Almost one million Canadian investors, associated with Social Investment Organization affiliates, are hoping that advisors across the country will be required to include values-based questions when they open a new account or review an old client file.
Currently, the “know your client” (KYC) rule is fairly vague, giving few specifics about what advisors need to know about their clients. A small fraction of advisors have already adopted values-based KYC as a best practice. However, the Investment Dealers Association’s (IDA) client relationship model (CRM) could soon make the KYC rule replete with enforcement — prompting advisors to ask and use specific information from their clients.
Eugene Ellmen, executive director of the Social Investment Organization (SIO), a national association for socially responsible investment (SRI) that includes 36 financial institutions, asset management firms, fund companies, investment consulting firms and credit unions, applauds the IDA’s effort but wants the national organization to include values-based questions into the process.
“The issue of environmental, social and governance never gets put on the table,” explains Ellmen. “Yet, there is lots of research that supports the notion that investors think about and want to adhere to their values.”
In a Corporate Social Responsibility report, released in 2005 by GlobeScan, 88% of the 495 survey respondents believed that the “financial community should pay more attention to social and environmental performance when valuing companies.”
“Yet, two-thirds of investors have never considered bringing up their social and environmental values with advisors,” says Ellmen. “The whole purpose of KYC is to allow advisors to ask certain questions that help them determine what investments are suitable. [By not including them in the KYC] these values never get included in a client’s suitability profile.”
For that reason, Ellmen is filing a formal comment in response to the proposed CRM.
Paul Bourque, senior vice-president of member regulation for the IDA, says the CRM’s core concepts were derived from the Ontario Securities Commission’s controversial 2004 fair-dealing model, which sought to impose greater transparency on the investment industry.
“Those core concepts were to improve transparency by making conflicts of interest, account costs and performance of investments clearer, and to provide a harmonized solution, so whatever proposal went out, it would be the same across Canada,” explains Bourque.
The IDA approved the CRM and, in March, sent out the new rules for review by the Canadian Securities Administrators and for public comment.
While the comment period was set for 30 days, the significance of the CRM proposals to member firms and to the investing public prompted the comment period to be increased to 90 days, with a deadline for all comments set for May 29, 2008.
Originally published on Advisor.ca on May 13, 2008