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"TAMRIS" - Setting standards

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Financial abuse is not limited to theft, burglary, illicit misappropriation or any other obvious criminal act!

Financial abuse in the financial services industry can be much more subtle, cynical and, at times no less significant than the more obvious forms noted above.

Financial abuse is any act arising from the abuse of a position of trust that either unreasonably benefits the advisor and unreasonably and negatively affects, or has the potential to negatively affect the financial wellbeing of the client.

But, it is more than just the act itself. All abuse violates basic human rights. Unfortunately, without a full understanding of the needs of the investor, the important first step of defining basic investment rights and upholding them becomes impossible.

Yes, there are sharks out there who would commit abuse irrespective, but, much abuse results from ignorance and the neglect that arises from ignorance.

An abuse of a position of trust occurs when a recommendation or action is made which is neither properly explained nor thought out and, which, if properly explained and thought out would either not be recommended in the first place or would not be agreed to by the client without some adjustment.

Text Box: For more information please read conflicts of interest and problems in the investment industry.


Importantly, the act must clearly and obviously transgress a number of clear lines.

  • Is the recommendation appropriate to the client’s financial position and financial needs? Is the advisor taking the client’s financial position into consideration before determining the strategy, allocation and security selection?Text Box:  

  • Is the client given the opportunity and the means to understand and assess whether the recommendations and rationale are indeed acceptable?

  • Is the recommendation appropriate to the client’s risk preference? Are all risks likely to affect the client being properly assessed? Is the client being educated or is just their current level of knowledge being document?

  • Are all costs and charges and remuneration associated with the investment clearly and properly disclosed? Is the advisor justifying their fees given the work involved

  • Has the most cost effective option been taken given the nature of the recommendation?

  • Is the client receiving clear and easily justified value from their wealth management and the consideration in fees and costs they are paying and is this justification part of the longer term relationship?

What the above means is that in order to clearly and effectively ensure that advice is appropriate to the client, the advisor must have a clear process that not only relates portfolio structure to financial needs to protect against both short and long term financial risks but must clearly explain how they work, how the portfolio manages these risks and meets the clients needs and the client needs to have access to a level of communication and education that will allow them to understand and assess what is being recommended and why it is being recommended.

All this requires greater communication, better education, higher standards of risk assessment, comprehensive reporting, justification of portfolio construction, planning and management and accountability of performance and costs.

All of the above requirements are way above the minimum standards policed by Ontario’s main regulatory and self regulatory bodies; the Ontario Securities Commission, the Independent Dealers Association (IDA) and the Mutual Fund Dealers Association (MFDA).

If standards are not raised, endemic financial abuse will continue.

  • At present, all an advisor is required to know by law are basic minimum standards of information about the client, which are recorded in the “know your client” form. The information recorded on this form is actually insufficient to perform a thorough analysis of the client’s financial needs and risk preferences, let alone a full assessment of the client’s existing asset position. Importantly there is no obligation to give the client a copy of this document. There is in fact no regulation which states that any document justifying recommendations be sent to the client.

  • Additionally, apart from a basic valuation of investments and statements of transactions, there is no other requirement to report performance, nor to even measure whether their performance has been good, bad or indifferent.

  • Worse still, many investors do not know how much they are being charged and many expenses, commissions and costs paid by the client do not need to be disclosed to the client.

If the above three factors are not conditions which perpetuate ignorance, which prevent the investor from finding out whether they are getting value for money and how much they are being charged, then they are conditions which perpetuate financial abuse.

Trailer fees

Trailer fees are annual fees paid by a mutual fund company to an investment advisor for recommending the mutual fund. The investor does not need to be told about this even though the money is paid from the investor’s own funds. Likewise the advisor has no obligation to do anything for the client to earn these fees.

Trailer fees and other referral type fees are an abuse of the client advisor relationship and, unless these fees are disclosed and used to offset valid and identifiable services performed by the advisor, they increase costs and are detrimental to an individual’s financial position.

The greed of the industry has seriously affected the ability of mutual funds to meet the objectives and needs of the individual. Indeed, the benefits of one of the most efficient investment vehicles ever invented have been submerged under the self interests and costs of an industry that has lost sight of its reason for being

Regulation and protection

If you study the rules and regulations of the Ontario Securities Commission and the Independent Dealers Association you will not find a single regulation defining the quality of advice or the parameters in which that advice should be delivered, monitored and reported.

All regulations relate mainly to issuance of securities and the rules and regulations governing their transactions and the rules and regulations governing the sale and purchase of securities for individuals.

Look at all the disciplinary proceedings taken by the IDA against its investment advisors and not one really deals with bad advice. All relate to clear violations of IDA and OSC rules and regulations. This means your advisor will have had to have either run off with your money or traded egregiously on your account without your permission and to your detriment.

Look at the court cases where it is said that common law can look at the wider client/advisor relationship and is not constrained by OSC and IDA rules and regulations to determine restitution. Even here, there are as yet no real cases dealing with bad financial advice.  All relate to certain specific securities transactions which clearly transgress the letter and the spirit of existing regulation.

The message for investors

Until advice is actually regulated in some shape or form, financial standards are raised and financial advisors have a real professional body to define the rules and regulations governing the provision of advice and to discipline and punish those who ignore them, you the individual investor will need to be responsible for policing your own financial position.

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