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Dec 28, 2018

Why Canadian Investors Should Complain, Why They Donít Complain And What To Do About It

by Ken Kivenko

Ken KivenkoCanadians don’t complain much when we are wronged. We are a more genteel culture. We are very trusting, especially of our financial institutions. Yet it is clear this undue trust and complacency is being exploited by Bay Street. If investors complained more, the industry would change for the better. With so few complaints, the incentive for the financial services industry to improve is reduced.

We certainly have a basis for complaining. For instance, we have among the highest mutual fund fees in the world yet there is over $1.5 trillion invested in mutual funds. Discount brokers have sold $25 billion of A series mutual funds to Canadians, knowing they will not provide the advice built into the price. We read about multi-million-dollar scandals involving double billing and overcharging for over a decade or more without an investor rebellion. Class action lawyers have difficulties finding lead plaintiffs for egregious cases of investor abuse. In addition, there is the usual assortment of wrongdoing including churning, undue leveraging, unsuitable investments, unauthorized trading, reverse churning and fraud.

A study by Environics Research Group Canadians Continue Crazy Contentment with Investment Advisors found that:

(a) 37% of respondents say they work with a financial advisor and most appear to be extremely satisfied,

(b) When questioned on various aspects of service, only an average of 3% indicated they were dissatisfied and

(c) the 2017 survey results were extremely similar to those the year before, in spite of media reports highlighting questionable sales practices in the financial services industry.

These results are not surprising since retail investors are unaware that most “advisors” are registered as Dealing Representatives (salespersons) with no obligation to provide advice in the best interests of clients. Hence, no complaints.

A detailed study by Professor Douglas Cumming, Ontario Research Chair at the Schulich School of Business at York University showed that recommendations by mutual fund salespersons are skewed by commission structures. Professor Cumming found that:

(a) Mutual funds that perform better attract more sales but the influence of past performance on fund sales is considerably reduced when fund manufacturers pay sales and trailing commissions to advisors,

(b) As past performance becomes less influential on fund sales, there is a corresponding reduction in future fund performance and

(c) For mutual fund sales through fund dealers that are affiliates of the fund manufacturer (as in a bank branch), past fund performance has little to no influence on sales, and this also negatively impacts future fund performance. In other words, embedded sales commissions leads to investor harm.

More recently, it was found that a mere 10 basis point increase in commission rate was enough to sway “advisors” to recommend selected proprietary funds for purchase. Most retail investors wrongly believe that their representative is required to act in their best interests so if losses are incurred they assume it is due to the market or their own fault.

Why are Canadians so reluctant to complain about high prices or exploitive advice?

For one, the public’s expectations of complaint handling processes are low: Consumers think it’s going to be difficult and time consuming. Stories abound about complainants being treated disrespectfully, low-ball compensation offers and the need to sign Confidentiality Agreements (gag orders).

Many retail investors are at a disadvantage—those who are recently widowed, in poor health, English is a second language, people with limited education, anyone who has difficulty writing clearly or expressing themselves and busy people who can’t devote the time and effort.

A lack of retail investor financial literacy acts as a major barrier for clients to understand what products/ trading practices may or may not fit their investment objectives, risk tolerance and time horizon, and a lack of awareness of the costs and fees associated with any purchases. For vulnerable investors, the lack of financial literacy can be even more damaging. They tend to be too trusting and willing to accept an advisor’s word—and unwilling to ask tough questions—when in fact that advice is all too often self-serving. Indeed, the trust can be misplaced, resulting in financial abuse of seniors, who disproportionately lose a portion of their life savings to abusive sales practices or fraud.

It’s our experience that the elderly are especially reluctant to formally complain for a variety of reasons. Seniors often avoid publicity or litigation due to the embarrassment of having been bilked. They may unduly blame themselves for losses and are reluctant or unable to formulate a complaint or are unaware that something is amiss. Sometimes a curt letter from an investment dealer that the representative did nothing wrong is enough to discourage a senior from pursuing a valid complaint.

The complaint process is complex and intimidating; lots of jargon is used so people feel they don’t understand what is being said to them. They therefore think “How can I fight what I don’t understand?” and conclude they are incapable, or worse stupid, compared to these “experts”.

Other reasons for client complaint passivity include:

•    Complainants do not know they have a valid complaint.

•    Client account statements are confusing and hard to interpret.

•    Clients are informed by the dealer/representative that they do not have a valid basis for a complaint. “You signed this” is used as a tool employed by dealers to confuse and intimidate complainants.

•    Clients do not understand the complaint process.

•    Clients do not want to rock the boat.

•    Clients don’t want the hassle of going through the complaint process.

•    Clients do not know their rights as investors.

•    Clients are unaware of the Ombudsman for Banking and Investments (OBSI, a free dispute resolution service.

•    Clients have unshakeable trust in their “advisor” (actually registered as a Dealing Representative).

•    Clients feel intimidated by the multi-step complaint process.

•    Clients do not know where to turn when they hit roadblocks.

•    Clients blame themselves, believing they must have misunderstood.

•    Clients are taught not to question authority, especially seniors.

•    Clients see the “advisor” as expert, knowledgeable and trustworthy, therefore if something went wrong it must be the investor’s own mistake.

•    Clients do not realize how common their situation is because they rarely hear much in the media or from other people (due to gag orders).

•    Clients feel embarrassed and ashamed at losing money.

Industry has all the resources; a burned investor feels they have none. Victims fear that if they complain, they might lose even more money. Many victims tell us how much it helped them to have someone validate for them that they have a legitimate concern and how to navigate the process. The complaint process is indeed very stressful, complex and unduly long; people get exhausted, give up and want to move on with their lives.

Some thoughts on generating more retail investor complaints

There is no one silver bullet to solve the dilemma. Increased financial literacy can help so that investors can detect when something isn’t right. Regulators could provide more plain language educational material on what dealer behaviours are legitimately subject to a complaint. Street-proofing materials can be powerful guides for investors to know their rights and avoid problems. Recently implemented Client Relationship Model 2 (CRM2) reporting increases cost visibility and performance information but regulators can do more to educate retail investors how to use the information.

Rules should ensure that job titles are reflective of demonstrated proficiency and registration and are not misleading. Titles like vice president, based solely on sales production, create undue investor trust. Better guides to making a complaint would also be helpful. Periodic regulatory sweeps of dealer complaint-handling systems can be effective in improving the complaint process for the retail investor.

Securities regulators could also include brief case studies for investor examination on their websites and publish an Investor Bill of Rights modelled on North American Securities Administrators Association (NASAA) or G20 high level principles of financial consumer protection.

Dealers could make it easier and simpler to file a complaint. Front line staff should be given more authority and training to resolve problems at the earliest point in the cycle. Eliminating the non-independent internal bank ombudsman function would simplify the complaint process and lead to better outcomes. Where a dealer identifies (from its complaints or otherwise) recurring or systemic problems in its provision of, or failure to provide, a financial service, it should consider whether it ought to act with regard to the position of clients who may have suffered detriment from, or been potentially disadvantaged by, such problems but who have not complained and, if so, take appropriate and proportionate measures to ensure that those clients are given appropriate redress or a proper opportunity to obtain it.

In many cases investors do not understand the purpose of the New Account Application Form (NAAF). Dealers should clarify the intent of the NAAF form so that clients understand its multiple purposes, including how it could and would be used when a complaint arises. Dealers should provide a signed and dated copy of the completed NAAF to the investor and provide a copy of the Know Your Client (KYC) to the investor on an annual basis or whenever it is changed.

OBSI should dramatically increase its outreach program so that investors are better informed of their rights and dispute-resolution options. Providing OBSI with binding recommendation authority would incent reluctant investors to submit complaints. OBSI should also define its service standard in a defined number of calendar days rather than “80% within 180 days”; people are turned off by the uncertain cycle time for resolution of their complaint.

It is hoped that the financial services industry will come to realize that complaints represent an opportunity to address customer concerns and improve business policies, processes and products. The end result will be a healthier industry and investors will more likely meet their financial objectives. It’s a win-win proposition.

Of course, the goal is to increase the flow of complaints so that the dealers use the feedback to improve processes, ultimately resulting in fewer complaints. The best way to reduce complaints is to prevent them in the first place. Rather than investors becoming more effective complainers, a better approach would be for registered representatives and dealers to adhere to the Best Practices formulated by the Institute for the Fiduciary Standard and prevent complaints. That’s the subject of another article.


Complaint Handbook: MBC Law author H. Geller This excellent plain language Guide fills a critical info need for the Retail Investors.


The Investor Protection Clinic at Osgoode Hall Law School provides free legal advice to people who believe their investments were mishandled and who cannot afford a lawyer. Canadian investors have not had a place to go for free legal advice; the Investor Protection Clinic fills this void. The Clinic provides legal advice to people who believe they have suffered an investment loss as a result of someone else’s wrongdoing.

Ken Kivenko, PEng, President , Kenmar Associates,,