Who Are Compliance Departments Protecting?
Since the dotcom bust of the late 90s 'staying compliant' has become more and more of an issue. As dealers face the rising costs of investigations and litigation, due to allegations of unsuitable investments or improper supervision, ever more strenuous restrictions are being placed on the average advisor. Many advisors complain of the extra paperwork and time involved in satisfying compliance departments. Dealers justify the extra regulation citing fiduciary duty and investor protection. Who is the paperwork protecting; the investor or the dealer?
It is now getting popular for dealers to hire lawyers specializing in defending advisors and branch managers to lecture at advisor conferences. The lecture material is thorough and professional, and it tends to revolve around one basic premise: keep client paperwork up to date... or else.
The argument seems to make a lot of sense. If a client's know your client data is regularly updated, all disclosures are documented as received by the client, and the advisor has detailed and dated notes of all client meetings I think anyone would have to agree: the client will have little or no recourse in an unsuitable investment investigation.
For example, on April 18, 2005, Edward Graham, a co-branch manager with Credential Securities in Regina was found to have violated IDA regulation 1300.2 – he failed notice an over concentration of one particular security in the accounts of multiple clients. The IDA also wanted to make the point Mr. Graham should have been alerted to a potential problem in one particular account when updated Know Your Client data indicated 50% speculative for an investor over 60 years of age. Mr. Graham acknowledged that 50% speculative was high for someone 60 years of age, but he did not acknowledge that it was high for this particular client. The Hearing Panel had to agree with the point, and dismissed the allegation.
Here lies one of the big problems in Canada's investment industry; dealers are using regulation originally designed to protect the investor to protect themselves instead. Once this connection is understood, it makes perfect sense why a dealer would hire lawyers to coach advisors.
Unfortunately whether lawyers specialize in defending investors or advisors, neither group have any vested interest in making our industry better. Lecturing to groups of investors or advisors primarily serves to advertise the legal firm to potential clients. The lecture material serves to teach potential clients how to spot new cases for the law firm, and how to make those cases easier for the law firm to research and argue.
Instead of serving our industry on a platter to lawyers, why don't we start taking responsibility, and try to fix some of the problems internally? For example, instead of hiring legal coaches to avoid paying for problems after they occur, how about investing in education programs for investors, and better risk assessment technology for advisors to avoid unsuitable recommendation complaints before they happen? Why not institute standards of risk every member firm and advisor can agree on?
Our industry is at a crossroads. The money, technology and know-how all exist. So why don't we start embracing transparent disclosure of compensation, risk and potential conflicts of interest, and stop hiding behind ever longer application forms and lawyer created loopholes? It's time to stop paying lip service to fiduciary duty and to start building confidence in our industry again.
It is now getting popular for dealers to hire lawyers specializing in defending advisors and branch managers to lecture at advisor conferences. The lecture material is thorough and professional, and it tends to revolve around one basic premise: keep client paperwork up to date... or else.
The argument seems to make a lot of sense. If a client's know your client data is regularly updated, all disclosures are documented as received by the client, and the advisor has detailed and dated notes of all client meetings I think anyone would have to agree: the client will have little or no recourse in an unsuitable investment investigation.
For example, on April 18, 2005, Edward Graham, a co-branch manager with Credential Securities in Regina was found to have violated IDA regulation 1300.2 – he failed notice an over concentration of one particular security in the accounts of multiple clients. The IDA also wanted to make the point Mr. Graham should have been alerted to a potential problem in one particular account when updated Know Your Client data indicated 50% speculative for an investor over 60 years of age. Mr. Graham acknowledged that 50% speculative was high for someone 60 years of age, but he did not acknowledge that it was high for this particular client. The Hearing Panel had to agree with the point, and dismissed the allegation.
Here lies one of the big problems in Canada's investment industry; dealers are using regulation originally designed to protect the investor to protect themselves instead. Once this connection is understood, it makes perfect sense why a dealer would hire lawyers to coach advisors.
Unfortunately whether lawyers specialize in defending investors or advisors, neither group have any vested interest in making our industry better. Lecturing to groups of investors or advisors primarily serves to advertise the legal firm to potential clients. The lecture material serves to teach potential clients how to spot new cases for the law firm, and how to make those cases easier for the law firm to research and argue.
Instead of serving our industry on a platter to lawyers, why don't we start taking responsibility, and try to fix some of the problems internally? For example, instead of hiring legal coaches to avoid paying for problems after they occur, how about investing in education programs for investors, and better risk assessment technology for advisors to avoid unsuitable recommendation complaints before they happen? Why not institute standards of risk every member firm and advisor can agree on?
Our industry is at a crossroads. The money, technology and know-how all exist. So why don't we start embracing transparent disclosure of compensation, risk and potential conflicts of interest, and stop hiding behind ever longer application forms and lawyer created loopholes? It's time to stop paying lip service to fiduciary duty and to start building confidence in our industry again.
posted by Edward Iftody, BA, CIM at
12:24 PM
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1 comments
