Don’t gloss over exempt market risks

By Stephanie A. McManus, LL. B. | September 13, 2012 | Last updated on September 13, 2012
3 min read

If you’re selling in the exempt market, you’re offering a service as well as a product.

Too often, dealer rep websites, client communications, brochures, and articles focus solely on products. They tout how much better exempt market stocks are than those on the volatile TSX, or those mutual funds being battered by market instability.

Read: Exempt markets deliver results

The dangers with this siloed approach are:

a) The clients’ interests often aren’t front and centre;

b) By advertising on the basis of the products you offer, you could change or misinterpret the information provided by issuers approved in the due diligence process by your dealer;

c) When you promote the exempt market as simply better than traditional markets, you risk glossing over the very real risks to which investors are exposed.

Read: EMDs must protect the process

The whole regulatory structure around the sale of investments is based on one notion: knowing your clients and their needs. At times, meetings can end with no product sales made at all, since you may find there‘s no product you can offer that’s currently suitable.

While this approach may make it harder to boost your bottom line, regulators will look through your client files to ensure you’ve made suitable suggestions during audits. Your business’ supervision and training processes should be ensuring this requirement is met at all times.

Read: Regulators reviewing best execution

Adopting a client-first mentality means knowing your clients’ preferences and your products extremely well. Design a match between the two, and disclose all the downsides and upsides of each investment.

Also, consider that many dealer websites and materials claim to offer safe, simple products with high returns. Before posting this or similar claims, ask yourself if each promise can be 100% fulfilled. If you have any doubts, or if you’re aware of how a statement could be misinterpreted, edit it immediately to avoid possible regulatory penalties.

A fun, promotional tagline may seem harmless, but could turn out to be a violation of marketing rules.

Read: Don’t get caught in regulatory traps

Exempt market vs. public markets

Those who work in the Exempt Market believe it offers a good alternative to investors.

Every registrant, though, needs to highlight both its good and the bad qualities when meeting with clients and prospects. While less visible markets do offers less volatility, they also offer less liquidity.

Read: Avoid exempt market risks

As a result, investors who don’t have the stomach for daily jumps and drops can avoid them by using exempt markets. But, the products are not without risk; they’re private products that are largely reserved for more sophisticated, eligible or accredited investors.

To ensure you’re serving clients well, develop a process to help you discover each client’s market experience, perspectives and specific needs.

Read: Lots of cash doesn’t buy investment smarts

More importantly, focus on what you offer as service. Pretend you’re up against another dealer, and make a list of your value-added services. Figure out why an investor would want to work with you as opposed to that competitor.

Use this list to create marketing material. Whether it’s bulk communications, newspaper or magazine articles, websites, brochures, or cold calling scripts, for example, submit all documents to your compliance department for approval. You’ll benefit from their trained eye and ensure you’re claims aren’t offside.

Marketing is one of the most important tools in the growth of your business. If you create reliable, quality material for your clients, they’ll be more willing to share it with their contacts and help you gain referrals.


Market differently to prospects and clients and 5 ways to get referrals

Stephanie A. McManus LL. B. is a member of the Bar in Ontario and Alberta, as well as a Principal of Compliance Support Services, a firm that provides compliance help to the financial services. The above is not to be construed as legal advice, but is provided for general interest purposes only. Please consult your legal or compliance advisor for matters related to your particular situation.

Stephanie A. McManus, LL. B.