somebody saying something. Off-channel communications can be very helpful as well. It seems like a small thing, but it can suggest that there's issues with compliance going on.
Trades being entered without any kind of confirmation. That's a big one. If you have a clearly problematic portfolio, like a greater than 80, 90% concentrated position, which I have seen and say a micro cap, that in and of itself is going to raise a flag.
Things like churning transactions that serve no purpose other than generating a commission. Again, that's very difficult for the advisor or the firm to explain. Or you might have something like for multi-account clients, double dipping where there's a purchase made in a commission-based account.
And then those assets are moved over for no apparent purpose into a fee-based or AUM-based account. So all of those kinds of things, that's a pretty strong indicator that you've got a good chance with your claim just because of the fact that there isn't really any rational explanation for that kind of behavior most of the time.
Ben Felix: The one-size-fits-all one is super interesting because I'm sure you're familiar with the research on this, but there's pretty strong research out there showing that advisor fixed effects, the advisor themself has a much bigger influence on their client's portfolios than the client's specific circumstances.
Matthew Taylor: Yeah, I'm not shocked to hear that anecdotally. And obviously there's a big sampling bias in what I see. But I think the type of person that's likely to get sued is the type that comes up with an idea and a sales pitch, and then they're looking to pound those square pegs into those round holes with everybody they get.
And I'm sure that that matches up quite nicely with the evidence that you're talking about there. And that's probably in part explanatory for some of it.
Cameron Passmore: How can an investor evaluate whether they've been wronged by a financial professional?
Matthew Taylor: That's a very difficult question, unfortunately. I mean, you go to a professional because you need their expertise. There's always this inherent asymmetry to the relationship.
It's the same if you're going to a doctor, a lawyer, a financial advisor, what have you. There are some indicators that you can look for. In terms of whether or not you've been wronged, most people aren't going to look until they've experienced some sort of a loss.
Now, markets fluctuate, things change over time, that in and of itself is an indicator. But realistically speaking, that's the trigger point when most people are going to start asking questions. A lot of the time it's around tax season.
They might be speaking with an accountant about some losses, and they might say, something is looking a little bit off here. It's better if it happens sooner, but asking for a second opinion, seeking a second set of eyes on things is never a bad thing. I think the quality of communication you get can be a very strong indicator that you might want to have somebody take a second look.
A not uncommon fact pattern when something bad has happened is there is a very robust amount of communication. There's a lot of courting going on when somebody is trying to get the account, and then they disappear and they might be in touch once or twice a year after the fact. And that's the bare minimum of communication.
But I think if you notice this huge switch, that's an issue. Another thing would be if you're not actually having conversations about your updated life circumstances, there should be a fairly continuous exchange of information to make sure that whatever is in place still makes sense, is still meeting the person's needs. Because life circumstances change all the time.
People retire, they get fired, a loved one who's contributing financially passes away, or they get retired or fired, they have a kid. All of those things should be going into the mix of information and affecting what kinds of recommendations are being made. So if you're thinking back and you're going, you know, I've had all kinds of things happen.
We haven't really talked about them. We haven't really talked about whether or not my needs have changed, or if this approach still makes sense. I think that that's another indicator, not necessarily that something has gone wrong, but there's a possibility.
And again, it's going to make sense to consider speaking to somebody else and getting a second set of eyes on things.
Ben Felix: A loss is a trigger, obviously. And then you gave a couple of cases where you might have an idea once you have become a client of somebody that something may not be quite right. Are there any warning signs before hiring an advisor that people can use to decide or to identify an advisor that may be negligent?
Matthew Taylor: There certainly are. They're not as great as I wish they were. A very strong one would be if you are dealing with somebody who is regulated by CIRO, which would be most of the large dealers, then you can look up if there's been any kind of complaint or investigation against that person.
That's publicly available information. It takes literally less than five minutes to do. And before you entrust somebody with a significant amount of your financial future, I think that's something that everybody will want to do.
Because a pretty common situation that you'll see in these kinds of claims is somebody has a small complaint or something bad happens, and then they're under close watch for a while. And then they sort of shift back to their old ways, but maybe on a much larger scale. So if there has been a past regulatory complaint, again, past results do not necessarily indicate the future, but it is a pretty strong piece of information.
Something that you will want to consider quite a bit, I think, in the course of choosing whether or not you want to work with this person.
Cameron Passmore: And in your experience, Matthew, are there any common traits of investors who find themselves on the wrong end of negligent advice?
Matthew Taylor: I think that here there's a lot more commonality. A lot of them are indicators of vulnerability of some sort. It might be advanced age.
It might be a lower degree of education. It can be a language barrier. That's a very big one because a lot of the forms, the official documents that you're dealing with, your statements, they're going to be in English or French, one of the official languages.
People might have pretty limited facility with those languages, and it can be much more difficult for them to understand what's going on, or they'll inherently be more reliant on their advisor if they seek out somebody, as people often do. They can speak the same language to them. That's a very natural thing.
You want to work with somebody that you can communicate with, but it's building in another layer of asymmetry like we were talking about before, and that they are now reliant on them with respect to the language piece of things as well. Another common element can be people who come into money suddenly who didn't have much of it before. They might be the recipient of a payout from a life insurance policy, let's say, a large inheritance.
They might all of a sudden find themselves in a fundamentally different financial circumstance. They're also reeling frequently from a personal life event that was very negative, and they're trying to figure out those two things at once. I've had consultations with people where somebody sought them out specifically because they've learned that they've come into a lot of money, let's say, and that's not necessarily a bad thing.
Maybe the person's actually going to offer them good advice, but it is something that can result in, I think, a problematic situation arising.
Ben Felix: Do you see people like lottery winners in that situation?
Matthew Taylor: I personally haven't a consultation with a lottery winner. I'm part of a larger group of lawyers that practice in the space in the U.S. and Canada, and we exchange notes quite a bit. I have heard people mention that specific kind of circumstance, yeah, because that's a very public and very extreme example of that phenomenon.
Ben Felix: It's an interesting one, too, because in an inheritance case, it's often a family that had money, and maybe there was some sort of education, but with a lottery winner, it's in many cases – or at least it can be – someone with zero financial background or knowledge, and all of a sudden, they have a whole whack of money.
Matthew Taylor: Absolutely, and that's a perfect storm for them to be victimized, unfortunately.
Ben Felix: What are some of the signs that a negligence claim will not be successful?
Matthew Taylor: I think if you've got very little independent documentary support, that's going to be a very big issue for you. That's unfortunately a conversation I need to have with people sometimes is saying, I understand what you're telling me, but in terms of what's on paper, what we can actually point to to prove this, it's much more limited. That can be mitigated to a significant degree if you've got a lot of people who have the same experience, but if it is just one person that's coming to you with this situation, then that is going to make it inherently much more difficult to prove their claim.
Ben Felix: Man, those must be difficult conversations to have with people.
Matthew Taylor: It's never great. I mean, another similar thing is frequently you'll have people that have been wronged, and it's just not enough money that they've lost to offer to do it on a contingent basis. There are avenues of recourse still, but it's quite difficult when somebody has clearly had something bad happen to them, but they just can't afford to do anything about it.
Ben Felix: If someone thinks that they're in a situation where they have been wronged, what steps should they be taking?
Matthew Taylor: I think the first thing that you want to do is get a second opinion from somebody else, do some homework, get some recommendations from people you trust, take a look around, figure out somebody in your area or somebody that you can communicate with that's reputable that you can have a look at where you are right now, because that's a very big aspect of helping the person out at this point in time, and it's not something that I can personally do, but they do need to deal with whatever situation they're in now.
Maybe they've got a portfolio that's full of the liquid junk, maybe they've got a very concentrated portfolio, whatever. They need to get their current situation out of that, and that's one, for their immediate financial well-being. Two, legally speaking, you also have a duty to mitigate.
You need to take steps to stem the bleeding, so it is something that will also factor into what they may be able to get out of the other end of the lawsuit on top of the other stuff, but that's something immediate that people can do to improve their situation, and it will also improve their situation legally, so that's absolutely something that I would suggest early on. Seeking a consultation with a lawyer, evaluating if you may have some legal recourse as well, that is something that you want to do sooner rather than later. Legal claims are not like wine, they don't get better with age, they're like milk.
They have a pretty set period of time in which they have value. If you don't do something about law enough, statute of limitations trips, you are out of time, there's nothing you can do, so you do want to evaluate whether or not you've got legal recourse sooner rather than later. There are free resources available as well that people might want to explore.
There's the Always Good Investor Protection Clinic, and they do some excellent work there. I'm a supervising lawyer there. It's student-run, but we have been involved in getting people who couldn't afford legal counsel or to go through a full lawsuit some level of compensations, which is always better than nothing.
Cameron Passmore: What do you think financial advisors should be doing to assess the risk tolerance of their clients?
Matthew Taylor: An important piece or a conversation that seems like isn't happening as much as it should would be risk capacity with people as well. I think anything that you can do to explore this, I think talking about scenarios can be a really good one because everybody has that conversation, I think, with somebody that comes in, they're like, yeah, I have great risk tolerance, I want to do some gambling, but if you talk to them, okay, what happens if you lose your job, what if your company enters into bankruptcy, or how would it affect your life if all of this money was gone, or if it was completely locked up in some illiquid fund, and they all start talking about all these horrible life consequences that they could have, and as they're talking through that, okay, maybe my risk tolerance isn't where I thought it was.
So I think exploring in a more concrete way is something that people respond to a bit better, I believe.
Ben Felix: We have a risk tolerance questionnaire that we do with clients, and we also have a risk capacity questionnaire, and it has six questions. Do you have a positive net worth? Do you have sufficient liquidity to cover three to six months of living expenses?
Do you have stable employment or pension income? Are you currently withdrawing more than 3% from your investments annually? Do you have adequate life and disability insurance?
Do you anticipate making a withdrawal of greater than 10% from your long-term portfolio? If yes, what is the expected time horizon for the withdrawals, and it ranges from less than a year to more than 10 years?
Matthew Taylor: That is a much more robust process than, I think, a lot of other places have, many other firms. So I think that that will certainly serve your clients well, and the fact that there's a discussion happening about risk capacity versus tolerance at all, there are many, many calls that I have with people where they're not aware that those are two separate concepts. It's just not part of the discussion that they've ever had.
Ben Felix: Yeah, that's wild. You mentioned earlier that you've got a biased sample because people come to you after something has gone wrong. So we're acknowledging that your sample is biased.
How well do you think investors, retail investors, understand risk, broadly speaking, when it comes to investing?
Matthew Taylor: I would say it's generally pretty poor overall. I think that there are a lot of aspects of risk that aren't discussed or people don't have an understanding of, the general public. I think people essentially think of the risk of the loss of their invested capital, and they think this asset class has more or less risk, and they're not thinking about different forms of risk, like liquidity risk is something that I don't think people give much consideration to.
Sequence of return risk or withdrawal risk, those forms of risk, I think that they're just completely off of most people's radars, and they just have this very rudimentary understanding of what investment risk is or what kinds of financial risks they face. So I believe the average person that's coming in looking for advice, they're probably coming in with extremely limited knowledge of what risk actually means or the ways that it can manifest.
Cameron Passmore: And again, in your experience, Matthew, how well do financial advisors understand risk?
Matthew Taylor: I think that's much more variable. That certainly runs the range. There are people that are extremely sophisticated, have an excellent understanding of it.
They have processes, like you've been describing, to educate their clients and have those conversations. And I've certainly met a lot of people like that, and I learn a great deal from them. So I always appreciate that.
I think there are also people that are at the other end of the spectrum who have probably not much greater an understanding than the people that they're advising. Frankly, the barrier to entry into the industry is quite low. The licensing process as an educational component, I wouldn't say it's a super robust educational component.
I think for some of the licenses, my understanding is it's still basically a multiple choice test. There's a greater degree of variability here. There are some excellent, excellent people that have a very strong understanding of it, and there are going to be people who are in between as well.
Ben Felix: I remember when I did my licenses initially, which was just a mutual funds license and an insurance license, I look back on what I knew then, and it's terrifying that I was licensed to give advice. And then the crazier part is that most of your education comes from the firm that you're with, and most of the education within firms often comes from product providers who are brought in for lunch and learns or whatever. And so all your education is coming from folks who are selling you a product, which you're then turning around and selling to your clients.
But if there's no independent education happening, you can get a pretty skewed view of how things work and what risk is.
Matthew Taylor: People gravitate a lot of the time towards doing the bare minimum, unfortunately, and if the bare minimum at your firm is learning about their product shelf or hearing from the product people what they're saying, that's going to be a big part of why at least some of the advisors are going to be absorbing, and that's going to be flowing through to the advice that they provide people. So I'm working with Harold Geller, who I understand was a guest in the past, and he likes to tell a story about how he got, I think, his mutual fund license. Maybe it was the Canadian Securities scores, like fresh out of high school, with essentially absolutely nothing.
There are people out there that that is their background coming into this space, and that doesn't mean that they're going to remain at that level of education forever. Lots of people go on to continue to learn and improve, and I'm sure provide an excellent service to their client, but there are also people who are not going to learn much more, and they're not going to make a lot of effort to improve from that place.
Ben Felix: The bar is low. The entry level to be licensed and qualified to give advice, it's not like being a lawyer, where you can be pretty sure people have gone through pretty rigorous education.
Matthew Taylor: It's kind of interesting that you say that, because what you're saying, I think a lot of it is similar to law. The barrier to entry is higher in going to law school, but in terms of actually learning how to practice law competently, you mostly give that for your firm and the people that you work with, and that can be extremely variable. It's not like medicine, where you're licensed to practice in a particular area.
You get your law degree, you get called to the bar. You can theoretically try and take on any kind of mandate at that point, even if it would be terrifyingly complex, and you don't have the experience. There are some similarities there, I think.
Ben Felix: That's very interesting. What are the conditions for financial advisors that imply a fiduciary duty in Canada?
Matthew Taylor: I wish that this was a simpler question to answer, and unfortunately, it can be difficult for people going in to know if they're dealing with a fiduciary or not. Generally speaking, in the context of people who are providing professional advice, there's five factors that are going to drive the analysis, and a lot of them are related to what we've been talking about already. The biggest one is vulnerability, and vulnerability can take a lot of different forms.
It can be that language barrier that we were talking about before. It might be their very rudimentary level of investment knowledge. It might be a lack of education or limited professional experience that would be relevant.
Anything that's going to heighten that asymmetry that I mentioned before between the professional advisor and the client. The second factor the courts will look to is the degree of trust. If somebody actually was completely trusting and reliant on their advisor, that's going to strongly militate towards it being a fiduciary relationship.
A related piece would be reliance. If somebody has been following their advisor's advice basically 100% of the time, relying completely on them, that's going to push more out towards the fiduciary end of things, versus somebody who may follow the advice some of the time, but not all the time, or might disregard the advice most of the time. That person is going to have a much harder time having a court say that was a fiduciary relationship that you were in.
Discretion is one of the key hallmarks. If you've got a discretionary account, that's going to be one of the strongest indicators. But it's not just what the paperwork says, because you can find many instances of civil lawsuits or regulatory proceedings where non-discretionary accounts have been treated as discretionary, or discretionary accounts have actually been treated more like an order execution account where the client is directing what's happening.
So the court's going to look at the reality of the situation, not just what it says on the account statement. The last indicator is if there are professional rules or codes of conduct, or if they're a member of some form of a professional organization that says that follows a fiduciary standard, or adopts some of those other indicia of a fiduciary relationship as part of the mandate for the organization. And if somebody advertises themselves as being part of that organization, meeting those standards, the court is going to hold them to that.
Ben Felix: Yeah, that one I find so interesting, that if you say you're a fiduciary, you're likely to be held to that standard.
Matthew Taylor: It's an important factor. And unfortunately, there are situations where people will say that. It's not necessarily in writing.
And then you find yourself in the he said, she said kind of thing. And we're talking about the evidence relating to it. But if somebody clearly is advertising themselves as such, that's going to be a much stronger indicator that they are.
Ben Felix: Interesting. We are at PWL, Discretionary Portfolio Managers, and we go through a third party certification. We're audited, and this third party called CEFEX, the Center for Fiduciary Excellence, they certify us as acting as fiduciaries, which we then present to clients.
So between those two things, it's highly likely we would be held to a fiduciary standard if we were in court.
Matthew Taylor: I think that's right. That would be very powerful evidence that you were fiduciaries. And if people want to be really explicit, they can put it in their contracts too.
You can contractually create a fiduciary relationship. There's nothing that prevents people from doing that. I personally haven't encountered that, but theoretically a possibility.
Ben Felix: Interesting. Oh, and I guess we also have, most of our advisors are CFA, CIM, or CFP, and often some combination of those things. And all of those have their own standards and codes of ethics, which typically promote a best interest standard.
Matthew Taylor: That's a big one. I have been involved in lawsuits suing people who are CFA charter holders, and that's absolutely something that we relied on in terms of pushing that lawsuit ahead and arguing the fiduciary standard applied.
Ben Felix: For context, for people, for why we care about this, how does legally acceptable advice differ between an advisor who is held to a fiduciary standard and one who's held to a suitability standard?
Matthew Taylor: So the best interest standard is a big piece of it. Fiduciary, I believe it's a Latin word. It's a word that basically means trust.
So we're talking about a trust relationship. And for context, the normal sort of negligence relationship is you need to meet a standard of care. In this context, that's suitability.
Inherent in suitability is not a best interest standard. It's that you're making an appropriate recommendation based on the person's needs and the products that you're suggesting to them. If you have a best interest standard or if you are held to a fiduciary standard, there's some other stuff that attaches to that.
You need to make disclosure. You need to make disclosure of any kind of conflict of interest. And if there is one, then you need informed consent from the person to accept that conflict, basically.
And you need to make recommendations that are based on their best interests and aren't informed by your own. Theoretically, you can make suitable recommendations that result in higher compensation to you, or there might be some other benefit flowing to you. And you don't necessarily have to disclose that either.
It wouldn't be inherently unsuitable. There might be other things that will flow from that. But just taking that one piece in the abstract, that's one way that it can differ.
Cameron Passmore: So given that, how important should obtaining a fiduciary relationship be from the client's perspective?
Matthew Taylor: I think from the client perspective, there's no drawback. I believe that a lot of people when they're seeking out advice, they probably have an expectation that those kinds of things would be disclosed to them, or there would be a discussion about it. My sense when I speak to most people is that they believe that that's something that must, should, or is happening when the reality can be a little bit different.
And 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. So 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.
Ben Felix: Could be higher minimums too.
Matthew Taylor: Absolutely. So there could be a lot of other reasons why it doesn't happen or why it's not available to somebody.
Ben Felix: We touched on some of the characteristics, but if an investor is looking for a fiduciary, how can they identify them? What should they be looking for?
Matthew Taylor: 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.
And 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.
I think people advertise their affiliation with FPAC. That would be a pretty strong indicator if somebody was looking for a fiduciary specifically.
Ben Felix: For listeners, FPAC is an industry association, the Financial Planning Association of Canada. I'm a member. I don't know how many other folks at PWL are, but good organization.
What types of issues in financial markets typically result in class action lawsuits?
Matthew Taylor: So class actions tend to have different components on 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 of people all deciding to retain one lawyer and sue together to take advantage of economies of scale. A 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 price-fixing conspiracy, something of that nature. As a result, there's really pretty minimal involvement from anybody else who's affected.
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.
You 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 are 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. Because 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. And 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.
There'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 pockets of claims. There are disclosure issues with publicly listed companies. Pick whatever your favorite TSX company is.
If they're failing to make disclosure of their true 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, that 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 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. That lends itself much better to class determination.
Ben Felix: I think asset managers as opposed to financial advisors are held to a stricter or to a more explicit fiduciary standard. Is that right?
Matthew Taylor: Yes. The Securities Act actually explicitly contains a fiduciary standard attaching to certain kinds of asset managers. That's literally written into a statute. I believe that's the case in every province. It's certainly the case in Ontario.
Cameron Passmore: What are some of the signs that a class action is likely to be successful?
Matthew Taylor: Class actions are different in a few other respects. We're talking more about the business perspective than necessarily the strictly legal, but these are very large complex pieces of litigation. If 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.
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. The involvement 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.
They're willing to take that significant downside risk 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. If you've got the involvement of a reputable firm that's had a great degree of success, if they've had good results in 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. 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. You keep pushing it towards trial or a meaningful settlement.
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. 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.
If 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. Another piece of it is that it 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.
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. You can share that and that can help drive some synergies between the two of them.
It can help push them along or vice versa if the U.S. lawsuit is ahead of the Canadian lawsuit.
Ben Felix: 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 beneficiaries funds?
Matthew Taylor: I 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. 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.
That in and of itself doesn't necessarily mean that there have been losses, but it certainly is something that warrants further scrutiny if that comes to light. Beyond that, I think it's a very individualized thing, but fees are another big indicator of how fees are being charged. There have been a lot of class actions related to fees.
There are certain fees that you can no longer charge them. 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. 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.
Ben Felix: Do class actions come up with pension funds often?
Matthew Taylor: They certainly do. For the disclosure type class actions I mentioned before, pension funds are very frequent litigants. They'll be the lead plaintiff, the representative plaintiff a lot of the time.
In 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. Their involvement is pretty common at this point in time, but not universal.
Matthew Taylor: That is certainly a type of claim that can happen. There'll 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 have 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 am sure that there'll be more of them in the future as well.
Ben Felix: For 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?
Matthew Taylor: Obviously, there should be some degree of scrutiny and oversight of compliance, making sure that whether their stated investment goals are or their stated investment approach, is 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 of the money that's available to them through settlements. There is an 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. The 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 were basically leaving money on the table as a result.
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. They 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. 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, 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 that I've had, so I certainly think that that would be a prudent thing for people to turn their mind to. 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 and 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.
Ben Felix: When 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 dispersed beneficiaries to just buy index funds?
Matthew Taylor: I think that will depend on what their stated goal is. If you had a fund that's whole thing was we're a risk capital fund and we're looking for a junior gold mining company that we're going to 20x on and that's the purpose of this fund existing, they'd be outside of their mandate by doing that. However, if it was a fund that had a more conservative 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're mandated to take on.
Cameron Passmore: I'm curious if you happen to have a favorite investing-related class action story.
Matthew Taylor: 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. They had a fairly significant market cap at, sort of, their peak.
It was billions of dollars. They were posting revenue of a billion dollars a year or something. There was a fraud investigation, the RCMP got involved, the Ontario Securities Commission got involved.
There was a very large class action. It turned out that there weren't any trees in the forest. There was a short-selling report.
They had done some background research. After that, the value of the company basically immediately collapsed. It went into bankruptcy proceedings and multiple people were prosecuted for fraud.
I 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 in terms of there is no trees there.
Ben Felix: Wild. I think it was a $6 billion market cap at its peak.
Matthew Taylor: Yeah, that sounds about right to me.
Ben Felix: Pretty crazy. You mentioned this. I want to come back to private assets. What makes private assets problematic specifically for retail investors?
Matthew Taylor: I think that there are two umbrella issues and they're related. Right off the bat, there's less information about these assets and there's less regulation. 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 of financials. There's audit of financials on a regular basis so you are having a third party take a look and making sure, okay, this checks out.
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 equi-analysts following most major listed companies.
What equi-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.
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 and have a rudimentary idea of what's going on at least. 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 equi-analysts that are reporting on them.
The 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, they usually think about a stock or a bond.
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. If it's a broad based index type of product, they understand, okay, I've just got that at large scale. It's sliced and diced.
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 a commercial real estate portfolio in a particular geographic location.
What's 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. You'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 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. A security, if it's well-traded, there is very robust pricing information because the pricing is just based on people transacting at any given time.
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.
Unlike 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.
But the number of purchasers is pretty small and those deals are going to be much more 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 1,000 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, and 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 it at $30, they realized a $10 profit, assuming there's no transaction costs.
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, and 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, okay, 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.
It'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 if somebody is recommending them, I 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.
Ben Felix: You mentioned apples and oranges. There's a paper from Ludovic Phalippou, who has 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.
Matthew Taylor: Yeah, Ludovic is a very smart guy. I grabbed coffee with him a few months ago while 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.
Obviously, I don't have even a tenth of the understanding that he does, but I do think that it sheds light on a lot of these issues.
Cameron Passmore: What additional steps should advisors recommending private assets be taking?
Matthew Taylor: 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. The liquidity piece of this is that basically all these funds can be gated or 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.
Normally, you can redeem, you've got the money in your account within a day or two. It's a very straightforward thing. People think, 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. 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. If 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 it'll probably be a feature for 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. So 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 actually really rebalance that 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. They're really at the mercy of the 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 those with their eyes open and actually understanding what it 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.
It 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.
Ben Felix: What about from the 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?
Matthew Taylor: 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 the person has available to sell me. 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.
And 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.
So 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. I can understand that as long as there's the discussion happening around it and 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 and 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.
Cameron Passmore: So how do you think this push into private assets for retail investors will affect future litigation?
Matthew Taylor: I 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.
They're very sophisticated entities. They're 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. They 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. So you can see that all of those considerations for the most part 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, and 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. And 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.
Ben Felix: 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 class is 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.
Matthew Taylor: I 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 a lot of the time offering memoranda 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. It's explicitly part of Ontario legislation that you can sue for that mismatch. I think that a retail investor will be much more likely to do that.
Ben Felix: 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 finfluencers or financial influencers. Can you talk about the legal and regulatory challenges that finfluencers pose?
Matthew Taylor: I think they pose a lot of difficulties. 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 with this in Australia, South Africa, or wherever.
If there's a problem, who's going to address that problem? So that's our question number one. 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, okay, we're dealing with the Ontario Securities Commission. Even within Canada, each province has their own commission. So if you've got somebody who's recording this content in Manitoba relating to an Alberta company, and there are transactions happening in Ontario, people need to figure out, hey, who's going to try and deal with this problem?
The different commissions can and do coordinate, but immediately off the bat, you've got, okay, this is a problem waiting to think about, and that's without even dealing with the cross-border 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 finfluencer. Anybody can make a podcast.
Anybody can plug in a mic. They can start recording. They can say whatever they want, and they can pretty easily reach a very wide audience over like your favourite video platform or audio streaming platform if most people can find a way on there, particularly if they've got a listener base.
But 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 finfluencers by regulators in Canada, and they've actually accounted for the fact that the person has no or very limited assets in 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?
Regulators 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 what amounts to advice.
It can be very difficult to ascertain the financial relationships between a finfluencer and different companies or different entities because of the fact that, probably speaking, they're not really regulated. They're supposed to be regulated. If you're engaging in promotional activity, you're supposed to make disclosures, 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. It'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.
Cameron Passmore: How do you think investors should assess the credibility of a finfluencer?
Matthew Taylor: 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.
If there's any kind of disclosure of a relationship, obviously that's something that you will 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 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. And 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.
Ben Felix: 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.
Matthew Taylor: I think the Securities Commission has done a report on this, which is quite good. The Ontario Securities Commission, I would recommend it to the listeners if they want to learn more. But they did a study on investor behavior and interaction with finfluencers.
And they came up with a number of things that they found that actually reduced the odds of somebody becoming victimized by advice from a finfluencer. 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. One of the recommendations they made was inoculation, which was presenting clients with the misinformation that is commonly floating around out there with finfluencers in a weaker form, and then rebutting it themselves. Having a one-person debate to help build resilience against finfluencer 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. Encouraging critical thinking, basically, is something else that professionals can do to help with this issue.
Cameron Passmore: What recourse, if any, do investors have if they've acted on the presumably bad advice from a finfluencer?
Matthew Taylor: 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. 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 finfluencers. The SEC in the United States has prosecuted some finfluencers as well. 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 proactively 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.
This is, I believe, one of the larger issues with this area is the fact that there's this limited recourse as well.
Ben Felix: I begrudgingly accept the title, but I have occasionally been called a finfluencer. What do you think licensed advisors like us need to keep in mind while making online content and potentially entering into the realm of finfluencers ourselves?
Matthew Taylor: 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. It's the last two, the advice and the promotion, that can get you into trouble. 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.
If you stray from that, you do risk regulatory and reputational damage if you don't differentiate between those things. 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. 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.
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. One of the regulatory decisions actually talked about what kinds of disclosure you need to make, and they said if you need to expand the box under the video stream and read through 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. Since so much content is audio now as well, I think that you will want to make an actual statement rather than relying on somebody having the tab open and actively looking at the audio. 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.
Cameron Passmore: Our final question for you, Matthew. How do you define success in your life?
Matthew Taylor: 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.
Ben Felix: It's a great answer, Matthew, and this has been a great conversation. We really appreciate you coming on the podcast.
Matthew Taylor: Thank you very much for having me. I've enjoyed this a lot.
Cameron Passmore: Yeah, I learned a lot. Thanks, Matthew.
Matthew Taylor: You're welcome.
Cameron Passmore: That 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.
Ben Felix: 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.
Cameron Passmore: Some pretty basic questions, we'll flush that out. 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 trying to find a nail.
Ben Felix: Well, that came up with the private assets 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. 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.
Cameron Passmore: Interesting 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. It really depends on the mandate, which is what he talked about.
Ben Felix: If you're a mutual fund manager and you say that the objective of your fund is to do one thing and to 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.
Cameron Passmore: This whole finfluencer environment that's going on around the world today and the highlighting, I thought his breakdown of the three points, it's about education, promotion, and advice. You get into trouble, especially in that middle one, if you're promoting something or if it's deemed to be advice. Education is one thing to be really transparent about.
If there are conflicts of interest to really highlight that and perhaps even include in the videos. This is something you've been thinking about for a long time, clearly with your 100 plus videos you've put out plus all of these podcasts.
Ben Felix: I do it, especially if I'm talking about a product specifically. I will say, historically, there has 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 disclosed that we have no relationship with them.
Cameron Passmore: 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, we know so many people are looking for a new advisor.
This is just a good framework on how to think about 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. You can see his experience just comes through and he knew those papers that you referenced, which that was really cool too.
Ben Felix: Yeah, I loved that.
Cameron Passmore: Actually met up with Professor Phalippou. It was pretty cool.
Ben Felix: I loved that he knew the papers and that he actually lectures on them, which was cool from a Canadian perspective as well. 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.
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. 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.
Cameron Passmore: Or if you're effectively acting from a position of trust.
Ben Felix: 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.
Cameron Passmore: Well-known in the space.
Ben Felix: Episode 236, we had Harold on. In some ways, a similar conversation. I thought Matthew brought different flavor to a lot of the topics. Definitely a complimentary discussion. 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 Somers and Philippa Hann talking about financial advisor misconduct.
Cameron Passmore: Agree. Great listen. I would argue, must listen for anybody.
Ben Felix: Fantastic conversation. I came away from it pretty energized. Really enjoyed it.
Cameron Passmore: As always, everybody, thanks for listening.
Disclaimer:
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Sources From Today’s Episode:
https://zbib.org/71e494008bb74d18a17de20419ca0647
Links From Today’s Episode:
Stay Safe From Scams — https://pwlcapital.com/stay-safe-online/
Rational Reminder on Apple Podcasts — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
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