Imagine that the college of Physicians and Surgeons issues a brochure entitled Researching Your Doctor’s Prescriptions: A Guide for Patients. Said brochure outlines a program of research that patients are expected to undertake based on disclosures about medications mandated by the College of Pharmaceutical Companies. The brochure cautions that the best way for patients to protect their health is to do in-depth research on any medication prescribed by their family doctor in order to ensure it is appropriate. Clearly, such a brochure would raise startling questions about the trustworthiness and reliability of the medical profession.

While the idea of this brochure might seem far-fetched, it is a useful analogy for considering the implications of a guide published in early 2008 by the Ontario Securities Commission, entitled Researching Your Investments: A Guide for Investors (posted on the OSC website under “Investor Brochures”). The guide is intended for retail investors considering investments in shares of public companies, including clients using financial advisors. The introduction states: “The best way to protect your money is to be an informed investor. Whether you have a financial advisor or invest on your own, it’s wise to verify information about an investment before you buy.”

More than five years ago, in the OSC’s fair-dealing model concept paper (January 2004), the commission expressed this view: “In an advisory relationship, the client is entitled to rely on objective, expert advice from the representative.”

The OSC’s perspective seems to have changed significantly since then, as it now recommends that retail investors should undertake to verify the suitability of advice. In view of this, the OSC’s brochure could be entitled Researching Your Financial Advisor’s Investment Recommendations — analogous to the medical example above.

The OSC outlines a detailed research program for investors in the brochure, in keeping with its role of mandating disclosure of information by public companies. Investors are expected to access and analyze these disclosures to protect their financial interests. The brochure emphasizes that investors should “never invest in anything you don’t fully understand.” And, it cautions: “Protect yourself by getting informed before you invest and staying informed after you invest.”

The meaning of “fully understand” is specified in considerable detail. Inves-tors should make sure they understand a potential investee company’s business and its products or services and should determine “whether the company is making money or losing money, and why.” Inves-tors will need to assess how the company is positioned in relation to its competitors, and should examine the company’s financial statements and balance sheets, considering assets and debts, income and cash flow. The prospectus should be reviewed along with management’s discussion and analysis, material change reports, information circulars and insider-trading reports. Investors should be on the lookout for any “red flags” in the firm’s financial statements, such as rising expenses in the face of flat sales. In addition, inves-tors should investigate the company’s executive management, board of directors, audit committee and governance practices.

Having analyzed all this information, clients then will be in a position to verify the suitability of the advisor’s investment recommendation — and pay a commission or management fee to the advisor for his or her advice.

This research will need to be repeated for each company in which the client is considering an investment. Moreover, the information is subject to change as the company will be making further disclosures on a regular basis. The OSC advises that it is necessary to “keep up to date on the investment and what’s happening with the company.” During the holding period, the client will need to “periodically review the investment to see if it’s still suitable.” A further assessment will need to be made when the advisor recommends the sale of the shares.

People have limited time and energy, and understandably might prefer to rely on the recommendations of an investment advisor. Although the OSC recognizes that financial advisors have an obligation to ensure that they recommend only suitable investments to a client, the guide also makes clear that the OSC considers it necessary for clients to “fully understand” and verify the suitability of advice in order to protect their interests.

This perspective raises fundamental questions about the financial services industry and its regulatory oversight. In effect, clients are being put in the position of replicating the analysis their advisors would be performing in making recommendations, while also paying for this advice. Are clients entitled to rely on their advisors’ recommendations? If clients are expected to do such extensive research to evaluate the suitability of advice, this raises questions about the fundamental nature of the advisory relationship. IE

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Pamela J. Reeve is an associate professor of philosophy at St. Augustine’s Seminary. She served on the OSC’s investor advisory committee in 2006-07.