The North American Securities Administrators Association (NASAA) is an association of securities administrators from Canada, the United States of America and Mexico, whose mandate is to protect the investing public. The NASAA recently released an Investor Advisory focused on the practice of “cross-selling” investment products. While the Investor Advisory is not a policy statement per se, it does signal that the practice of cross-selling is going to come under increasing scrutiny by regulators.

Cross-selling is a common tactic used by investment advisors and banking representatives to sell additional or new types of securities to their existing customers. The marketing strategy may be purely informational, with customers being notified of the range of financial products and services that are available to them. However, as the NASAA cautioned in its Investor Advisory, regulators appear to be worried that cross-selling is being used to take advantage of loyal customers. This led the NASAA to note that cross-selling is a “growing concern” for securities regulators.

How are investment products typically cross-sold?

Cross-selling can be done in many different ways – the common factor is that this strategy targets existing (rather than new) customers. From a financial organization’s perspective, cross-selling can be beneficial in that it not only increases revenue derived from any given customer, but also protects the customer from switching to a competitor. The NASAA has stated that the position of financial services companies is that cross-selling “is a fair and highly effective marketing strategy”.

Why then is the NASAA concerned? The NASAA has noted several cases in which aggressive cross-selling was used by investment advisors and banking representatives to encourage their existing customers (with whom they had already built good will) to investing in unsound or high-risk investments. Especially in instances where the customer is “financially vulnerable, elderly or suffering from diminished capacity, or otherwise easily swayed by sales tactics”, cross-selling ought to be used carefully and with the customer’s best interest in mind. The NASAA warns “if an advisor or bank representative is not acting in the client’s best interest, this could be considered a breach of fiduciary duty.”

What have investors been told to watch for?

In its Investor Advisory, the NASAA notes that all of the following are “red flags” that investors ought to watch for in a cross-selling scenario:

  • unregistered investment professionals or the sale of unregistered products;
  • aggressive sales tactics, such as high-pressure sales pitches that create a false sense of urgency (e.g. this is a “once in a lifetime opportunity” and you “must act now”);
  • investments promising high returns with little or no risk (i.e. investments that sound too good to be true);
  • investment offerings that are unsolicited, or those that investors are asked to keep secret from others; and
  • investments with limited supporting information or no written documentation demonstrating their legitimacy.

To protect themselves, the NASAA advises investors to be skeptical of high-pressure sales tactics, ask questions and demand supporting research and documentation. The NASAA also suggests that the investor seek independent professional advice. Finally, the NASAA states that “regardless of how long you have known a person or been conducting business with an individual, it’s worthwhile to do a quick search of the [local regulator’s] database to confirm up to date licensing and compliance.”

What are the takeaways for financial organizations?

Financial organizations that routinely use cross-selling to sell their investment products should be aware that this marketing strategy has been, and will likely continue to be, scrutinized by securities administrators. The behaviors that the Investment Advisory cautions against are things that are already either contrary to best practices or simply illegal, regardless of whether they are deployed in respect of existing customers or new customers. As such, the Investment Advisory’s list of things to watch for should not be controversial or problematic for investment advisors that follow best practices.

However, the Investment Advisory makes a fair point in that existing clients are potentially more receptive to investment advice than new clients. That is obviously a boon to the advisor and the Investment Advisory does not suggest that there is something inherently wrong with attempting to leverage existing relationships. However, the Investment Advisory does signal that regulators are going to be particularly sensitive to situations where existing client relationships are leveraged as a way to place clients in inappropriate investments. Investment advisors may want to consider whether their existing policies and procedures appropriately take into account the potential for cross-selling to be abused.