The definition of suitability is being warped by an insane distribution culture.

OBSI is fighting a losing war against leverage, and with its latest name and shame the mark is on the current point in time.  

While all the recent leverage name and shame cases are to do with the last market downturn, the refusals to pay are all to do with the next.   If companies were to pay these cases now, they would put a line in the sand about the suitability of leverage and set a precedent that would cut them off at the knees in the next downturn. 

Besides, the transaction and the use of leverage wherever possible is the business model.   This is the conflict between advice that is in the client’s best interests and recommendations that fit the rather wide parameters of the KYC.   The distribution model is always looking to protect and widen its distribution.   That leverage is a far too large and accepted part of the model itself is a further cultural wedge at the heart of the insanity that pervades this market place.

A best interests standard for those wishing to call themselves advisors/advisers would solve many of these issues, and those who do not wish to place the best interests of the client first should be called what they are: salespersons.

And back to the current OBSI case, Mr and Mrs H who were recommended by an advisor to borrow $200,000 against circa the same in investible assets.   50% went into mutual funds and 50% into segregated funds.   Interest was to be paid by withdrawals from their registered retirement funds. 

To tell you the truth there is too little detail here to fully draw the insanity of the situation out of the picture:

  1. What were the interest costs and the capital repayment schedule?
  2. What were the mutual fund and segregated MERS?
  3. What were the clients’ withdrawal demands on their funds?
  4. What was the disposition of their existing assets and the allocation of the recommended?

If you have investors who are reliant on their assets to support their financial security, they are most likely drawing down on capital.  Drawing down on capital means that investors are likely to have a dependence on income and capital certainty that would conflict with an overly aggressive equity allocation let alone a leveraged equity one.  Combine leverage with withdrawals and a large segregated fund allocation, and you are increasingly likely to expose the so called safe segregated fund investment component.  I call the segregated component a so called safe component because the additional costs and the inflexibility of these investments render them unattractive and risky (for a number of reasons) within portfolios that are destined to deplete capital to meet income and capital expenditure needs. 

OBSI is the end of the line for most investor complaints: they have most likely passed through various rounds of complaints and regulation supposedly designed to protect the investor.  

The fact that this type of advice can pass regulatory muster and that the last line of defense for investors seeking pragmatic restitution is effectively found wanting only serves to increase the bounds of the current distribution model. 

Failure to enforce the ombudsman’s decisions pushes the line in the sand further back in the industry’s favour.   Rather than having a move towards best interest standards and professionalism the dynamics are supportive of increasing freedom to recommend solutions that conflict with investor interests.   These are precedent creating incidents.  But this is a position that the status quo is supporting and the status quo includes our regulators charged with investor protection mandates.

The definition of suitability is being warped by an insane distribution culture.

And also:

Armstrong & Quaile refuses OBSI request – Advisor.ca

Leave a Reply