Monday, October 27, 2014

The role of securities regulators in “educating ” financial Consumers

The role of securities regulators in “educating ” financial Consumers                   October, 2014

October is Investor Education Month in Canada so it's a good time to discuss the role of regulators in educating financial consumers. We support financial literacy for Canadians but have warned against depending on it as a tool against consumers making big mistakes and industry abuses. Laws and Codes , a Best interests standard and robust enforcement are needed to protect consumers - financial education and disclosure alone can't do the job.A Best interest standard and "merit regulation" would benefit investors far more than "investor education" which no matter how good it is, does not narrow most investors' competency/capability gap.

That being said, actions need to be taken until financial advice is delivered on a professional basis.

The MFDA prepares some excellent guidance materials for the dealers it regulates. It should do the same for its most important stakeholder - the mutual fund investor - materials that will explain their rights , how the MFDA protects them and where the bear traps are. We call this type of education Street proofing -getting investors primed to engage with Bay Street- improving awareness. If well done, it would increase the level of engagement that regulators have with Main Street and help prevent at least some complaints and potentially increase client satisfaction. It would help create a cadre of oonstructively critical and inquisitive investors determined to better understand the advice given and the nature of their investments.

Recently ,the Mutual Fund Dealers Association of Canada (MFDA) announced the launch of an investor education section on its website. In the new section, investors can find information about mutual funds, including information about fees and Fund Facts documents, as well as information on checking a salesperson's ( advisor's ) registration and disciplinary history, the MFDA /IPC investor insurance scheme , OBSI and advice on avoiding fraud and financial harm. Links to investor education resources from members of the Canadian Securities Administrators are adroitly used as well as other regulators and international organizations. Including the SIPA and FAIR Canada websites would be helpful too. Investors who are seniors / retirees can also review the seniors' section of the MFDA website which contains information about the assistance that the MFDA can provide to seniors, as well as a library of links to on-line resources directed towards Canadian seniors.A good MFDA communication plan should ensure it will be accesssed by many information hungry mutual fund investors.

This initial effort by the MFDA is welcomed but much more can and needs to be done. There are a number of areas that we think deserve special attention from the MFDA. These are primarily areas where we are receiving a lot of requests for additional information or where there have been a significant number of complaints. These include but are not limited to : Outside business activities, the risks of leverage, dealing with advisors that are dually registered ,"Free Lunch" Investment Seminars -Avoiding the Heartburn of a Hard Sell , Guide to filing a robust complaint , peeling back the DSC onion, completing a NAAF to prevent problems,What the heck is KYC and why it is important? , How mutual fund salespersons are paid , Understanding the impact of conflicts-of -interest, Understanding the difference between Best interests and Suitability, Understanding and using the Fund Facts Risk disclosure , Using the Account Statement for better investing outcomes, The difference between Suitable and Unsuitable investments and the meaning of “advisor “ titles and credentials ( could link to Glossary on IIROC website) . A forthright presentation in text and/or smart phone APPS of these tough issues will help reduce investor abuse / undue losses and improve investor outcomes.

Better design of forms would allow a certain amount of education to be embedded in the form itself.For instance, there have been numerous suggestions to make the New Account Application Form more meaningful and for Risk Profiling approaches to be documented and standardized.Online forms could be made “ intelligent ” and interactive . Such an approach is consistent with Just in Time delivery of information and education.

We would also like to see the MFDA ( and IIROC) issue timely ALERTS informing investors of specific issues and hazards prevalent at the time. This could include warnings about deceptive advertising ( a great example can be found at ), Betting the Ranch: Risking Your Home to Buy Securities , The signing of blank forms, explaining Return of Capital mutual funds, Alternative Funds Are Not Your Typical Mutual Funds , The risks and dangers of making financial side deals with your salesperson , Using the MFDA Whistle blower program, How to effectively use Fee disclosure and Performance reporting , Watch out for Misleading Titles and Designations , How to read the Fund Prospectus etc. ALERTS should also inform investors of ongoing Consultations and new or pending regulations/ rules of interest to retail investors. Investors would subscribe and have the ALERT sent directly to their email inbox. This kind of real time investor protection is vitally needed in today's fast paced investment world.

Investor education can also be effected by the use of Case Studies ( narrative and /or video) which showcase people's experiences with different investments and dealers. Such studies make investing issues real to main Street. It is well known that for retail investors , personal stories are more effective in conveying messages than dry facts. Given the wealth of data locked up in MFDA investigations and Enforcement Cases ,the MFDA should use Case studies to inform investors what can go wrong and how to protect against advisor /dealer malfeasance. Street proofing investors is a core element of investor protection.

Finally, a comprehensive Glossary of all the commonly found terms in the mutual fund industry would be extremely useful. A good example would be the one provided by Morningstar Canada. A simple link would do the job.

All documents , ALERTS and Warnings should be written in plain language and available in both English and French.

A similar set of ideas apply to IIROC but these would include additional topics uniquely relevant to the brokerage industry. Similarly, Securities Commissions could fill in the gaps for the Exempt market , in particular, Equity crowdfunding. By working collabartively with SRO's a robust Street proofing educational regime can be esttablished at reduced cost.

Financial literacy topics such as portfolio construction , risk minimization ,the calculation of performance return , asset allocation, tax optimization, The relationship between risk and return, The Grass Isn’t Always Greener-Chasing Return in a Challenging Investment Environment , Structured products , Financial tools and calculators etc. should , with a few exceptions, be left to professional educators that are independent of both the industry and securities regulators.They have much greater leeway to be constructively critical of regulations, regulators, industry participants , industry sales practices and behaviours.

Of course , if investment advisors were professionals working to a Best interests standard , much of this Street proofing education would be redundant . There would be no need for CAVEAT EMPTOR


     1. Investor Enquiries and Complaints Archive: Kenmar Associates
  2. Improve consumer protection by SROs: C.D. Howe Institute research report
  3. Marketing of mutual funds (2005) Ken Kivenko
  4. How to know when your advisor is behaving badly - The Globe and Mail


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