How Banned Advisors Still Sell Investments

Investment advisors that provide advice to Canadians are typically registered through one of two bodies. The Mutual Fund Dealers Association (MFDA) and the Investment Industry Regulatory Organization (IIROC) are both self-regulatory organizations that follow the rules set out by the various provincial securities regulators.

There is however a third option and it’s not always being used for legitimate reasons.

In addition to actual insurance, life insurance companies offer investment products often called “segregated funds” that any insurance licensed salesperson can sell to their clients without holding a license with either investment body. While segregated funds are good niche products that are a great option for some situations, they certainly aren’t meant for everyone.

No doubt there are some who sell only these types of investments that still try to have their client’s best interests in mind, but they are not meant for everyone and many investors should not be using them. Worse still though, is that some are using this loophole for one of two far more sinister motives.

The first motive involves a simple unwillingness to adhere to regulations that are put in place to protect consumers. Licensing by the MFDA or IIROC involves significant disclosure and compliance requirements that are strictly enforced. I have met far too many “advisors” that either used to be investment licensed or chose not to get licensed as they felt that the regulations were simply too challenging or annoying.

They’ve stated that they would rather just sell segregated funds and avoid dealing with all of these “rules”. And yes, they know full well that by doing this, they may not be offering the best options to their clients and may be forcing their clients to pay higher fees than necessary.

A couple of years ago, when the Canadian Securities Administrator’s Client Relationship Model (better known as CRM2) rolled out, we saw an even bigger shift of assets into these segregated funds to avoid transparency. CRM2 requires securities dealers to provide greater fee transparency and disclosure and segregated funds are again exempt from these rules. Some saw this loophole as a way to avoid telling their clients how much they charge in fees.

The second and even more disturbing motive in selling investments solely through the insurance platform is due to being permanently banned from the securities industry. Yes, you read that right – there are advisors out there that have been permanently banned from selling securities for wrongdoings that simply move all of their client’s money over to segregated funds and keep on working.

While most regulators (both securities and insurance) realize that this is a problem that needs to be fixed, the framework needed to make this happen is not yet properly established. There is still limited information sharing about enforcement decisions between many of the provincial and federal regulatory bodies and even if the appropriate insurance authorities are made aware, they still have to conduct their own investigation into the incident(s) in question which all takes time.

Since most bodies don’t have formal information sharing arrangements, the insurance regulators rely on reporting of the disciplinary actions by the licensees themselves, something they may not be willing to disclose.

So what can you do to protect yourself? Take the time to find out what types of licensing and designations your current or prospective advisor holds. The investment advice marketplace is confusing and it’s up to you to ensure that you are receiving advice from someone who’s fully qualified and bound to the highest standards of regulatory oversight.

If your advisor has placed all of your investments with an insurance company, ask if they also hold an MFDA or IIROC license. If they don’t, it may be time for a second opinion.