Mystery Shoppers Report on Financial Advisors

By Andrew Rickard | October 29 2015 07:00AM

Last year, financial services regulators sent people out to test the way investment advice is offered in Ontario. While most of these mystery shoppers returned with positive impressions, the scope of the project was fairly narrow; in some cases it relied on a sample size as small as six.

On Sept. 17 the Ontario Securities Commission (OSC), the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) released a report on the Mystery Shopping for Investment Advice project they conducted last year.

A market research firm acting on behalf of the regulators equipped 27 mystery shoppers with various investing scenarios and sent them out to visit exempt market dealers, investment dealers, mutual fund dealers, and portfolio managers. Although the shoppers did not follow a script, they were given profiles tailored to the type of firm they were visiting, with various amounts of money to invest, personal circumstances, risk appetite, time horizons, and investment objectives.

In total, the shoppers visited 88 different shops across Canada, including 11 exempt market dealers, 30 IIROC firms (12 independent and 18 owned by one of the “Big Five” banks), 34 mutual fund dealers (20 independent and 14 “Big Five”), and 13 portfolio managers (9 independent and 4 “Big Five”). Only 11 of these advisors were also licensed to sell life insurance products, and 7 of them mentioned this fact to the prospects as part of their mystery shop.

However, only 24 of the 88 visits resulted in specific financial recommendations, namely from 7 exempt dealers, 6 IIROC shops, and 11 MFDA members (no portfolio managers reached the point of a recommendation). What’s more, only 21 of these visits resulted in specific product recommendations.

The regulators say that 86% of these product recommendations were suitable, while 14% were inappropriate due to asset concentration issues. In addition, 71% of the shops that made recommendations complied with Know Your Client, Know Your Product and suitability requirements, 71% discussed product fees, and 63% fulfilled all compliance expectations. In 50% of shops in which recommendations were made, advisors gave a verbal explanation of how their proposals related to the prospect’s circumstances and goals.

Overall, product fees were discussed in 56% of all shops (including those which did not result in a specific recommendation) and advisor compensation was discussed in 33% of all shops.

As for the mystery shoppers themselves, 88% of those who received specific recommendations thought that the advisor had provided enough information to allow them to make informed decisions, although the regulators say 33% of these satisfied customers still had an experience which did not meet their compliance expectations.

The regulators did not disclose the names of any of the firms which were visited as part of the project, and none of the mystery shops were audiotaped or videotaped; the project data comes from questionnaires that shoppers filled out within 12 hours of visiting a firm, as well as from notes they may have made during the process.

It is worth noting that the mystery shoppers did not make it past the interview stage and actually transact business with the firms in question; the report reveals that they were not given any money, nor did they open accounts or commit to an investment strategy.

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