MFDA releases findings from industry-wide advisor review

MFDA releases findings from industry-wide advisor review

MFDA releases findings from industry-wide advisor review

In line with its statement of priorities for the year, the Mutual Fund Dealers Association of Canada (MFDA) has released its findings from an Approved Person sweep it initiated last year. Based on information from its Client Research Project, the analysis covered over 80,000 advisors and over 16 million client accounts, reflecting total investment holdings for all client accounts of MFDA members.

Industry-wide, the report found that overall asset allocations were consistent with widely accepted diversification and asset-allocation principles: some 55% of assets were in balanced funds with a mix of fixed –income and equity exposure, 14% were in fixed-income funds, and 31% in equity funds. That translated to an overall allocation of 60%-65% in equities and 35%-40% in fixed income.

“There were differences as expected amongst age groups, with clients between the ages of 35-44 having the highest equity exposure and clients over age 75 the lowest,” the report said.

Looking at risk rankings for mutual funds held in client accounts, roughly 75% had ratings of low-medium or medium based on their Fund Facts information. Funds with rankings of medium-high or high, on the other hand, accounted for just approximately 5% of total client assets.

The review also went deeper by identifying specific Approved Persons with atypical books of business compared to the general population. Specifically, the MFDA screened for advisors whose client accounts had significant concentration in high-risk sector funds, a majority of assets held in medium-high or high-risk funds, or had substantially all of their clients 100% invested in equity funds with no diversification into fixed-income investments.

“We also considered other information including the Approved Person’s history of complaints and enforcement actions, particularly those related to suitability,” the report added. For such high-risk advisors, the MFDA requested complete KYC information and current investment holdings; it also conducted interviews to know how they collect KYC information, their investment philosophy, how they present investment recommendations to clients, and their approach to suitability.

The detailed review of high-risk approved persons showed extreme investment patterns. Among the limited cases where it found significant concentration issues, most had already been identified by the member or MFDA staff, with actions being taken to address it; new issues are reportedly being met with appropriate regulatory action.

Another high-risk pattern was when an approved person had uniform KYC information across all or nearly all of their client accounts, raising doubts on accuracy with respect to clients’ individual circumstances. In such cases, there was also insufficient supporting documentation explaining how risk tolerance, investment objectives, and time horizons beyond what was on the KYC form. Cases of uniform KYC information also tended to have an investment pattern with all or nearly all clients being 100% invested in equity funds.

As a result of its review, the MFDA offered the following key recommendations and best practices:

  • Members should conduct regular periodic reviews of their approved persons’ books of business;
  • Members should have policies and procedures to assess risks relating to concentration in exempt securities or higher-risk sector funds;
  • Member policies should require sufficient documentation to support the determination of clients’ risk tolerance, investment objectives, and time horizon;
  • Specifically document information on any external client investments that may be a significant factor in determining KYC information and investment recommendations at the member; and
  • Take steps to reassess KYC information and re-perform the KYC collection process when there are significant concerns about the accuracy or adequacy of information collected by an advisor.

 

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