When financial advisors don’t properly fulfil their know-your-product (KYP) obligations, they put themselves at risk of potential litigation, a legal expert told the Institute of Advanced Financial Planners’ annual symposium in Gatineau, Que., on Friday.
Advisors who rely solely on the product information that dealers provide are not in compliance with the client-focused reforms, said Harold Geller, a lawyer with Geller Law in Ottawa who specializes in legal action against advisors. “You have to do independent analysis,” Geller said.
He spoke alongside Jason Pereira, partner and senior financial consultant with Woodgate Financial Inc. in Toronto, about regulatory trends and best practices for advisors to avoid being sued.
Geller recalled a case in which an advisor conducted general market research and summarized a sales brochure to a client. Although the advisor researched and shared the benefits of a particular investment with the client, the advisor failed to disclose its risks.
“Telling the client about the risks is the pathway to getting their informed consent for any instructions they provide you,” Geller said.
Rather than just tallying up clients’ scores on risk tolerance questionnaires, advisors must educate clients to ensure they’re well aware of investment-related risks, he said.
For example, if a client expects an 8% return on an investment, the advisor needs to be upfront about the associated risks.
“It’s an opportunity for a conversation, which should go into your notes, to show your due diligence in educating the client about the issue,” Geller said.
Advisors can show their clients the historical upside and downside of an investment on a one-, three- and five-year basis to illustrate possible outcomes, Pereira suggested.
Apart from risk tolerance and capacity, advisors should also assess a client’s risk composure.
For example, if a portfolio holding is down, the advisor can bring it to the client’s attention, asking how they feel about it and how they might react if losses occurred across the entire portfolio, Geller said.
Taking notes during this process demonstrates an advisor’s attention to detail and allows them to cover their bases, he said.
“What a great learning opportunity, what a great teaching opportunity, what a great cover-your-assets opportunity,” Geller said.
Taking detailed notes can also help avoid enforcement action in securities trading, Geller said. When he sues an advisor for making discretionary trades in non-discretionary accounts, Geller looks at the advisor’s notes for information on each trade: security name, quantity, price and timing.
“Often, these aren’t in the records … they’re not in [client relationship management documents], they’re not in the emails, and there’s no record of a call or a direct meeting,” he said.
Moreover, advisors should take clear notes of their analysis to demonstrate suitability, Geller said.
For example, there may be a place in a client’s portfolio for alternative investments, but advisors should detail these investments, including their proportion in a portfolio and the cumulative effect of risk on the portfolio.
Investment Executive was a media sponsor of the IAFP symposium. No coverage was guaranteed in exchange for the sponsorship.