The financial services industry has been through tremendous upheaval in the past couple of years, in part because firms and their advisors, respectively, introduced and recommended certain products to clients that, although exciting at first, later led to some significant challenges. As a result, advisors surveyed for Investment Executive’s 2010 Report Card series are now looking to their firms to provide substantial due diligence on the new products they offer clients.

In Canada, the demand for increased due diligence can be traced back to certain key events. First, there was the collapse of hedge fund company Portus Alternative Asset Management Inc. earlier this decade. Later, Canada’s $32-billion non-bank asset-backed commercial paper market ground to a halt in August 2007 because of the lack of transparency and disclosure by third-party issuers.

Finally, insurers had to deal with issues related to segregated funds with guaranteed minimum withdrawal benefits last year. Although Canadians had invested $6 billion into these funds, many product providers found themselves on the hook for long-term guarantees on portfolios whose values were greatly reduced when the markets collapsed in the fall of 2008.

In response to these highly publicized product-related issues, the Investment Industry Regulatory Organization of Canada issued a set of guidelines on the product due diligence process for investment dealers in March 2009, entitled Best Practices for Product Due Diligence.

As a result of the changed environment, IE asked advisors to rate their “firm’s due-diligence process for new products” for the first time this year. The responses reveal how advisors now feel about their firms’ due-diligence processes. An advi-sor in Ontario with Toronto-based CIBC Wood Gundy puts it succinctly: “[The firm is] careful in letting anything get though the door. This has been going on for three or four years now. It protects the client, the advisor and the firm.”

Similarly, advisors who ply their trade at the firms with the highest ratings feel their firms are thriving because they treat the issue seriously, guard the client relationship, implement hoops that product manufacturers need to jump through and communicate thoroughly about the process with advisors.

When looking at the brokerages and dealer firms, those that performed well in the due-diligence category have already been doing what IIROC has recommended by focusing on product transparency. Other firms have responded to the regulatory guidelines by implementing screening committees. Advisors surveyed across the board agree that the due-diligence process is better now as a result.
@page_break@Toronto-based Richardson GMP Ltd. , which received a strong rating of 9.2 in the category, has a new product review committee that meets biweekly to review every product new to the organization. Andrew Marsh, Richardson GMP’s CEO, says the process is “speedy and streamlined.”

A Richardson GMP advisor in British Columbia has much faith in the group and the process: “I’ve seen the kind of hoops companies and individuals have to jump through to get approved.”

Similarly, Toronto-based Dundee-Wealth Inc. has created a committee of members with research and compliance backgrounds. Says Richard McIntyre, executive vice president, retail: “We have a client focus, and not every product is a great product for clients. So, we have to make sure we are protecting advisors and protecting clients. We take that role very seriously.”

A DundeeWealth advisor in B.C. is tickled pink with the firm’s efforts: “First of all, none of the shady things get to us. We don’t have to worry about something they approved blowing up in our faces.”

Advisors with Mississauga, Ont.-based PFSL Investments Canada Ltd. were similarly enthused, as they rated their firm at 9.6 in the due diligence category.

“We control the shelf like crazy,” says Jeff Dumanski, PFSL’s president and chief marketing officer. “When a new fund comes about, we don’t put it on the shelf unless there is some kind of different or unique niche. We look at performance, support, track record, people who are running the fund, longevity — we are screening for all those things.”

PFSL advisors praise their firm’s approach, but one advisor in Ontario says PFSL sometimes applies “too fine of a comb. They’d probably screen [the regulators] if they [could].”

In fact, being overly due diligent may backfire. Advisors with Toronto-based TD Waterhouse Private Investment Advice rated their firm at only 7.4 in the category because they say it has too many checks and balances in place. Says an advisor in Quebec: “It’s ridiculous. They’re extremely diligent.”

Meanwhile, for advisors at insurance firms, what matters most is that their firms take the time to review products. Says an advisor in Manitoba with Winnipeg-based Great-West Life Assurance Co.: “They have a tendency not to lead but to learn from others’ mistakes.”

Being slow does have its benefits, says Ernie Murdoch, senior vice president of career sales with Mississauga-based RBC Life Insurance Co. , noting that carefully evaluating products has protected his firm in the past: “We were slow in [entering] the GMWB marketplace — and rightfully so. Our risk associates said, ‘Not sure if this is the right place to be at this time’ — and that worked out well for us.”

Although such evaluations are a critical component of a due-diligence process, firms have also focused on educating advisors on the products that are available. Says Terri DiFlorio, president of Woodbridge, Ont.-based Hub Financial Inc.: “We definitely review products and we educate our brokers on what they should be looking for or what they might want to pay attention to in those products.”

IE