When fund dealers maintain only the bare minimum of their regulatory obligations, there is a higher probability of regulatory intervention and client complaints, according to Karen McGuinness, senior vice president of member regulation for the Mutual Fund Dealers Association of Canada (MFDA) in Toronto.
This was the message shared by McGuiness and Robert Brush, a partner at Toronto-based Crawley MacKewn Brush LLP at the Association of Canadian Compliance Professionals’ (ACCP) annual conference in Toronto on Monday.
The panel provided reminders and cautionary tales to the audience of compliance professionals regarding problematic issues the MFDA looks for when assessing whether firms have fulfilled suitability requirements.
One example given concerned advisors who decide their clients need a riskier investment in order to provide greater return.
“The problem with that argument is that it’s your responsibility to make suitable recommendations to the client given the client’s risk tolerance,” said McGuinness. “You don’t ask a client how much return they require and then match the risk tolerance to the product.”
Brush described encountering advisors who neglect to inform clients that while a risker investment may provide a greater return, it may also produce larger investment losses.
The “downside conversation” has to happen, said Brush.
Firms also need to examine suitability requirements for clients whose trades were conducted at other firms but have since transferred to the firm in question, says McGuinness.
“Just because the trade happened at another dealer, that doesn’t mean you’re not going to be responsible for it,” she said.
Added Brush: “If what was set up at the old firm ended up being unsuitable and resulted in a loss and the loss has materialized in the new firm, I can tell you that the new firm will be a defendant in that lawsuit.”
The panel also discussed the topic of outside business activities.
Some dealers will monitor these types of activities through an annual questionnaire to advisors asking about issues such as referral arrangements or whether they have had dealings with clients that could raise concerns. These are not regulatory requirements, according to McGuinness, but they are a good risk management tool.
Brush believes advisors’ attitudes toward outside business activities need to change.
The mindset seems to be “I don’t have to tell you unless …” when it should be “I have to tell you about this activity unless …,” according to Brush.