Some in the investment industry expect an increase in client complaints against financial advisors as investors scrutinize their portfolios following the recent stock market downturn. Yet, others believe incidents could be tempered by stricter rules put in place since global financial crisis of 2008-09. At the same time, there are strategies advisors can use to try to avoid complaints, or worse, face legal action from clients.
The number of investment-related complaints jumped by 57 per cent in 2008, the year when the global financial crisis took place, compared to the year earlier, then rose by another 73 per cent in 2009, according to data from the Ombudsman for Banking Services and Investments (OBSI).
The majority of investigations during those years, OBSI says, were into complaints related to the suitability of investment advice. Examples include if an advisor didn’t fulfill their know-your-client obligations or didn’t explain the risks and characteristics of the investments recommended properly. Other complaints in 2008-09 related to discount brokerage margin calls and transaction errors.
An OBSI spokesperson says that while the organization has seen an increase in inquiries in recent weeks, it’s too soon to see any complaints.
The Investment Industry Regulatory Organization of Canada (IIROC) also saw a spike in investor complaints during the 2008-09 and noted a surge in investor contacts to its complaints and inquiries team in March and April of this year. An IIROC spokesperson says it could take several months for more complaints to surface and that the self-regulatory organization will “compile and analyze data from the pandemic period in the coming months.”
Jonathan Heymann, president of Wychcrest Compliance Services Inc., a Toronto-based consulting firm specializing in securities compliance and registration, says it can be a natural instinct for some investors to seek blame when stock markets fall.
“Obviously, we’re talking about peoples’ life savings and their financial future,” he says. “When things are going well and people are making money, clients don’t look too closely at their portfolios because they leave it in the hands of their financial advisor. When things go south, they start taking more notice and start picking apart their portfolios and looking at what investments they’ve been put in. If they’re looking for something to complain about, and if they look hard enough, they’ll probably find something, even if it is not truly warranted.”
Ellen Bessner, a partner at Babin Bessner Spry LLP in Toronto says suitability is the most common reason clients sue their advisors.
She says clients can sue their advisors if they have a “cause of action,” which, generally speaking, is “a breach of the advisor’s obligations to clients, according to law.”
That could entitle clients – or plaintiffs in a court of law – to monetary relief if they can prove they suffered damages as a result of the breach, she says.
Ms. Bessner says advisors should ensure they’re following all of the rules, regulations and protocols around working with clients – and pay attention to the details – to protect themselves against a potential lawsuit.
“That’s not easy because there are so many [details],” she says. “To avoid being sued, you want to dig into a client’s risk in a bigger, broader way than simply risk tolerance. You need to get into risk capacity, which is a client’s financial ability to endure any potential financial loss."
Ian Russell, president and chief executive officer at the Investment Industry Association of Canada, expects client complaints to increase as a result of the recent market drop. However, he believes the numbers could be lessened in part by the partial stock market recovery that has taken place since March as well as regulatory changes that have tightened rules around how advisors work with clients in recent years.
Mr. Russell points to the two-stage Canadian Securities Administrators’ (CSA) client relationship models – known as CRM1 and CRM2 – that have increased transparency around fees as well as requirements around know-your-client and know-your-product suitability rules.
The CSA’s new client-focused reforms, which were published on Oct. 3, 2019 but not yet implemented, will also put more onus on advisors to ensure clients’ interests come first when choosing what’s suitable for their portfolios. Mr. Russell says the pending rules also discourage riskier bets such as investing in speculative securities and leveraged products.
“Many advisors and dealers have already updated their compliance policies and procedures in relation to the new rules because they know they’re coming,” he says.
Many firms have also adopted new technologies to support remote operations during the pandemic, which Mr. Russell says has helped advisors communicate with clients regularly about their portfolios amid the market turbulence.
“These discussions will have given advisors an opportunity to explain client concerns and understand client dissatisfaction,” he says.
Indeed, Mr. Heymann says the best way advisors can try to prevent complaints is by having constant communication with clients.
“You have to keep talking to them,” Mr. Heymann says. “You have to keep explaining what’s going in on the markets … and what’s your potential solution. How are you going to ride it out? What’s your methodology? If you do a good job of communicating, clients are willing to give a lot of space to advisors to sort things out. The worst thing that advisors can do is to stick their heads in the sand … because their clients will lose faith in them. They’ll think that they’re not being honest or that they’re not in control or that they’re not going to make the right decision.”
He says when relationships involve money, “things can get heated pretty quickly. … It’s[all about] communicating with clients and making sure the file is updated and documenting the rationale – including the research you’ve done and why you recommended a particular investment over another – that can help keep you inoculated.”