When an investment advisor takes on a new client and does not complete the know-your-client forms, is there disciplinary action? Which governing body is responsible?
— Don Henderson
A: Investment advisors are required to follow what are called the know-your-client (KYC) obligations, which are part of provincial securities law. Advisors must verify your identity and personal details such as date of birth, marital status, occupation, income, net worth, and so on. Before they recommend investments, they also need to understand your risk tolerance, objectives, time horizon and investment knowledge. The KYC documents are collectively referred to as the New Account Application Form (NAAF), and they must be updated whenever there is a material change in your situation.
The KYC rules are enforced through regular audits by the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada, the bodies that license most advisors in Canada.
Say an advisor takes on a new client named Gladys. She’s 79 years old, skittish about the stock market, and needs only a modest income from her portfolio. Three months after opening her account, Gladys notices that her money was invested in five penny stocks and a commodity fund, and she’s lost 40% of her life savings. If she makes a complaint, the advisor would need to produce a document—with Gladys’s signature—describing her as a high-risk, sophisticated investor or he would be hard-pressed to justify his recommendations. If he failed to understand Gladys’s situation—or if he just ignored it—he could be sanctioned by his firm, its regulator, or both. That could mean a fine or suspension of his license. In some cases, Gladys might be offered compensation for her losses.
But it won’t be easy. When challenged, advisors and their firms can dig in their heels: don’t expect a complaint to be resolved easily, and never assume you will be fully compensated for losses. If you are unable to settle your dispute with the dealer or its regulator, your next step is to file a complaint with the Ombudsman for Banking Services and Investments. Again, however, this is not a speedy or painless process.
The best strategy is prevention: before signing on with a new advisor, be clear about your risk tolerance, ask what losses are possible with the recommended investments, and carefully read over the KYC documents before you sign them.
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Beth Hamilton-Keen, CFA, is a Director of Investment Counselling at Mawer Investment Management Ltd.