The portus alternative Asset Management Inc. fiasco is a good example of the old saying, “It’s an ill wind that blows no good.”

With regulators, financial intermediaries and some trade associations firing volleys of blame at one another for their respective shortcomings, some marketplace realities that have been evident for years are finally hitting home.

One of these is the huge gap between what financial advisors say they are doing and what they are doing. On the one hand, they hold themselves out to the public as professional financial advisors. But the reality is they earn their living selling financial products. Most of their “advice” is simply a means to access the generous initial and ongoing sales commissions, referral fees and perks that the sale of these products provides them.

When you see client portfolios filled with high-cost products — such as mutual funds, segregated funds, universal life policies, wrap accounts, or alternative investments such as Portus — it is hard to resist asking whether the “advice” given by financial advisors was perhaps more suitable to meeting their own needs.

One of the more startling issues to emerge from the Portus situation is the lack of understanding on the part of financial advisors of the scope of the
know-your-client/suitability requirements. It is troubling that people are questioning whether these requirements include the need to “know your product” and whose obligation it is to do so.

These questions point to a lack of understanding of how our regulatory system is structured to meet investor-protection needs. If financial advisors do not know the product, how can they possibly determine its suitability to meet their clients’ needs? (See also page B6-B7.)

The good news is that Portus is serving as a catalyst to focus on the need to have meaningful know-your-client/suitability requirements in place. These requirements are at the heart of our regulatory system, which relies, in addition to disclosure, on intermediation by licensed experts between investors and issuers of securities.

Portus also underscores the need to conduct due diligence on the products financial advisors recommend to their clients.

It is raising questions about the extent to which advisors can rely on their firms having conducted adequate due diligence on the suitability of the products being offered to clients.

It also raises the issue of the need to ensure that financial advisors have strong dealer/firm support backing up their activities, a relationship many financial advisors have resisted as being an unwarranted, expensive intrusion into their ability to carry on business.

And it raises the issue that, in many cases in which structured products are offered to the public, no legal or other experts are acting for the investors and negotiating suitable safeguards. The underwriters, selling agents, accountants, lawyers and other experts are all acting for the issuers of the securities or their promoters. How aware are financial advisors of this shortcoming in relation to their advisory roles? How aware are their clients?

At a minimum, Portus highlights the need for financial advisors to take action to broaden their understanding of what it means to be a financial advisor, rather than simply a salesperson, and to hone their ability to provide the comprehensive, individualized advisory services they purport to provide to clients.

It is troubling that Advocis, which describes itself as the largest professional membership association of financial planners in Canada, still doesn’t seem to grasp that its practice standards for financial planning and advisory services must extend to ancillary product sales activities if it is ever to succeed in closing the gap between what financial advisors say they do and what they actually do. IE