Investor education has always been important, but with the new obligations coming into place with the second phase of the client relationship model (CRM2), it’s now going to be even more critical that advisors know what their clients are learning and the advice that the regulators are giving investors. As a result, there are several steps you should take to prepare for this change.
The first thing you should do is read the materials on the Investment Industry Regulatory Organization of Canada’s (IIROC) and the Mutual Fund Dealers Association of Canada’s (MFDA) investor education web pages. If you are regulated by IIROC, read both IIROC’s and the MFDA’s investor education web pages. Why? Because IIROC advisors can sell all the products MFDA advisors can sell, and the MFDA has several articles and information relevant to all types of mutual funds that IIROC advisors who sell mutual funds are well advised to familiarize themselves with.
Second, when you read the materials, pay particular attention to the links to materials for seniors. Read the sections on seniors and what the messages are to seniors. These are not just messages to seniors, this gives advisors real insight into the regulators’ views concerning which products and strategies are seen not to be suitable for seniors. You may very well disagree with what the regulators think, as these materials suggest that all seniors ought to be placed into a single category. I find this troubling, as our regulators have expressed that seniors are those who are aged 60-plus.
As the average lifespan of Canadian men and women is increasing substantially, we are supposed to be applying one set of rules to people living through several decades. Is the same strategy appropriate for every client aged 60-90? Is it the case that someone presumably approaching retirement at 60 should be investing in the same securities and strategies as someone at 80? Although advisors may think the answer is no, it is important to be careful particularly if you place clients into investments that are contrary to the views expressed in the investor education web pages. This is all the more reason to read the materials in the website and consider whether you have the evidence — in the form of notes, letters, etc. — that support accounts operating outside the regulators’ parameters and expressed values.
Third, you can have difficulty explaining concepts to clients in a simple, comprehensible fashion. In fairness, it’s only in the past few years — with the introduction of know-your-product and CRM rules and regulations — that advisors’ have had a significantly greater degree of pressure to gain a deeper understanding to better explain concepts to their clients. Judges and regulators want to know what clients understood at the time of investing and throughout their relationship with their advisors before concluding whether an investment or strategy was suitable for a complaining or suing client.
Of course, complaining clients always say that they were novice investors, didn’t understand anything and that their advisors provided no explanations, regardless of what they signed off on in their know-your-client forms. Therefore, I suggest that you use the regulators’ websites to assist you with your basic explanations. After all, the explanations on the investor education web pages are supposed to provide explanations to investors, so, surely, if you can prove that your explanations were similar, or at the same level as the materials in the investor education web pages, this will assist you if or when you’re called onto the regulators’ carpet or hauled into court to answer suitability questions.
Finally, it’s challenging when clients have only little information or understanding about investments or financial matters. So, you may want to refer certain materials to clients from the investor education web pages to help educate these clients. At least, in this scenario, clients will be reading information that’s relevant to them. Furthermore, this is better than having clients read the information later and accuse their advisors of failing to meet his or her duties. Note that seniors have more time to read materials and as this is definitely the most risky segment of the population for advisors — as regulators and judges believe them to be vulnerable — there’s all the more reason to send them links to the Investor Education materials.
Although investor education month only comes every year in October, the materials on the regulators’ websites remain all year long. So, it’s never too late to pull out your computer and begin to review the materials prepared for investors. That way, when the regulator comes knocking, you will be prepared and able to prove that your explanations were at the same level and consistent with the messages, concerns and values, expressed in their web pages.