Stromberg reports

Editor’s note: This article appeared in the first issue of Advisor’s Edge.

Glorianne Stromberg rocked the Canadian financial services industry with her 1995 report entitled Regulatory Strategies for the Mid-’90s: Recommendations for Regulating Investment Funds in Canada.

It has, more than once, been described as a scathing report on the mutual fund industry. To her credit, however, the (so-called) “Stromberg Report” stimulated much discussion leading to many industry and regulatory changes.

Later this month, she will release another report commissioned by Industry Canada’s Office of Consumer Affairs. Her mission? To further study how the Canadian retail investor should best be protected. We asked her to take part in a question and answer exchange, via e-mail, about the financial services industry, the role of financial advisors and planners, and about Glorianne Stromberg.

AE: In your view, what are the biggest challenges facing financial professionals serving the individual investor today?

I think the biggest challenge facing financial professionals is the need to remain relevant to their clients. There is a need not only to add value, but to be seen to be adding value.

This will require a substantial investment of time and resources in education, proficiency training, technological systems, controls and procedures. It will require the financial professional to adopt a client-needs focused approach as opposed to a product-biased approach.

For many financial professionals this means they’ll need to broaden their education, experience and training — not just with respect to “products” that are “sold” but also with respect to being able to provide overall financial planning and investment advisory services to clients. The objectivity of this advice and the assurance that client interests really do come first will become an increasingly valuable part of the service offer.

AE: In your view, what can individual financial advisors and planners do to ensure that they are best meeting the needs of their clients while still building successful businesses?

I think the most important thing for individual financial advisors and planners to do is to recognize that they will only build successful businesses if they are best meeting the needs of their clients. This involves a recognition that clients have integrated financial planning and investment advisory needs. Meeting these needs will require a whole new approach to proficiency and training to arm themselves with much broader competencies than the traditional training to sell securities and insurance provided.

AE: Your 1995 report expressed concern that not enough collaboration was being undertaken by the various course providers and regulatory bodies to develop common standards for financial planners. Much has been done since then and we now have the Financial Planners Standards Council. Any thoughts on these efforts?

I think it is very positive that there is a recognition of the need to develop common standards for financial planners. There is a lot of debate though, on what these common standards should be and whether the ones that have been adopted are designed to produce the agreed-upon competencies that anyone who holds him or herself out as being a “financial planner” should have.

The concerns centre around the fact that when you switch from a product or institutional bias to an overall client-needs based focus, the competencies vary. There is a concern that perhaps the cart came before the horse when standards were adopted prior to agreeing on what the competencies should be that are reflected in the standards.

Another area of concern is the grandfathering provisions. The concern here is that the previous training has been largely focused on product sales, rather than investment advisory and financial planning services. While many industry participants have a lot of knowledge and experience, I think the public would expect if one is going to hold oneself out as an investment professional — a financial planner — such a person would have been trained appropriately and would have passed the requirements for certification as an investment professional.

A further area of concern is the examination methodology, which seems to be designed to test rote memory rather than “judgment.”

I’ve yet to see a real-life situation where the needs can be adequately dealt with simply by ticking off the right box in a series of multiple-choice questions. In other words, the testing methodology needs to be designed to test the ability to apply the concepts covered in the courses in a practical manner, with a view to assessing the level of understanding of the course material and the ability to apply it in a responsible manner.

AE: On May 1, the new Sales Code Rule will have come into force and the industry will be bound by this rule, which is based on The Investment Funds Institute of Canada (IFIC) guidelines for ethical sales practices, an area that you focused much attention on in your 1995 report. Are these standards satisfactory, in your opinion? Will they adequately protect the Canadian investor?

The Sales Code Rule should go a long way toward protecting the Canadian investor. Only experience will tell whether the standards are satisfactory.

I happen to think that the Canadian investor would be better served if the persons he or she turned to for advice were truly independent. I expect that as Canadian consumers/investors become more knowledgeable and aware of choices, there will be a competitive advantage for those investment professionals who truly can differentiate themselves by being independent and whose compensation reflects such independence.

AE: What do you think of the comments made by John A. Geller, then acting chairman of the Ontario Securities Commission, on the need for tighter regulations on the use of educational seminars featuring speakers, partially paid for by mutual fund companies? Is more regulation really necessary?

My 1995 report made reference to the use of investor education as a marketing strategy. Many of the people I spoke with expressed concern about abuses that were taking place in the name of investor education. They suggested and I agreed with them that there was a need to develop a code of standards and ethics regarding investor education — what should be done and what should not be done. In addition, there is a need to provide some quality control over the programs that are offered by the various industry participants. It was also suggested that before an industry participant should be allowed to offer an investor education seminar or course, he or she should be required to successfully complete a training course designed to enable him or her to comply with the code of standards and ethics regarding investor education.

These measures, if they were to be implemented, should go a long way to addressing the problems.

I also think this is an area where mutual fund companies and others should take a fresh look at what they are doing and ask themselves whether they really want to be seen as sponsoring activities that lead to abuses of the nature that Geller was referring to. It is in their self-interest to take a fresh look. If we were to develop a more litigious climate in Canada, they might well find themselves on the wrong end of a lawsuit.

AE: This month you are scheduled to release a report for Industry Canada’s Office of Consumer Affairs, which will be shared with their provincial counterparts. What was the mandate given to you for this next report and what do you, personally, hope to achieve?

I was asked to review the requirements for the reasonable protection of the retail consumer/investor who is increasingly turning to investment funds as a source of retirement income. The Office of Consumer Affairs is interested in this area from the perspective of consumer protection and the adequacy of consumer protection laws in the current environment. The review will:

• assess where the retail customer was prior to the Stromberg Report, changes made after the Stromberg Report that have benefited the consumer and what still needs to be done;
• identify impediments to changes that would benefit the retail customer;
• recommend what facilitating role governments could play to bring about changes that would increase individual consumer/investor sovereignty and control over their assets, with specific recommendations for initiatives that could be undertaken by the Consumer Measures Committee;
• identify mechanisms that would enable retail investors to better identify their goals, the means of achieving them and to assess risk; and
• review consumer redress and compensation mechanisms with a view to identifying how the retail consumer receives greater protection or less, depending on where the purchase is made.

It is expected that the review will be completed by June 30, 1998.

AE: What sort of response have you had from the industry to the news that you are going to be writing another report?

The industry response has been very positive — overwhelmingly so. I hope I can do justice to the expectations.

AE: If you could change one thing in the financial services industry right now, what would you do?

I’d bring all types of arrangements whereby money is managed on a collective basis, directly or indirectly, under a common regulatory structure.

AE: How do you hope to be remembered?

I hope to be remembered as a person who helped to “do right things right” and who made a difference.