Advisors should prepare themselves for a new way of handling clients’ problems, because OBSI’s dispute resolution service will be mandatory as of August 1.
The ombudsman’s office independently reviews complaints and can make non-binding recommendations regarding restitution. The complaint process is outlined in NI 31-103, Registration requirements, exemptions and ongoing registrant obligations. Once the rule changes come into effect, every firm will be required to send a notice to clients explaining the new complaint process.
If a client has a complaint, he should tell a firm in writing what went wrong, when it happened and what his expectations for remedy are. If an advisor receives a complaint, he must pass it along to the compliance department so it can investigate and respond. Firms should make it clear that advisors shouldn’t attempt to deal with a complaint themselves. Every action the firm and its compliance department take should also be well documented, because OBSI or the courts may be involved later.
Within five business days, the firm should tell the client it received his complaint. That also gives the firm a chance to ask for details about what went wrong in the client’s eyes. The advisor will be able to explain what he believes happened when the compliance team interviews him as part of its investigation. Compliance will examine the complete client file, the advisor’s notes and his rationale for making the investment recommendation. If it determines the advisor is at fault, the firm will offer a settlement, likely charged back to the representative. If it’s a serious problem, the firm may place the advisor under close supervision, terminate him and report the transgression to the regulators. Alternatively, a firm may decide that a client has no cause for complaint, in which case the client’s next avenue of complaint would be OBSI.
The client can also turn to OBSI if a firm doesn’t provide a decision within 90 days, or he isn’t satisfied.
OBSI can recommend compensation up to $350,000, but increasingly, firms have ignored compensation recommendations altogether. In that case a client may pursue his claim in court, which could be costly for all involved. A firm’s liability would be at the discretion of the presiding judge.
What can advisors and firms do to protect themselves?
As always, advisors should take detailed notes of meetings and communication with clients. It’s imperative an advisor’s reasoning for an investment decision is put in writing. Before processing a trade, the compliance department should also review the proposed transaction in light of the client’s financial situation and investment objectives.
Advisors must also explain all the features and risks of an investment and confirm the client understands. Nothing should be ambiguous, or the client could complain he wasn’t fully informed. This is particularly important for investments in the exempt markets, which are less liquid and often more risky than primary markets.
All firms must keep a complaint log. If a particular advisor a frequent subject of problems, their activities will have to be closely monitored. It may be that the advisor isn’t going over investment details well enough with clients.
Firms should develop a supplemental investor questionnaire in addition to the KYC form to obtain a detailed understanding of the client’s financial position and risk profile. This will limit a client’s ability to claim that an investment was not suitable. The questionnaire should be incorporated into a checklist that the advisor and client each sign. That shows they’ve discussed the client’s finances and goals, and why the advisor recommends a particular investment. If a client should also sign an acknowledgement form for any offering documents.
Having a program in place that sets out what an advisor must discuss with a client also helps the compliance team ensure a client file is complete before approving a trade. A good program should include a checklist to ensure that advisors have disclosed the features, risks and specific suitability for the specific client. In the accompanying notes, write what the main features are, what the risks are, why you are recommending this product over another and most importantly why this is the right investment for them. Clients should then be asked to initial the document to show they have understood and agree with the recommendation.
There will be times a client doesn’t take his advisor’s advice and again, this should be documented to avoid disputes later on.
The majority of client complaints stem from miscommunication; few are the result of an advisor’s active malfeasance. For instance, advisors should be clear about their limited ability to predict an investment’s future performance. They should also be explicit about the potential risks involved. Laying it out at the beginning of a relationship and documenting all client discussions will go a long way to protecting the advisor should a client choose to complain.