Friday, February 16, 2018

One Account Application for all Accounts ?

Under IIROC Rule 2500 ,IIROC dealers are allowed to use a single account application for a client, in cases where the client's investment objectives and risk tolerance are identical for all of the accounts covered by the application. A single form can make sense if an investor's investment objectives, risk tolerance/profile , time horizon and tax situation are truly  identical for all of his/ her accounts. It makes less sense when the "advice" is provided by non-fiduciaries operating under the lowly suitability standard.

Many investors may want to take different approaches in various accounts, for instance emphasizing interest income in a registered plan such as a RRIF and capital appreciation in a cash or margin account, or having different time horizons or risk tolerance in various accounts to meet specific financial  objectives. That's not a problem for those retail investors who have enough investment experience to recognize that various accounts may have different objectives, risk tolerance and time horizons, and can clearly state their views to a dealing representative ( aka "advisor"). But there are a lot of others who may be relatively unsophisticated and not understand the implications of a one-form-fits-all approach.

What really stands out for us is the statement that, "The client understands that the accounts on the same account application will be assessed for suitability on a multiple account or portfolio basis." We question what percentage of retail investors will really understand what that means. The Mutual Fund Dealers Association of Canada approach says that "suitability must be analyzed for each individual account. The fact that the client may have other assets in other accounts, or with other institutions, should not be taken into account."

In our view, the IIROC approach favours the dealer while the MFDA approach favours the client. If suitability is assessed on a portfolio basis, an investment dealer could argue that a single holding which might represent a major portion of a client's RRIF account would be suitable if it were looked at in terms of that client's total holdings. Using MFDA rules, that holding would have to be assessed for suitability on the RRIF account only, even if the client's other accounts had identical objectives and risk tolerance. If an investor were to suffer a significant loss in a specific holding, the outcome of a complaint might rest on whether it was viewed in the context of a single account or on a multi- account ( portfolio) basis. Accordingly, we have asked IIROC to amend their Rule 2500 to exclude RRIF  accounts . See our letter here.