Advisors unfairly targeted says Advocis chief

(April 29, 2005) Securities regulators are unfairly targeting advisors in the Portus Alternative Asset Management fiasco while shirking their own responsibility, and the national media coverage isn’t helping, according to the president and CEO of Advocis.

“We take strong objection to the implication that advisors who referred their clients to Portus funds were only motivated by lucrative referral fees and the further notion that all advisors act outside of a client’s best interests,” says Steve Howard. “Financial advisors were as taken by surprise as were many large manufacturers and distributors in this situation.”

The defence of the industry comes on the heels of reports that regulators across the country are preparing enforcement actions against advisors and their firms. The enforcement action will likely claim that by referring clients to Portus, advisors had, in effect, given advice on a product they were not qualified to sell.

Since Portus was shut down by the OSC in February, advisors who referred clients to the product have been criticized as being largely motivated by lucrative referral fees. Howard refutes this accusation.

He says the focus on referral fees creates a “vacuum of trust” that taints the entire financial services industry as the consumer is inundated with negative media reports. Howard doubts the public’s ability to draw a distinction between the advisors who referred clients to Portus and those who did not.

“It’s irresponsible to make a mass, general statement and not provide the consumer with guidance on who is appropriately qualified and appropriately governed to protect their interests,” he says. “I don’t think the average investor is astute enough to make the distinction that when the Globe and Mail, or [OSC enforcement head] Michael Watson are talking about advisors, that there are distinctions they should bear in mind.

“It’s doing the whole industry a disservice and it’s limiting the consumer’s ability to succeed, because it makes them more wary of dealing with anybody. Consumers should have advisors.”

Despite criticism that advisors who referred clients to Portus failed their duty of due diligence, Howard points out that the OSC should shoulder much of the blame for the Portus fiasco, since the Commission was responsible for approving the product in the first place.

“Did the OSC, in approving the fund, approve that the fund was a valid product that was sustainable and viable, or did they simply approve that Portus had filed the right paperwork?” he asks. “Whether advisors recommended a limited amount of investment, or a maximum amount on behalf of their client, the fund wasn’t sound. The degree of wrongness is really lost against the point of ‘should the issue have been there in the first place?'”

If the OSC simply rubberstamped Portus’ paperwork, Howard is sure the same problems will happen again.

“Who’s going to stop it?” he asks. “If it happens again in the future, is it because advisors inappropriately recommended a consumer be in that fund, or is it because that fund isn’t viable or sustainable, and not properly supervised?”

He says there is no doubt in his mind that some of the referrals to Portus were inappropriate, but feels the regulators and the media are painting all advisors with the same brush.

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“I think if advisors behaved inappropriately, they should be sanctioned for their inappropriate behaviour,” Howard says. “There are mechanisms in place that the OSC could have relied on before now and should have relied on — that being the bodies that administer the conduct of advisors.”

He says disciplinary action should be taken at the association level, whether the advisors in question are members of the FPSC or the CLU Institute, both of which already have their own codes of conduct.

“What the OSC should be doing is working with these associations to make sure that those advisors are members of these associations and that they are governed in the manner that such professionals should be,” Howard says.

He says the very existence of these associations proves the advisory industry has “stepped up” in an effort to do their part to protect investors, but that the OSC generally ignores these efforts.

“I don’t think it’s wrong at all that these claims should be pursued, but I do think it’s irresponsible to send out headlines that say ‘The sins of the advisors’ and ‘Regulators to target advisors’ when this is clearly a three-part problem,” he says. “I’m only arguing for balance and clarity about the cause of the problem. There’s an absolute imbalance in the presentation.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(04/29/05)