Seniors’ group calls for fund industry overhaul

(September 23, 2004) Advisors should annually update “know your client” (KYC) forms and provide complete information on fund fees and compensation to clients on request, says a report from CARP, Canada’s Association for the Fifty-Plus. That’s just one suggestion from a 20-page report that takes the fund industry to task and makes numerous recommendations for reform.

Updating the KYC form every year would “bind the advisor to the needs of the client and make actionable advisor’s recommendations that are clearly contrary to the interests of the client,” says the report.

“An investment unsuitable to financial objectives is one of the most frequent complaints among investors,” CARP notes. “Many advisors, planners and brokers are not adhering to the KYC criteria to make prudent investment recommendations.”

A standard checklist form that highlights mutual fund characteristics such as risks, fees and advisor compensation should be made available at the client’s request, the report suggests, adding that undisclosed marketing arrangements that encourage advisors to recommend one fund over another should either be disclosed, or prohibited entirely.

The report was produced by CARP and the Small Investor Protection Association, with the participation of a number of well-known investor advocates, including Stan Buell, Ken Kivenko and Robert Kyle.

CARP claims that Canadian fund investors, particularly seniors, are losing money due to deficient regulations, abusive industry sales practices, excessive fees, inadequate governance and lax enforcement.

The report includes 16 additional recommendations to enhance investor protection, including the creation of a federal Investor Protection Agency, which would oversee provincial regulatory bodies, set up a central database of industry participants and complaints and monitor dispute resolutions. The agency would also have the power to order investigations or inquiries and order restitution in cases of wrongdoing.

‘The investor is ignored when setting new regulations or amending existing ones,” the report states. “The reality is that self-regulatory organizations, such as the IDA and the MFDA, have not provided a fair balance between the interests of investors and those of their member firms. In fact, inherent conflicts of interest exist within the regulatory system.”

Other recommendations include legislating prompt and fair handling of investor complaints and introducing new laws that would protect whistleblowers. The veil of secrecy surrounding settlement agreements (which often include confidentiality clauses) should be lifted, CARP adds, at the investor’s discretion.

CARP also wants securities regulators to publicly issue statements whenever an investigation involving a financial services firm is initiated. “This would permit investors to make a more informed decision when considering whether to maintain or open an account with a prospective dealer.” Canadian regulators usually do not disclose whether a specific firm or individual is under investigation until the procedure is complete.

The seniors’ group would also like to see the creation of an investor protection fund for mutual fund dealers, similar to the Canada Deposit and Insurance Corporation. The MFDA did begin the process of setting up such a fund, but put the project on hold in response to industry concerns and is currently in talks with the Canadian Investor Protection Fund.

Fund companies should improve their annual reports and financial statements, CARP believes, by clearly displaying benchmark comparisons and breaking down fund fees, as well as providing more insight on how well the firm’s investment strategies are working.

The report, called “Giving Small Investors a Fair Chance: Reforming The Mutual Fund Industry,” was produced earlier this year and was originally scheduled for release in June, but was put on hold because of concerns its message would be lost during the federal election campaign.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com