In the spring of 2015 the OSC Investor Advisory Panel hired PlanPlus to research risk assessment practices in Canada in comparison to best practices around the world. Its findings painted a grim picture of what advisors are doing – MFDA or IIROC – to assess a client’s risk profile.
"The know-your-client rule or suitability rule requires that an adviser know their client well enough to give them suitable recommendations," said IAP member Connie Craddock last October on the release of the OSC report. "Part of it is understanding what the investors' tolerance is for risk. Is the client able because of their circumstances and are they willing to take a lot of risk, are they conservative, do they need to preserve their capital?"
For many seasoned pros the risk profile forms given to clients are a small piece of the puzzle when it comes to assessing risk tolerance. In other words, KYC means to truly know your client.
Ottawa IPC advisor Bob Roby’s been working in the industry for more than 30 years and believes this is a systemic problem that’s been going on for some time.
“It’s so unfortunate how the industry has misled the investing public for so many years,” wrote Roby. “For example, banks push GIC’S as investments citing their safety. Investors love the words ‘safety’ and ‘guaranteed’. Banks love that investors love these words because the banks are making huge profits on the backs of the misinformed by utilizing these funds to lend out the back door to the same consumers at much higher rates than what the banks are paying. Sounds like a great deal?”
While assessing risk is a big deal, it’s important that advisors also understand the context in which clients evaluate this risk. The veteran advisor provided WP with a good example of what exactly is meant by context and risk.
“The real rate of return, which is rarely if ever pointed out is the rate of return minus taxation and inflation. Therefore at current rates a 5-year GIC would have an ATR of -1%,” wrote Roby. “I remember back in the 80’s when GIC rates were at 18% and everyone was so happy.”
But any advisor who’s been around the block knows that there’s more to the story.
“A brief look back would actually show the ATR as 18% minus 13% inflation for a net of 5% less taxes on the 18% for an ATR of minus 3%,” Roby emphasized. “Based on a rate of 5%... if inflation is 3% and taxes 2% you break even, a better result than the 18% GIC.”
So, is 2016 the year risk becomes understood? Not if risk profile questionnaires don’t change it won’t.