Markets to blame? Investor complaints on the rise, CSA says

(January 22, 2003) Investor complaints to securities regulators have increased over the past couple of years, likely the result of a lengthy bear market, says Doug Hyndman, chair of the Canadian Securities Administrators. For the second straight year, concerns about financial advisors, including the suitability of investments, topped the CSA’s annual list of complaints.

“Advisors are on the front line dealing with clients, so it’s probably not surprising that’s where most of the complaints come from,” says Hyndman.

Although the CSA does not compile exact figures, Hyndman estimates the total number of complaints to the country’s 13 provincial and territorial securities regulators in 2002 would be in the thousands.

“There’s been a bit of an increase in the last couple of years, reflecting what’s going on in the market,” he told Advisor.ca. “Although, maybe not as much as you would have expected, given the severity of the downturn.”

The top five advisor-related complaints were suitability, lack of registration, distribution of illegal securities, scams or frauds, and customer service.

Suitability appears perennially on the complaint list, Hyndman says, indicating that advisors should ensure clients are clear about their investment objectives and expectations.

“I think most of these problems are not as a result of bad people doing bad things,” the CSA chair says. “Most of them are a result of misunderstandings and differences in expectations. Clients are often guilty of not being clear of what they want and not fully understanding the trade-off between risk and reward.”

The CSA recommends investors make sure their investment needs are discussed in depth at the time of opening a new account and that advisors accurately record that information.

Hyndman suggests advisors take detailed notes in all client meetings, adding that the standard “know your client” forms can be inadequate. “In many cases, KYC forms don’t provide enough depth for the two sides to have good agreement on what they’re trying to achieve.”

The Ontario Securities Commission, which provides a detailed breakdown of complaints, received 112 complaints about customer service issues, such as discrepancies on account statements, and 104 regarding suitability of investments in fiscal 2002. That’s a decrease from the same period in 2001, however complaints about scams, disclosure and corporate governance were higher.

That’s probably because investors are worried about the credibility of the public securities market in the wake of Enron and other accounting scandals, Hyndman says. “They become vulnerable to different kinds of investment that are outside the mainstream, and those are usually more risky than the public markets.”

Despite the rising number of complaints, the totals are relatively small compared to the amount of general information requests commissions receive. For instance, the OSC reports nearly 25,000 telephone or e-mail enquiries in fiscal 2002, but only 553 complaints.

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Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca