The group welcomes efforts to distinguish advice from information, and calls for a robust suitability process
In response to IIROC’s proposed guidance on order-execution only (OEO) services and activities, the IFIC has filed a submission emphasizing the importance of a robust suitability process.
“Any proposal that would allow OEO registrants to make investment recommendations without providing suitability and KYC must be considered in the broader context of regulatory reform,” said IFIC president and CEO Paul Bourque. He noted that the CSA has issued several proposals to increase investor protections, which include strengthening suitability and enhancing the know-your-client process.
In its proposed guidance, IIROC said that OEO firms are not required to determine whether an order is suitable for a client as long as they made no recommendation to the client. It also noted that OEO firms provide several tools to investors, including model portfolios – which it believes constitute a recommendation.
“Notwithstanding this view, we appreciate the potential usefulness that model portfolios provide to OEO clients,” the organization said in its proposed guidance, floating the possibility of extending the suitability exemption to firms that provide certain limited model portfolios.
While lauding IIROC’s efforts to clarify the difference between investment advice and mere investment information, the IFIC called for a consistent and principled approach to KYC and suitability across all regulators and self-regulatory bodies. “We must ensure that investors who seek advice are protected by a robust suitability and Know-Your-Client (KYC) process, no matter which platform they choose,” Bourque said.
IIROC’s proposed guidance also suggested the existence of an “advice gap.” According to the organization, many full-service firms have minimum asset thresholds for new clients, driving those who can’t reach the threshold to alternatives, including OEO firms. Since such firms cannot provide advice, investors with lower amounts of investments may be unable to receive recommendations.
“There is currently no advice gap in the context of mutual funds because funds can be purchased through a bundled fee model at a cost that is affordable to investors regardless of account size,” Bourque said. “A mutual fund account can be started today for as little as $25 per month. Many small investors would lose the ability to obtain advice for a nominal amount if bundled fees were prohibited.”
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“Any proposal that would allow OEO registrants to make investment recommendations without providing suitability and KYC must be considered in the broader context of regulatory reform,” said IFIC president and CEO Paul Bourque. He noted that the CSA has issued several proposals to increase investor protections, which include strengthening suitability and enhancing the know-your-client process.
In its proposed guidance, IIROC said that OEO firms are not required to determine whether an order is suitable for a client as long as they made no recommendation to the client. It also noted that OEO firms provide several tools to investors, including model portfolios – which it believes constitute a recommendation.
“Notwithstanding this view, we appreciate the potential usefulness that model portfolios provide to OEO clients,” the organization said in its proposed guidance, floating the possibility of extending the suitability exemption to firms that provide certain limited model portfolios.
While lauding IIROC’s efforts to clarify the difference between investment advice and mere investment information, the IFIC called for a consistent and principled approach to KYC and suitability across all regulators and self-regulatory bodies. “We must ensure that investors who seek advice are protected by a robust suitability and Know-Your-Client (KYC) process, no matter which platform they choose,” Bourque said.
IIROC’s proposed guidance also suggested the existence of an “advice gap.” According to the organization, many full-service firms have minimum asset thresholds for new clients, driving those who can’t reach the threshold to alternatives, including OEO firms. Since such firms cannot provide advice, investors with lower amounts of investments may be unable to receive recommendations.
“There is currently no advice gap in the context of mutual funds because funds can be purchased through a bundled fee model at a cost that is affordable to investors regardless of account size,” Bourque said. “A mutual fund account can be started today for as little as $25 per month. Many small investors would lose the ability to obtain advice for a nominal amount if bundled fees were prohibited.”
Related stories:
Robo-advisors ask for slack on know-your-client conversations
Proposed guide on order-execution only services and activities released
