Protecting vulnerable investors

As the baby boomers and their parents age, both regulators and the financial services sector are taking steps to try to reduce the possibility that older or vulnerable investors are taken advantage of or provided with negligent advice.

Protecting vulnerable investors
As the percentage of the population in Canada that is either at retirement age or close to it continues to increase, there is a common frustration regardless of the size of one’s investment portfolio — trying to read and understand financial disclosures outlining key information.
“Something I would like to see is readable documents,” says Harold Geller, a lawyer at MBC Law PC in Ottawa. 
“The print is too small and we are still not communicating in plain English,” says Geller, co-leader of the firm’s financial loss advisory group and a former member of the Ontario Securities Commission’s investor advisory panel. “What is time horizon? Is it the first dollar out or the last dollar out?” 
Clarity, he says, even if it is something as seemingly obvious as larger type, in print or online, is not a trivial issue. “Readability is the key. It is also your defence and will lessen your litigation risk,” he suggests.
It is a view echoed by Arthur Fish, a partner at Borden Ladner Gervais LLP, especially when dealing with older investors. “Let’s get the basics right — the basics of good communication,” says Fish, who manages the firm’s family wealth practice in its Toronto office.
Aiming to reduce jargon in written information provided to investors in the financial services sector and limiting the fine print in these documents is obviously good practice no matter what the age of the client. But these are just a couple of the many issues that are likely to increase in importance at a time when there is an ongoing spike in the number of clients who are considered older investors and a heightened awareness by regulators about the need for a framework to protect these individuals.
The latest census in 2016 revealed that nearly six million Canadians are over the age of 65. Almost five million more Canadians are in the 55-to-64 age group and not far away from traditional retirement age.
It is a huge percentage of the country’s overall population and a segment with a wide range of wealth and investment portfolios.
“It is good business to be elder friendly,” says Laura Tamblyn Watts, national director of law, policy and research at CARP (formerly known as the Canadian Association for Retired Persons). 
“You want to make sure you value these customers or someone else will take these clients,” says Tamblyn Watts, a lawyer and former director of the board of the Canadian Foundation for the Advancement of Investor Rights. She explains that good investment advice is just one aspect of showing older clients that you understand and respect their needs. “It can be as simple as having doors [to a meeting room] that are wide enough to get a walker through,” she notes. 
Fish points out another unique aspect related to these groups of investors. “Since people are living longer, we now have two aging generations simultaneously, the baby boomers and their parents,” he says.
As a result, both regulators and the financial services sector are taking steps to try to reduce the possibility that older or vulnerable investors are taken advantage of or provided with negligent advice.
The OSC introduced a staff notice this spring entitled “seniors strategy.” It is described as an action plan for “responsive regulation” to protect older investors. The British Columbia government is the latest province to enact legislation that will permit the Investment Industry Regulatory Organization of Canada to obtain civil judgments in the courts to make it easier to collect fines imposed on individuals who breach its rules. 
Six provinces have now moved to provide this power to IIROC as well as other measures to enhance its “enforcement toolkit.” Elsa Renzella, senior vice president for registration and enforcement at IIROC, says provinces have been “very receptive” to enacting these changes. “It increases deterrence. The penalties are real. We can take a decision and register it with a court. It will be treated similar to a civil judgment,” she explains. Individuals sanctioned by IIROC “can’t simply flee the jurisdiction,” Renzella adds. At least 30 per cent of complaints it receives are related to older investors, so enforcement in this area has long been a priority for IIROC, she says.
Proposed changes to enhance investor protection in this area were also announced in June by the Canadian Securities Administrators, with a 120-day comment period that ends in mid-October. Among the recommendations are increased requirements to “know your client” and “know your product” to ensure that clients receive advice that best meets their “suitability” in terms of investments. However, an outright ban on embedded commissions is not among the recommendations, nor is the “best interest” standard that some regulators suggested, to impose a higher duty of care on advisors. 
In the case of older or vulnerable investors, though, one aspect of the OSC’s seniors strategy has received positive feedback from the financial services sector. If ultimately enacted, it would require registrants to make reasonable efforts to obtain contact information for someone the client designates as a “trusted contact person.” An advisor could then seek to speak to that person if there are concerns about a client’s behaviour or decision-making capacity.
While this person would not have the legal authority of a power of attorney, it is potentially another layer of investor protection, says Tamblyn Watts. “Older people are allowed to be financially foolish, as long as they are not acting under undue influence or have a diminished capacity,” she says. At the same time, she warns that advisors need to ensure that the “trusted contact,” who might be a family member, truly does have the client’s best interests at heart. “That person might be the abuser,” she states.
Where there appears to be consensus is that the role of a financial advisor is likely to become more complex and subject to more scrutiny when dealing with older clients.
“It is about finding the right balance between privacy and dignity and taking reasonable efforts to protect the client,” says Fish. However, he notes that these increased obligations are also taking place at a time when the wealth management sector is increasingly competitive and there could be significant reputational damage caused by a single advisor who does not follow rules or best practices. “You have to have the right system in place to pick up patterns and to reduce the number of files that might have to be escalated or brought to external counsel,” says Fish.
Negligent advice from an advisor, says Geller, is not only about the concern that it may attract the attention of a regulator. “The ability to sue the dealer is extremely easy. There is a high level of responsibility and reliance by the client,” he adds. Social media also makes it very easy to share information and complaints. “A lot of our cases start with one client and go to 80,” says Geller.
According to Tamblyn Watts, even a well-meaning and diligent advisor may be in a difficult position when dealing with an older client. “How do I know if the person truly understands? Capacity is a legal test, not a medical one,” she says.
The elder law specialist was also involved in training material for advisors, including videos, put together for the Investment Funds Institute of Canada, which posted them online this summer as part of its vulnerable investors resource centre. Elder-friendly practices, including client meetings, as well as explanations about capacity are included in the training content by the organization that acts on behalf of the country’s investment funds industry.
The Investment Industry Association of Canada, which represents more than 120 IIROC-regulated dealer member firms, says ensuring that aging clients are treated fairly is a priority. “There is much more training at firms. There are inter-disciplinary teams. There is more focus on the advisor having a meaningful understanding about the needs of the client,” says Michelle Alexander, vice president and corporate secretary of the organization.
At the same time, “this is not a homogeneous group,” stresses Alexander, about the term older investors. In fact, those in the field say that there is not any specific age when a person fits that description because, just like any investor, there can be significant differences in risk tolerance, wealth, financial knowledge and other areas such as the use of technology. “Compliance costs are increasing, so we hope to have some flexibility to help manage these issues. There is no one size fits all,” she says.
Stereotypes about older investors such as the belief there is a reluctance to use technology in this area — including services such as “robo advisors” — are also often incorrect, says Fish. “People wrongly assume that older people do not like electronic communications. In my experience, the opposite is true,” he suggests.
“We need to use this technology. It is also a way to serve less well-to-do clients, at a price they can afford,” he says. 

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