Quebec’s financial services watchdog, the Autorité des marchés financiers, has severely rebuked the province’s main consumer advocacy group over a “mystery shopper” investigation into financial advisor competence.

The results of the investigation were published in the October issue of Protégez-Vous, a leading consumer magazine in Quebec, under the headline: “Financial advisors: 50% failed our test.” The headline on the article inside read: “Incompetence reigns.”

The AMF financed the study through a grant of $52,800 aimed at investor education and good governance, but evidently was unimpressed with the results. The AMF accused Option consommateurs, the consumer group that conducted the investigation and prepared the report that appeared in Protégez-Vous, of unfairly tarring all financial advisors.

“The manner in which Option consommateurs acted has had the effect of staining the reputation of all members of Quebec’s financial products and services distribution industry,” the AMF says. It has paid out $40,000 of the $52,800 but intends to withhold the rest.

The AMF says the magazine didn’t clearly indicate that the study couldn’t be used to draw general conclusions about the competency of advisors. It was also unhappy that Option consommateurs, in co-operation with Protégez-Vous, had set 65% as an “arbitrary” passing grade for the test. “Putting the bar at that level permitted a conclusion that half the advisors had failed the test,” the AMF says. “This practice lacks objectivity and seems to have been adopted for editorial reasons.”

AMF spokesman Frederic Alberro says his agency has received “strong reactions” from the industry, as well as from other groups, about the investigation. But that wasn’t the reason why the AMF decided to criticize the project publicly. “Our decision was made objectively,” he says.

Option consommateurs director Michel Arnold defends the project. He says the reportage in Protégez-Vous made no claim that the results were representative of the entire Quebec industry. “It’s clearly indicated that 50% of those interviewed failed the test,” Arnold says. “On the other hand, it would be surprising if we had fallen, by accident, on the worst cases in the industry. So, that’s why these results raise a lot of questions [about the competence of financial services professionals.] Our goal was to inform consumers about the situation.”

He says a small but vocal minority in the financial services industry have criticized the study but no financial institution has publicly attacked it. It is unfortunate the AMF has “bowed to industry pressure,” he adds, by choosing to criticize a project that “highlights a real problem in the industry.”

The 65% passing grade was established because the test was basic and the grading system generous to the advisors, Arnold says.

The investigation consisted of four operatives posing as 30-something single parents with one child in search of an advisor. The four approached 39 advisors working for a variety of financial services providers — banks and caisse populaires, investment and mutual fund dealers, and insurance companies.

In an interview with each rep, each investigator claimed to have inherited $75,000 and described his or her goals as purchasing a $300,000 house and retiring at 55. The investigators claimed to be earning $55,000 a year, but had no benefits from the firm at which they had been working for only six months. Advisors were graded on criteria involving collecting proper client data and imparting proper financial information.

The advisors fell down most severely when it came to ascertaining basic know-your-client information, including the person’s financial situation, family ties and risk tolerance. A majority of advisors failed to ask questions such as whether the person was working or whether he or she had investments and debts.

“In total, 25 of 39 representatives put together only a partial portrait of their client,” the article says. “This is probably the most important deficiency turned up by the investigation.”

The investigation also found many advisors didn’t adequately inform prospective clients about their options. Only 11 reps told the person he or she couldn’t afford a $300,000 house. Just eight advisors provided clear, complete and adequate recommendations regarding the client’s financial situation.

Numerous advisors offered confusing and incomplete explanations of products, including one unfortunate Bank of Montreal rep who claimed equity portfolios weren’t risky and that capital gains taxes applied to houses, failing to mention the primary residence exemption.

La Chambre de la securité financière — a Quebec-based SRO representing 31,000 mutual fund reps, financial planners and insurance brokers — is taking a different tack. Following the unveiling of the study, the CSF announced its own investigation into advisor competence. IE

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