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Bulletin #0658-C

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Ken Woodard
Director, Communications & Membership Services
For Distribution to Relevant Parties within your Firm

Mystery Shop Report - Insights into Advisory Practices and the Investor Experience in Ontario

The Mutual Fund Dealers Association of Canada (MFDA), Ontario Securities Commission (OSC) and Investment Industry Regulatory Organization of Canada (IIROC) today released a joint report, Mystery Shopping for Investment Advice, which describes the results of performing mystery shops of advisors in Ontario.

“Canadian investors place significant trust in their advisors to meet their financial goals.” said Mark Gordon, President and Chief Executive Officer. “This project has given us insight into what investors experience when making the important decision to choose an advisor.  The results support our strategic focus on initiatives directed towards improving the investor experience in the areas of suitability, Know-Your-Client, fees and the overall advisory process.”

Summary of MFDA Member Shop Results and Key Findings:

  • MFDA Members are accessible to the retail public – Shoppers were able to meet with MFDA advisors and were not turned away because they did not have enough money to invest.
  • 34 out of a total of 88 shops (39%) were with MFDA Members – Initially 150 shops were planned equally distributed across four registrant categories: mutual fund dealers, investment dealers, portfolio managers and exempt market dealers. There were 105 shops completed but only 88 shops provided sufficient data that would allow us to assess the shop responses. Of the 88 shops, there were 34 shops of MFDA Members, 30 shops of IIROC Members, 11 shops of exempt market dealers and 13 shops of portfolio managers.
  • 32% (11 of 34) of MFDA Member shops resulted in shoppers receiving specific product recommendations – Shoppers were instructed not to open an account or invest any money. Compliance with regulatory requirements would result in elements of the advisory process being performed when an account is opened and recommendations made.  As an account was not opened or money invested, the shops progressed to various stages.  In some shops, the advisor provided an overview of the products and services offered while other shops progressed to specific products being recommended. In 38% of shops (13 of 34), the shopper received general advice but not a specific product recommendation.  In 29% of shops (10 of 34), the shopper did not receive any advice.  In the 11 shops where a specific product recommendation was given, all elements of the advisory process were assessed from a compliance perspective.  In the remaining 23 shops, if an element of the advisory process took place, it was assessed.  Where a discussion in a particular element of the advisory process did not take place, it did not necessarily result in a non-compliant rating.  Rather, consideration was given to how far the meeting progressed.

Compliance Assessment of the 11 MFDA Member Shops Where Shoppers Received Specific Product Recommendations:

  • Overall Assessment – 27% of shops (3 of 11) achieved an overall best practice rating as the advisor used best practices in several key areas, 55% of shops (6 of 11) received a compliant rating and 18% of shops (2 of 11) received a non-compliant rating. For the 2 shops that received an overall non-compliant rating, while the recommendations were suitable, in both shops the advisors did not properly assess risk tolerance (as described in the KYC section below) and in one shop the advisor also did not discuss fees.
  • Know-Your-Client – In 45% of shops (5 of 11) advisors used best practices by using questionnaires to explain KYC concepts. 36% of shops (4 of 11) advisors discussed KYC in a compliant manner. In 18% of shops (2 of 11), the advisors made assumptions regarding the shoppers risk tolerance instead of asking questions specifically designed to assess the shoppers’ attitude towards risk or willingness to accept risk.  Academic research indicates that advisors may make assumptions of client risk tolerance based on other KYC information such as net worth, income, or age.[1]  To avoid this, advisors should use a structured and disciplined KYC process such as using a properly designed questionnaire.
  • Suitability – Suitable product recommendations were given in all 11 shops. However 18% of shops (2 of 11) were rated as non-compliant as the advisor did not properly assess risk tolerance (as explained in the KYC section above).
  • Fees – In 82% of shops (9 of 11), fees were discussed. In 9% of shops (1 of 11), the advisor did not discuss product fees.  The remaining shop could not be assessed as the shopper did not answer the question regarding fees in the post-shop questionnaire.

Compliance Assessment of the 34 MFDA Member Shops:

  • At least one best practice was found in 35% of shops (12 of 34) and a non-compliant practice was found in 12% of shops (4 of 34).
  • A discussion of the risk-return relationship occurred in 53% of shops (18 of 34) which includes 8 shops (24%) where the advisor used best practices by using visual aids and graphs to explain the relationship. In 9% of shops (3 of 34), advisors did not explain the relationship between risk and return but were expected to do so as they gave specific product recommendations.  The remaining 38% of shops (13 of 34) did not progress to a point where this element could be assessed.
  • In 100% of shops (34 of 34) the advisors discussed the shoppers’ circumstances and investment goals.
  • KYC was collected or was in progress in a manner that met or exceeded our expectations in 94% of shops (32 of 34). The remaining 6% of shops (2 of 34) were non-compliant because the advisor made assumptions regarding the shoppers’ risk tolerance. 
  • In 41% of shops (14 of 34), advisors discussed fees in a manner that met or exceeded our expectations. In 9% of shops (3 of 34), advisors did not discuss fees but should have in order to provide a balanced presentation to the shoppers.  In the remaining 50% of shops (17 of 34) advisors did not discuss fees but the shop did not progress to a point where products were discussed.

MFDA Actions and Next Steps:

The MFDA is committed to improving the quality of the advisory process and the overall client experience.  Our approach has been to break the suitability obligation down into its component parts, identify areas for improvement and develop clear and objective regulatory standards and practical guidance in these areas.  The MFDA has spearheaded the development of new standards and guidance in the Know-Your-Client (KYC) and product due diligence processes and in establishing objective standards for assessing suitability.  These efforts have resulted in overall improvements to supervisory processes and the implementation of a structured approach to assessing suitability. 

Going forward, in addition to the MFDA’s strategic initiatives, the implementation of pre-sale delivery of the Fund Facts document for mutual fund purchases contained in National Instrument 81-101 and implementation of the Client Relationship Model Phase 2 requirements will provide clients with greater transparency and ability to understand performance and costs associated with the advice they receive.  The MFDA 2015-2017 Strategic Plan also outlines the MFDA’s plans to improve the advisory process and overall client experience even further.  Strategic initiatives arising from the MFDA 2015-2017 Strategic Plan include:

  • Continuing to develop guidance to improve the quality of advice and the overall client experience. This will include developing best practice guidance on the advisory process and involve input from advisors on common problems they face and practical solutions to address them. It will also include developing guidance on specific topics such as KYC practices and the transparency and suitability of fees and charges.
  • Developing plain language communications to educate investors on the advisory process including what to expect when meeting with an advisor, the KYC collection process, advisor licensing and qualifications, the nature of the services to be provided, and key regulatory requirements.
  • Continuing to protect seniors by focusing compliance and enforcement efforts on senior investors and by providing Member education and guidance on key issues applicable to seniors.
  • Providing further guidance on the use of titles. Specifically, initiatives will be focused on the use of titles targeting senior investors and the use of the “financial planner” title.
  • Instituting a continuing education requirement for advisors in order to keep their industry knowledge current and maintain a high standard of professionalism.
  • Continuing to develop clear and objective regulatory standards and practical guidance to promote compliance by Members and advisors.

[1] Roszkowski, M. J., & Grable, J. (2005). Estimating Risk Tolerance: The Degree of Accuracy and the Paramorphic Representations of the Estimate, Journal of Financial Counseling and Planning, 16(2), 29-47