PMAC COMPLIANCE OFFICERS NETWORK. Advising the Senior Client

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1 PMAC COMPLIANCE OFFICERS NETWORK Advising the Senior Client Sean D. Sadler Rene Sorell June 16, 2015 Doc v1 INTRODUCTION 2 In 2014, IIROC reported that unsuitable investments represented 40% of IIROC s disciplinary actions. The vast majority of these cases involved senior citizens. The baby boom generation is the largest demographic cohort in Canada and includes those born between 1947 and 1966 who are now in the 48 to 67 age range. By 2036, it is expected that one in four Canadians will be over age 65. Life expectancies continue to increase. More and more of the adviser clients will be older and some will start to experience diminished capacity during the period that an adviser works with them.

2 3 The senior cohort is not an homogenous cohort and the investment advice needs to be tailored to the individual circumstances of the client. Despite this, it is important for the adviser to have sensitivity and awareness to the general proposition that seniors are more susceptible to physical and mental limitations than when they were younger. This type of client brings the adviser to the place where registrant regulation meets the law of capacity. The OSC has recently published a study on the financial concerns of older Canadians. Several implications that emerge from the OSC Study: 4 1. Older Canadian should not be treated as a single group for policy purposes, but rather as 3 distinct groups: 1) pre-retired.; 2) retired (under age 75); 3) retired (over age 75). 2. Planning to deal with the unexpected needs to be a bigger part of financial planning, both before and after retirement. 3. There needs to be more planning for health management and its financial implications, Financial advice needs to address healthrelated issues, both in terms of saving for retirement and in terms of managing spending during retirement. 4. There is an opportunity to develop online tools to help people plan for the unexpected. Most obvious needs are tools to predict the impact of inflation and future healthcare costs. People also need to understand how long they are likely to live and plan for that. 5. Fraud is a significant problem that merits attention, affecting approximately 60 out of every 1,000 older Canadians.

3 Obtaining and updating KYC 5 The adviser s duties for the collection and updating of KYC information for seniors are the same as for any other client but the types of questions that should be asked are somewhat different. The senior client has little or no time ahead of them before they will need to call upon investment savings to sustain their living standards. Accordingly, advisers should obtain answers to the following questions: 6 When do you want to retire? Do you have pension entitlements? How much money do you need to support your lifestyle? What special expenses or purchases do you envisage in your retirement years? Are your parents alive? Do they depend on you and do you expect an inheritance? Do you have children or grandchildren that are dependent on you? Do you have a will and a financial power of attorney? Do you have an emergency contact that the adviser can contact if the adviser cannot reach you? Do you have confidence that you can instruct the adviser or would you feel better if a family member or a trusted friend had the power to instruct the adviser?

4 7 Once the KYC is collected it is important to have frequent contact to determine if any of the personal circumstances of the senior client have changed. More than with a younger client, it is prudent to have a face to face meeting with the senior client to give you better insight into whether the client is experiencing any cognitive impairment. You should arrange to meet your senior clients in person at least once a year. 8 If the senior client is still working, the adviser should request of the client, in writing or by , that the client must inform the adviser as soon as a retirement date is identified. Once retirement arrives, the client leaves the accumulation phase of investing and enters into the distribution phase. The KYC will need to be updated to reflect this material change in the client s life.

5 9 Thorough practices around the KYC collection and updating process are an important way to protect the adviser from litigation and regulatory risk because: The securities regulators have low tolerance for the mishandling of seniors accounts and will take regulatory action quicker than they might otherwise would if the client was not senior. Seniors often have children enter the relationship with their investment advisers when problems show up in the account and the children may be more inclined to react in an adversarial way against the adviser and allege that the KYC was inaccurate. Seniors have much less time to overcome capital losses than younger clients and may be more inclined to seek compensation on the basis that the KYC was not sufficiently complete. Investment suitability 10 The suitability obligation that applies to advisers in recommending investments to the senior client is the one that has more risk to the adviser than any other client. In most cases, advising the senior client requires a different approach to suitability than would be the case for a younger client. As a client ages, their investment time horizon, goals, risk tolerance, liquidity needs and tax status will change. The ability of the senior client to recover from capital losses is limited by the shortening of the time horizon. A younger client may have more modest savings but has more earning power. A senior client may have more savings but has limited or no earning power. Accordingly, the adviser should take into account these changes and carefully review the portfolio to align it with the maturing client s circumstances.

6 11 A potential pitfall for the adviser is to assume that, because the senior client is an accredited investor by virtue or his or her net worth, the client is therefore eligible to purchase accredited investor products. Many senior clients qualify as in the accredited investor category based on their saved capital, not their income. In such cases, the adviser should carefully consider whether the client should invest in the product because the client s capital is the source of their income. Eligibility is not the same as suitability. Another risk to the adviser arises when the senior client requests that the adviser purchase a security for his or her account that the adviser considers unsuitable. It is prudent that the adviser document very clearly the advice given to the client to not pursue the investment. Regulators and courts are very sympathetic to senior investors that suffer losses and will not necessarily let unsolicited trades go by without consequence to the adviser if it is not clear that the adviser discharged the suitability obligation. A recent Ontario court decision (Stradiotto v BMO Nesbitt Burns) on broker negligence is worth noting as an example of the court s views on dealing with the senior client: 12 The broker-dealer failed to regularly update the KYC for a client and particularly after the client retired: [151, 168]. Client was a recently retired lawyer, had some investment knowledge and experience but was dependent on his advisor to pick stocks. Client had low risk tolerance. Client always took advisor s recommendations. Client had made good records of his statements to investment dealer that he was dependent on investment dealer to make all decisions. Court emphasized the cornerstone importance of the KYC process [34]. As a consequence of not updating the KYC following the client s retirement, the broker fell below the standard of care expected of investment dealers. That standard is informed by the standards and practices of investment dealers laid down by IIROC and other securities regulators. * References are to paragraph numbers in decision at (2015) 123 OR (3d) 184

7 13 The court said that by failing to update the KYC and respond to client concerns, the broker was not able to properly monitor the client s account for investments suitable for a retired client. Court needed expert evidence to assess whether client s target portfolio mix had been achieved and what industry rules and standards were. The client is not exposed for contributory negligence unless he has a role in selecting stocks [122]. Broker s duty of care is inversely proportionate to experience and skill of client and degree of independence client asserts [128]. Senior focused supervision and compliance 14 Supervision of seniors related compliance issues requires the UDP, CCO and other supervisory personnel to monitor the senior client account activity. U.S. and Canadian regulators have noted that helpful monitoring techniques include: Using trade activity reports to identify anomalous trading activity. Is there more trading in one or more senior accounts than other accounts handled by dealing representative. If so, what is the explanation for that? Understanding how much of adviser' client base is represented by seniors and conducting spot audits on senior accounts for unusual trading activity. Creating specific policies and procedures for the handling of senior clients. Identifying age as a prima facie risk factor for certain types of investments. Educating sales people on how to communicate with the senior client.

8 15 Requiring an adviser to document suspected diminished capacity or elder financial abuse and escalate the issue immediately. Clearly designating the individual or groups to whom the securities professional is to escalate the matter, e.g., a designated member of the compliance department or a specially-created senior task force within the firm. Training employees to escalate early - at the first sign. Embedding escalation procedures in employee training and continuing education courses. Prohibiting the adviser from making securities recommendations to the investor or investments in the account until the concern no longer exists. Communicating with the investor s designated emergency contact or the person with power of attorney for the investor. Conducting a review of the investor s account and identifying any transactions or patterns that could indicate a problem (i.e., financial abuse by a securities professional or other individual). 16 Maintaining frequent contact with the investor to assess any new developments. Having a manager or designated individual communicate with the investor along with the adviser who has direct responsibility for the investor s account. Notifying the compliance department of further conversations with the investor, and involving them as appropriate. Consulting appropriate authorities to determine next steps, which may include a government protective services organization, if elder abuse is suspected. Documenting any contact with the compliance department in the investor s file. Assigning investment objectives to each product that adviser sells in order to aid advisers in assessing the appropriateness of the product for a particular investor, and to facilitate comparisons between the objective of the product and the investor s stated investment objective by supervisors and compliance personnel.

9 17 Conducting periodic supervisory interviews with advisers to discuss the portfolios of their senior investors. Conducting periodic calls with senior investors to confirm whether there have been changes that would impact the investor s account information, such as financial changes or changes to their investment objectives. Confirming with the investor directly whether particular transactions were solicited or unsolicited. Using financial planning tools that help investors plan for retirement and anticipate expenses, lifestyle changes, and goals during retirement. The tools provide guidance to securities professionals regarding investment choices that may help the investor reach their stated objectives. Using a filtering program based on age and investment objectives to assist advisers in selecting appropriate products for investors. Requiring special supervisory review of all new account forms reporting investment objectives more aggressive than income for investors over a certain age. 18 Maintaining trade blotters that contain account information (such as age, net worth, investment objective) alongside the transactions for ease in supervisory review. Restricting high-risk trading for investors over a certain age unless pre-approved. Using exception reports to isolate activities and accounts for additional review, such as RRSP distributions above the minimum required distribution, or investors over a certain age that list speculative as an investment objective. Conducting specialized reviews of new accounts that are opened as guardianship or committeeship relationships for verification of proper documentation. The burdens of dealing with seniors may result in portfolio managers declining to accept or continue working with some clients.