March 1 marked the end of the 2004 RRSP season. For weeks, financial services providers bombarded the public with advertisements urging people to turn to them for solutions to their financial planning and investment needs.

Many of the advertisements assured the public of the advertiser’s expertise and that they could be trusted to act in their clients’ best interests. They created a warm and fuzzy feeling about how lucky the public was to have so many trustworthy advisors to whom they could turn for expert advice on how to meet their lifetime financial needs.

But the reality is that many people who enter into relationships with these financial services providers will not have happy experiences. Worse, the likelihood of these people meeting their financial objectives is remote.

Some in the industry will be quick to blame the client for this state of affairs, and there may be circumstances in which this blame is justified. But if experience is any guide, the causes of client unhappiness over which the financial advisor has control probably can be traced to failure to understand the client’s risk profile and the recommendation of unsuitable investments — especially those providing hidden income streams and fee revenue to the advisor and the firm.

The industry should do something about this. It needs to “walk the talk” by making sure its actions live up to the image projected in the advertisements. It means performing a zero-based review of all operating procedures to align them with placing the client’s interests first. A starting point is looking at the complaint history.
What are the problem areas? What are the solutions?

Know-your-client procedure is one area that begs for improvement. There have been numerous cases in which clients have stated they have no idea how the firm assessed their investment knowledge, their investment objectives or their tolerance for risk. In some cases, clients have said they never saw the forms until they were pulled out to justify the suitability of unsuitable investments. In other cases, clients said they signed the forms without an opportunity to read them and without being told about, or understanding, their significance.

Why are compliance officers not addressing such a basic component of business conduct? Why are the SROs not conducting member reviews when they receive recurring complaints about a member firm’s handling of a fundamental process that is at the heart of the client/advisor relationship?
Where are the internal and external industry ombudspersons on these matters? Why are they not at least highlighting the recurring problems in the interest of reducing the number of complaints, and the related SRO and ombudsperson costs?

Another problem area is the suitability of investment recommendations. Suitability has many dimensions, but the one that betrays client trust the most is when firms encourage or permit advisors to generate revenue for themselves and the firms by switching a client’s assets to a different mutual fund each year using the deferred sales charge option. For an advisor with a $100-million book, switching 10% of the assets generates $500,000. Where are the compliance officers when this happens?

Advisors and their firms also betray clients’ trust when they recommend high-cost structured products knowing that the client does not understand the product, its fee structure nor the risk involved. This betrayal of trust is compounded when the firm and the advisor fall short on their due diligence inquiries, and in their own understanding of the product and its risk.

Advisors and firms that betray client trust for short-term gain betray themselves and the industry. It’s time to take a hard look at current practices and stamp out the dishonourable ones. IE