New note stresses importance of advisors and dealers adhering to their suitability obligations
Investor advocacy organization Kenmar Associates has issued a new warning to investors on lowball settlement offers, calling it an “unconscionable practice” that can cause severe emotional and financial stress on top of investment losses from inappropriate investment recommendations.
“It is bad enough for Firms to provide bad advice but to intentionally reduce a fair settlement represents a profound disrespect for clients,” Kenmar said in a new note.
Echoing previous statements, the group said that confidence in retail investors’ general unwillingness or inability to challenge lowball offers, as well as a low likelihood of regulatory intervention, encourages the practice of offering less-than-fair compensation for valid complaints.
“Unfortunately, based on objective evidence, you cannot count on regulators to protect you from low-balling even when [OBSI] compensation recommendations are reduced in plain sight,” Kenmar said.
The note cited several examples of comments from substantive responses that place responsibility for losses on the complainant or other factors. While a firm may claim that losses were due to unfavourable conditions in the financial markets, Kenmar countered that firms have a duty to mitigate losses with stop-loss orders, derivatives, monitoring of portfolio risk, and other measures.
The organization also noted the fundamental obligation to make suitable recommendations, stressing that the responsibility to ensure products are suitable rests solely on advisors and dealers. It added that the duty cannot be substituted, avoided, or transferred to clients, as made clear in a ruling by the Alberta Securities Commission in 2001.
“Firms cannot substitute their own judgment for that of the client,” Kenmar continued, stressing that a client’s financial ability to withstand market fluctuations over the long term should not be used as a basis to override their preference to avoid high-risk investment strategies or products.
Similarly, the note argued that risky investments would be unsuitable for investors who seek a monthly income and have sufficient assets to achieve that objective through low-risk investments, regardless of any other elements of KYC.
A high-integrity substantive response letter, Kenmar said, should include:
- The firm’s final decision in plain language;
- A statement of relevant facts;
- A clear outlining of any assumptions;
- The rationale behind the decision;
- Rules/principles and standards applied to the decision;
- Documents, files, and records used in the analysis;
- When compensation is offered, the basis behind the method of loss calculation; and
- A clear indication that a rejected offer can be appealed for free with OBSI up to $350,000.
