Most advisors behave themselves, even if they don’t know a regulator’s watching. But some are still failing the basics of advice.
That’s what OSC, IIROC, and MFDA found in their joint report, Mystery Shopping for Investment Advice. The report describes the results of a mystery shop of advisors across Ontario between July and November 2014. The review didn’t find any serious misconduct, but of shops that made recommendations, 14% made unsuitable ones, 21% did not conduct thorough KYC and 29% didn’t discuss fees appropriately.
The first initiative of its kind undertaken by Canadian securities regulators, the mystery shop assessed retail investors’ experiences and evaluated the investment advice process.
A total of 105 shops occurred throughout Ontario across four investment platforms, including investment dealers, mutual fund dealers, exempt market dealers and portfolio managers. Of these, 88 shops had sufficient data to allow for an assessment of the shoppers’ experiences against a set of benchmarks for best practice, compliant and non-compliant advice.
Good news: In more than three-quarters of shops (78%), investors heard about investment products that advisors could sell. Investors were asked about their investment objectives in 89% of shops.
But, shoppers were less likely to hear about product fees (56%), be told about the risk/return relationship (52%), be asked for thorough know your client (KYC) information (32%) or be told about advisor compensation (25%).
And regulators concluded that since their experiences varied, investors would have difficulty comparison shopping, understanding the variety of business titles or knowing whether they received suitable advice.
About a quarter of shops (24) made recommendations. Suitable product recommendations (appropriate given the investors’ investment objectives, risk tolerance and financial circumstances) were made in 86% of shops, and unsuitable recommendations in 14%. For these 24 shops, thorough KYC information was collected in 79% of shops and an appropriate discussion of product fees in 71%. Sixty-three percent of shops met or exceeded all regulatory expectations.
In response to these findings, the OSC, IIROC and MFDA have set out detailed action plans to build on their ongoing efforts. These next steps will focus on an enhancement of advisory practices, setting out clear expectations and using the findings to inform policy making, with a view to improving the overall experience investors have when seeking investment advice. Investment industry firms and advisors should review and respond to the findings to ensure investors receive advice that is appropriate and leads to a better investor experiences.
The related Notices (OSC Staff Notice 31-715, IIROC Notice 15-0210, MFDA Bulletin 0658-C) also include critical information about proficiency and registration categories of the platforms shopped (Appendix A) and evaluation benchmarks (Appendix E) against which the mystery shop results were assessed.