On September 17, 2015, the OSC, IIROC and MFDA released the results of their joint “Mystery Shopping for Investment Advice” initiative. This exercise, conducted in 2014, involved sending individuals to meet with Ontario-based advisors, including investment dealers, mutual fund dealers, exempt market dealers and portfolio managers. While the individuals purported to have a lump sum to invest, no real funds were actually provided for investment, which meant that the investigation could deal only with the initial stage of engagement between investor and advisor.
The aim of the study was to conduct 37 or 38 meetings with each of the four advisor categories, for a total of 150. However, the number of meetings actually conducted (105) fell somewhat short of this, largely because of the difficulties in arranging meetings with exempt market dealers (EMDs) and portfolio managers (PMs). Only 11 EMD meetings and 13 PM meetings took place, rather than the 37 that had been anticipated in each case. By contrast, 30 investment dealer meetings and 34 mutual fund dealer meetings went ahead, out of the 38 that had been anticipated in each case. Of the 105 meetings actually conducted, only 88 produced enough data to be used in the study.
Compliance was generally good, with 63% of the “shops” meeting or exceeding all expectations. With respect to the 88 meetings that ultimately supplied the data for the study, the report shows a fairly consistent level of dissatisfaction (around 30%) with overuse of jargon by all classes of advisor other than portfolio managers. Similarly, about 20-30% of the advisors other than PMs did not disclose the range of products or services they offered. Fees were discussed at the initial meeting by 77% of PMs, 67% of investment dealers and 55% of EMDs but just 38% of mutual fund dealers. Advisor compensation, as distinct from fees, was discussed by approximately 20-30% of advisors in each of the four categories.
Specific investment recommendations were made in only 24 of the 88 shops, with seven of those 24 being deemed unsuitable for a variety of reasons, including a failure to evaluate the investor’s risk tolerance and a failure to adequately consider asset concentration. Among the 24 advisors who made recommendations (which did not include any of the PMs), 79% obtained adequate KYC information and 71% appropriately discussed product fees. While the figures are broken down by category of advisor, the numbers of each are so small that the differences among them are probably of limited statistical significance. No serious non-compliance requiring regulator action was uncovered in the course of the exercise.
According to the OSC’s press release, the next steps to follow from this initiative will be to use the findings to inform policy-making “with a view to improving the overall experience investors have when seeking investment advice.” Firms and advisors are encouraged to review the “Mystery Shopping” report (known as OSC Staff Notice 31-715), which details the level of compliance found with respect to many of the fundamental duties applying to advisors in Ontario and across Canada.