Compliance

Investment firms have compliance departments that monitor their advisors to ensure they are complying with industry regulations.

In addition, full service investment dealers (those licensed to sell stocks, bonds and ETFs as well as mutual funds) typically must be members of the Investment Industry Regulatory Organization of Canada or IIROC.

IIROC’s website is: www.iiroc.ca/

The reason it is important to discuss compliance is because the rules and regulations serve as protection, not against losing money on your investments, but against unscrupulous or fraudulent practices. They are also designed to prevent illegal practices, such as money laundering, from occurring.

As with any form of protection, there is a cost involved and a portion of the fees and commissions you pay are used to cover the cost of compliance.

One of the goals of compliance departments is to ensure portfolios are properly aligned to meet the client’s needs and are managed in an appropriate manner. In order to accomplish this goal, the status of the clients’ accounts is monitored to ensure the information is complete and up-to-date.

Some of the responsibility needs to fall upon the client to keep their documentation up-to-date. While regulators regard this as a vital requirement, many clients see it as an aggravation or an intrusion of their privacy.

The documents can often sit unopened on the kitchen table for weeks without being completed and returned. However, updates are a regulatory requirement that advisors and clients must comply with.

The consequences of not keeping documentation updated can result in trading restrictions. While the funds in your account will still be accessible, you may be prohibited by regulators from making changes to your investment portfolio or from making new investments.

Current legislation requires account objectives to be updated and confirmed every two or three years.

It takes only a few minutes to review, update and sign the appropriate form to ensure that you and your financial advisor are on the same page. It is in everyone’s best interests to remain onside with the regulatory requirements.

New legislation will require all investments to be ranked by the risk or volatility inherent in each particular investment. You will need to decide what percentage of your account is devoted to low risk, moderate risk and high risk investments.

The risk rankings of the individual investments are used in conjunction with your asset allocation to select a mix of investments that are most suitable for your financial situation.

The project was introduced in early 2013 and, as with any new undertaking the process of ranking investments will evolve over time. While it is not a perfect system, the information gathered over time will help to improve the risk ranking process.

Online and discount brokers may not be obligated to provide you with a risk ranking on individual investments.

It is important to remember that these are efforts by the investment industry to assist you and your advisor in making decisions that best suit your needs and objectives. If you are uncertain, ask your advisor to demonstrate how their firm ranks investments.

NEXT: The Process

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