The uncertainty surrounding the consequences of the meltdown of the non-bank asset-backed commercial paper market has many considering what would happen if the doomsday scenario played itself out and the money that people committed to their investments simply evaporated.
Even more frightening is the impact this could have on financial institutions and intermediaries caught up in the morass of product generation, investment management, advice-giving and product sales. The shock waves potentially could ripple through every aspect of economic life.
Currently, there is a massive effort to downplay the consequences — to urge the masses not to worry, to wait it out. The rationale is that the institutions involved are “too big to fail.” Increasingly, as the reported losses add up to countless billions of dollars, this observation is changing to “too big to rescue.”
This leaves many people considering what their remedies would be if this were to happen. Most are surprised to learn there is no consumer protection fund to cover ABCP or similar products. There is, of course, no reason why there should be such a fund. What is surprising is that people assume there is.
This assumption highlights the shortcomings in the capability and know-how of so many Canadians in making financial decisions. The time to have thought about consumer protection coverage was before they made the decision to invest.
The blurred lines between products, product sales and advice have placed a heavy onus on financial advisors to ensure that inves-tors have all the information they need to make a reasoned decision to invest and that they understand this information and the consequences of it. A failure on the part of advi-sors to ensure product suitability and fitness for its purpose before selling the product to clients should be and, for the most part, is actionable.
This is what makes it absurd for the industry to be fighting against meaningful point of sale disclosure prior to an investment decision being made.
For those parroting the need for a principles-based regime without articulating the principles underlying such a regime, surely meaningful, timely and relevant disclosure that is actually communicated to and understood by the investor would be a core principle. It is absurd for regulators to require delivery of this disclosure to be made only if the investor expressly requests the same.
Dr. Edwin Weinstein, president of the Brondesbury Group, who has studied investor behaviour and needs, points out that the situation in Canada is aggravated by the low literacy levels of a large segment of the Canadian adult population who have difficulty in or are unable to find and understand the information to comprehend the protection (or lack of it) that people are afforded.
He also notes that at least 40% of adults cannot grapple with trade-offs between two variables for making a decision and that the less literate are less likely to seek print information and are, therefore, less likely to understand the risks shown in print.
Weinstein says there are two other aspects of consumer protection risk that affect the ability of Canadians to understand the financial risks they are assuming. He categorizes these as awareness-related risks and financial status risks.
Awareness-related risks include saving beyond the limits of the protection funds, believing that there is protection coverage when there is not and that the financial institution that sold the product provides protection when it does not.
Financial status risks include failure to understand risks associated with a financial product; owning more of a product than is covered by protection funds; concentrating assets in a single type of product or a single institution; being a victim of financial scams; the proportion of wealth in “at risk” financial products; and inability to recover from a financial debacle.
This means that financial advi-sors need to play a strong role in helping existing and potential clients be aware of and manage investment risks — before disaster strikes. IE
Explaining risk to investors
As the ABCP disaster shows, advisors have a crucial role to play
- By: Glorianne Stromberg
- January 21, 2008 October 30, 2019
- 14:21