Commentary

Suitability continues to be the single largest category of complaints in investments. We see three factors contributing to the prevalence of suitability complaints:

• the increasing number of defined contribution pension plans, making people who used to be plan beneficiaries responsible for their own investment decisions;
• the growing complexity of financial products, most recently evidenced by the troubled Asset-Backed Commercial Paper, or ABCP, but also in Principal Protected Notes, income trusts, and other financial instruments beyond the comprehension of most investors and a number of advisors; and
• widely acknowledged low levels of financial literacy among Canadians.

All of these factors reinforce the need for well-informed advice, independently and clearly delivered, to retail investors. Unfortunately, they also give rise to situations where the unsophisticated investor is ill-served by an advisor, either through error, incompetence or outright abuse.

We note the importance of the requirement that advisors must “know your product” in addition to “know your client.” Some of the largest retail-level investment frauds and losses in recent history have been fuelled by inadequately informed advisors selling products they knew little about, in some cases to investors who shouldn’t have held them.

As we have said in past years, behind virtually every suitability case is a failure of disclosure, or poor communication. Full and plain disclosure is not a magic solution for every suitability issue, but it would prevent the majority of suitability complaints we see every year.

Major Issues in 2008