The investment industry’s most creative moments lately are not found in new products, strategies, insights or anything else useful.
If you want to see the industry in full innovation mode, look at the tricks it uses to avoid taking full responsibility for the mistakes made in advising clients. One is to write language into contract fine print that limits a firm’s liability for its own errors. Another is tossing out lowball offers to settle disputes with disgruntled clients.
The investment industry talks endlessly about the value of the advice it provides. But no loophole goes unexplored in finding ways to avoid taking responsibility when that advice goes wrong.
The latest trick is writing language into retail client account agreements that partly or fully absolves firms of liability for losses resulting from bad advice. So odious is this practice that it prompted a bulletin from the Investment Industry Regulatory Organization of Canada, the self-regulator of brokers.
One example of inappropriate contract language would be to waive responsibility when clients suffer losses from securities recommended by the firm’s employees. Recommendations are supposed to be made on the basis of what is suitable for clients, but this doesn’t always happen. For example, an adviser might urge a client to buy a product that pays the most generous fees to the seller.
Another clause cited by IIROC limits the firm’s total liability to the amount of fees paid by the client for the one calendar month in which damages occurred. Still another completely waives the firm’s liability for client losses.
IIROC encouraged firms to change or remove this language rather than outright ordering them to stop this practice. Still, IIROC going public about this is noteworthy. It signifies a certain level of disgust.
According to the investor advocacy group Kenmar Associates, lowball offers are how investment firms sometimes respond when the Ombudsman for Banking Services and Investments rules against them in complaints made by clients. OBSI might recommend compensation of a certain amount and the firm responds with an offer of less. The implication is that the client might get nothing if the firm chooses not to follow OBSI’s ruling.
Kenmar documented lowball offers in a recent report that noted how the elderly, widows, new Canadians and other vulnerable individuals were disproportionately represented among the victims. The report said lowball offers can be made before complaints even get to OBSI.
OBSI’s mission is to independently resolve client-firm disputes that have reached an impasse. In its 2018 annual report, OBSI says the most common investment issue raised by complainants was the suitability of the products recommended to clients. Fee disclosure was next, followed by incomplete or inaccurate disclosure about a product.
All of these issues speak to basic competency of investment advisers, and the branch managers and compliance departments that are supposed to monitor their work. A firm that tries to limit its liability in suitability and disclosure matters is effectively saying it’s a seller of products rather than a trustworthy advice provider.
The 2018 OBSI annual report says the organization closed 325 investment-related cases and found in favour of the complainant in 139 of them. OBSI can recommend compensation of as much as $350,000, but the average investment compensation amount was just $21,698.
If you have a dispute you can’t resolve with your investment firm and cannot afford a lawyer, then for sure try OBSI. But this ombudsman is not a scourge of Bay Street. It has not driven investment firms into a defensive posture by consistently taking the side of clients.
Nor can limited liability be linked to Bay Street starving for revenue and profits. Aside from exchange-traded funds, fee competition in investment products and advice rates a 1.5 out of 10 on the intensity scale. You could say the same thing about innovation in products and services, which is surprisingly scarce at a time when financial technology – fintech – is supposedly a threat to the status quo.
To see the investment industry at its nimblest and cleverest, check out what it’s doing to avoid taking full responsibility for the failures of its advice. Mistakes are inevitable in an imprecise world such as investing. Your character is defined by how you own up to them and make them right.