Investors want effective regulation
Around this time each year, Bay Street goes to some lengths to demonstrate its dedication to helping us in our quest for financial security. The idea behind Investor Education Month, an initiative that runs each April in this country, is that a better-informed investor makes for a happier, healthier industry all round.
It’s a great concept in theory. We believe education goes a long way to protecting investors from bad investment decisions and even potential abuses by unscrupulous advisers.
On this front, there’s still a lot to be done to narrow the persistent gap between what the industry believes to be adequate information and what investors actually make of these so-called communications. A mutual fund buyer, for example, is told to “always read the prospectus,” which contains everything you need to know about your investment. In reality, the document is often complex, inaccessible and useless. As one of our readers writes: “A prospectus can be a complicated play on words written by many skilled individuals and usually comprises from 35 to 40 pages full of confusing numbers and figures.”
But the industry is facing a much more serious problem that can’t be soed by once-a-year lip service to investor interests or even real education: a widespread lack of trust by investors.
How suspicious are investors of the industry? Respondents to a survey by The Globe and Mail earlier this year reported concerns about mutual fund performance, fees and the potential for improper practices. In fact, fully 59 per cent are so dissatisfied they intended to curb their fund investments. Notably, most of these people have solid investment knowledge, and many even rate their levels of investment knowledge as sophisticated. If these well-informed people are having a hard time believing they can succeed in this environment, you can bet the rest of us are also worried.
What’s more, in the shadow of revelations of anti-investor practices in the U.S. mutual fund industry – poor governance, and improper trading and sales practices are among the key offences – Canadians’ lack of trust in their investment professionals is being compounded by our own regulatory problems.
According to the 400-member Small Investor Protection Association (SIPA), more investors than ever are reporting losses stemming from shoddy financial advice. SIPA founder and president Stan Buell says many of the stories relayed to him are heartbreaking, often coming from panic-stricken seniors who have lost substantial savings. Most find they have few options for redress, outside the lengthy and expensive legal process.
Sadly, long-standing promises to protect the interests of investors have gone unfulfilled by an industry that insists it can and should regulate itself, yet seems largely uninterested in punishing wrongdoers within its ranks. Even with various industry-sponsored complaint mechanisms in place, small investors have the deck stacked firmly against them. What real chance, for example, does a wronged individual investor have when facing the high-powered legal team behind a brokerage firm (as in the Investment Dealers Association’s arbitration program)? Even so, our securities industry continues setting rules, even sanctioning rogue advisers among its members but can do little to order restitution.
Our feeble rules seem even more inadequate as we continue to wait for uniform securities regulation – the much-awaited reform that could help defend the interests of small investors.
With so many 50-plus Canadians being hurt by nothing worse than their misplaced trust, CARP believes urgent reform is necessary. Currently working with the Consumers Council of Canada and SIPA, CARP’s advocacy team is developing recommendations for better oversight of investment professionals and more effective legislation for the protecting investors.
For the unfortunate investors already suffering from industry malpractice, such changes can’t come soon enough. These are people for whom the hype around investor education must ring especially hollow. Most, no doubt, believed they’d made informed decisions.
June Yee is financial editor of 50Plus magazine.