OSC pushes advisers to put clients first: Roseman

Susanne was a recent widow when she asked a large mutual fund firm for investment help. Not satisfied with the performance, she sold her funds later.

“I have lost $16,000 in fees for pulling out my investments,” she says about the deferred sales charges that kick in up to seven years after mutual funds are purchased.

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“I had no idea I would have those penalties. I was naïve in thinking the firm had my best interests in mind. I think they took full advantage of my lack of investment knowledge and trusting nature.”

She wrote to me after her refund request was denied. And while I felt sympathetic, I told her that investment advisers don’t have to serve your “best interests” under the law.

An adviser’s legal duty is to recommend suitable investments for you, based on your goals, financial knowledge and experience, plus your ability to tolerate risk.

Ken Kivenko, a member of the Ontario Securities Commission’s investor advisory panel, describes the difference in Canadian MoneySaver magazine.

“A very common example would be if the ‘adviser’ recommends a high-priced mutual fund with a deferred sales charge — a recommendation designed to generate the highest commission,” he wrote in June 2012.

“The fund is suitable — it will satisfy the client’s needs. It isn’t necessarily the best solution and a disclosure obligation isn’t likely to stand in the way of a commissioned salesperson.”

Under a best interest standard, advisers have to recommend a cheaper fund. Research shows that investors generally make more money over the long run if they keep their costs low.

But under a suitability standard, investors have to make purchase decisions with inadequate guidance and live with the results, Kivenko argued.

The Canadian Securities Administrators released a 2012 paper on the issue. It said that to act in another person’s best interests, advisers or dealers had to ensure that several conditions are met:

  • Client interests are paramount.
  • Conflicts of interest are avoided.
  • Clients are not exploited.
  • Clients are provided with full disclosure.
  • Services are performed reasonably prudently.

Canada is being pushed to impose tougher rules for the financial industry after the stock market crash of 2008 to 2009. Other countries, such as Britain and Australia, have already strengthened their investor protection regimes.

On June 18, the Ontario Securities Commission held a lively session with a group of investor advocates to look at the benefits and drawbacks of raising the standards for advisers.

“Individuals can’t judge the suitability of investments on their own until things go wrong,” said Susan Eng, vice-president of consumer advocacy for CARP Canada, a national organization that promotes healthy aging.

“Our members expect some balance in the relationship between clients and advisers and a clear path to restitution.”

Most Canadian consumers don’t have basic financial literacy or numeracy, said Alison Knight, a member of the Consumers Council of Canada.

“Don’t focus on elite investors. You have to build regulations based on who you’re dealing with,” she advised the OSC.

Harold Geller, a lawyer, said he had passed the Canadian Securities Course at age 17, while still in high school, and he became licensed to sell stocks, bonds and other securities.

“One can still get into the industry today for a fee and a few exams,” he said. “It’s a low level of proficiency.”

Most people are under the impression that their advisers already have to act in their best interests. A recent survey by the Investor Education Fund (IEF) showed that 70 per cent believed there was a duty to put the client first.

Tom Hamza, president of the IEF, said two-thirds of clients also know little about the background of their advisers. He said the relationship was usually “an arranged marriage,” based on clients’ trust in a financial institution.

The OSC will hold two more sessions on the best interests standard in the next few weeks and post transcripts at its website.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at [email protected] or www.ellenroseman.com


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