Volatility worries compliance officers

“[Market volatility] must ratchet up the pressure that firms are under, particularly compliance departments, in the sense that it becomes really difficult for firms to attract new clients simply because it’s hard to show that they’re going to be managing accounts in a controlled manner,” says Jonathan Heymann, president of Toronto-based compliance consulting firm Wychcrest Compliance Services Inc. and a former Ontario Securities Commission (OSC) employee.

For the Report Card survey, several COs and executives expounded on how market volatility affects a firm’s financial outcomes, and how smaller firms may, in fact, be hit harder than large legacy institutions.

“If the markets fall, growth will be slowed,” says a CO from an independent dealer in Manitoba.

Adds a CO from an Ontario-based investment bank: “Ongoing market weakness is bad news for smaller firms.”

COs also commented that market volatility can be a threat for firms, in part, due to how it can negatively impact investor behaviour.

“The state of the market and the potential for downturns [is a threat],” says a CO from B.C. “People let that affect their investment decisions.”

COs, advisors and investors can have some assurance that regulators account for market volatility.

The Investment Industry Regulatory Organization of Canada (IIROC) regularly monitors the solvency of firms, examines reporting and accounting infrastructure, provides heightened supervision when firms’ regulatory capital is significantly eroded by continued operating losses, and takes measured regulatory intervention when needed, says Louis Piergeti, vice president of financial and operations compliance at IIROC.

Piergeti points out that Canada went through a credit crisis almost 10 years ago that challenged the viability of a number of firms’ business models.

“The regulators closely supervised and managed the situation to the extent that these firms were able to turn it around [through] recapitalization, operational efficiencies to reduce costs, changes in business strategy and/or mergers to become profitable again,” he says.

Still, it’s important to note that when markets fall, client dissatisfaction can go up.

Many institutions are moving to a fee-based model based on a percentage of a client’s assets. As a result, if clients do poorly because of the markets, their dealers and advisors do as well, says Ellen Bessner, partner at Toronto-based Babin Bessner Spry LLP.

Volatile conditions may cause clients to start looking more closely at their statements. This can lead to more complaints if clients don’t understand which information they should be evaluating or know how to articulate their expectations.

It’s up to advisors to be proactive in addressing potential concerns, Bessner says: “If the advisor has not had good communication with his or her clients, then the threat is that another advisor is going to swoop in.”

Advisors can try to prevent client frustration by effectively discussing monthly and quarterly statements, regardless of market conditions. “If clients had regular discussions with their advisors, they would understand market impact on particular investments [and] the volatility of each investment. And they would be more in tune with the products in their portfolio,” Bessner says.

She also says that requirements from the regulators to provide more paperwork, such as account statements and investment fund reports, has caused greater complications, instead of resolving client issues as intended. “Throwing more paper at the problem is not a good solution,” Bessner says. “It doesn’t help clients; it confuses them. They’re less inclined to read [paperwork] when they’re getting too much stuff.”

When Heymann was employed with the OSC, he says, most complaints received were about client misunderstandings rather than nefarious behaviour on the part of the advisor.

Heymann suggests compliance departments apply greater scrutiny to these complaints during times of market stress to determine whether dissatisfaction is due to an advisor’s bad decisions or market volatility, which is outside of an advisor’s control.

Firms and advisors can both work to prevent complaints from escalating to the regulators by ensuring the lines of communication are open when they first receive news of a problem. “The client must have a good understanding of what they can expect from the firm and when they’re going to hear from the firm,” he says. “The worst thing a firm can do is ignore the client.”