Advisor negligence includes everything from advisors failing to know their clients’ needs and providing unsuitable recommendations to unauthorized trading or misleading a client with false information.Atstock Productions/iStockPhoto / Getty Images
Investment industry regulators are focusing too much on trying to protect investors from fraudsters and not enough on shielding them from the more widespread problem of financial advisor negligence.
That’s the message from outspoken investor advocate Harold Geller, a lawyer at MBC Law Professional Corp. in Ottawa whose firm handles negligence and fraud cases.
“There is a very significant warning to consumers about investment scams and fraud, but there is almost no warning about how investors should protect themselves from the much more common issue of negligence and other regulatory abuses,” he says.
While fraud awareness is important, so too is advisor negligence, Mr. Geller says. That includes everything from advisors failing to know their clients’ needs and providing unsuitable recommendations to unauthorized trading or misleading a client with false information.
“The vast majority of claims that we see – and we see the worst of claims – are regulatory breaches, or civil breaches, not criminal breaches,” he says. “Why not speak to the vast majority of consumers who suffer and the financial advisors?”
Mr. Geller also points to a study released last autumn by financial crime expert Mark Lokanan, an associate professor of accounting and financial governance at Royal Roads University’s School of Business in Victoria, which shows about 95 per cent of offences analyzed were regulatory and not criminal based on how they’re handled in the industry.
The report, which analyzed complaints that went through the Investment Industry Regulatory Organization of Canada (IIROC) from 2008 to 2019, shows only about 5 per cent of cases are considered criminal, such as fraud and forgery.
“The other offences are regulatory breaches, not criminal, so the bigger concern should be going after those,” Mr. Geller argues.
Mr. Lokanan says his research shows that a “significant majority [of investors] have very poor investment knowledge and are depending upon the right advisors to advise them in a direction that they will not fall victim to financial exploitation.”
However, he says he found “the total opposite” in his research in that many advisors are not leading their clients down the right path.
The report, funded by the Social Sciences and Humanities Research Council of Canada, a federal research-funding agency, says retired people, in particular women, and people with low or moderate-level investment knowledge were more at risk.
Mr. Lokanan says he believes the current regulatory system is too lax and not equipped with the technology to prevent advisor misconduct. The researcher and data scientist is working on an algorithm, expected to be available commercially early next year, that he says could help investment firms pinpoint negligent and fraudulent behaviour.
“If [the self-regulatory organizations] can utilize computational technology the way it’s being utilized in many other industries, detection of these kinds of practices will perhaps increase,” he says.
Mr. Geller says he believes incidents of negligence would be reduced if the industry focused more on professionalism over sales.
“If the advisor is aware of not just the rules, but the intent of the rules and regulations and meets or supersedes it, then they won’t be exposed to findings of wrongdoing,” he says.
Advisors also need to communicate with investors in plain language they can understand and be sure to identify the risks as well as the benefits of their investments, Mr. Geller says.
What’s more, advisors must document all of their conversations with clients to show there is consent to make certain investment moves.
“You have to show your work,” Mr. Geller says. “You might have spoken with the client 50 times, but if you don’t actually put it down in writing and send it to your clients, then you’ve ignored compliance. ... The system can’t work that way.”
Mr. Geller believes many of the standards and regulations being rolled out across the industry offer some improvements but says it’s up to advisors to go above and beyond what policymakers put out.
Jean-Paul Bureaud, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), is also hopeful that changes such as the new client-focused reforms set to take effect later this year, and the Ontario Securities Commission’s recent announcement that it will go along with other members of the Canadian Securities Administrators (CSA) and ban deferred sales charges on mutual funds in the province, will help improve investor protection.
He also points to some of the work the CSA has done to support vulnerable investors that he believes will help advisors who are “trying to do the right thing.”
It’s not just about following the rules and being transparent, Mr. Bureaud says, but also doing more to support clients who lack investment knowledge.
“I don’t think you should need a rule to do something that’s in your own best interests,” he says of advisors. “The industry is better served by looking at the long-term value that they add to their clients overall.”
Mr. Bureaud believes it’s up to investment firms to create a culture that puts clients’ interests first.
“Advisors should put themselves in their clients’ shoes. …. If they do that, they’ll begin to enhance the relationship because they’ll understand how they need to either explain things differently or appreciate the degree of reliance the client is placing on them,” he says.
“Presumably, the more they act in their client’s best interest, as opposed to taking an ‘I’m just here to sell you a product’ approach, the better it would be for the advisor’s business over time,” Mr. Bureaud says.