her tears and started to tell stories about how she remembered
how special Josh was when he was very little and she always
knew Josh would be a great success.
Mrs. Smith was ready to sign and begin to receive the monthly
income. Josh filled out the “know your client” (KYC) form, the
subscription agreement, the loan documents, the risk disclosure
statement, the borrowing to invest disclosure statement, and
other required documents, and Mrs. Smith signed, happily, as
directed by Josh. This was not only an easy sell, Josh felt great
helping this poor woman who he knew all his life.
Mrs. Smith happily carried on with her life. She sold her
husband’s business, with the help of her lawyer, and paid the
bank what was owing on the business loan. She also sent Josh
a letter thanking him, which he proudly displayed in the reception
area of his office.
The securities regulator comes knocking!
Six months later, the securities regulator’s periodic audit of
Josh’s office was scheduled. The regulator was interested mostly
in products with leverage and those purchased with leverage
loans by clients over the age of 60. Mrs. Smith fell into that
category, among other clients. The regulator called Mrs. Smith
and interviewed her over the telephone. While Mrs. Smith told the
regulator that she so appreciated Josh’s help she was asked and
answered the following questions:
The securities regulators regularly audit EMDs and call clients
and if they find one client who concerns them, then they will do a
more thorough audit and seek to suspend or terminate registrations
or penalize the dealing representative, his or her EMD firm and
its compliance officer and Ultimate Designated Person for his or
her failure to know the client sufficiently or for recommending an
unsuitable investment. The securities regulator concluded that the
investment was unsuitable for Mrs. Smith, among others, because:
1. she could not afford to lose ANY capital;
2. she did not have the ability to understand the product;
3. she did not have the ability to take the additional risk of borrowing to
invest and this strategy actually had two levels of leverage;
4. she was only invested in the real estate industry and was not diversified
into other industries;
5. the income she received was partially or entirely return of capital or
borrowed money and she did not, nor could she have understood;
6. Josh had no notes to prove what Mrs. Smith said to him about her level
of understanding, even limited, to demonstrate her appetite for risk; and
If the EMD had a more thorough compliance review of each
matter, this may have been stopped before Mrs. Smith invested
and the dealing representative and the client would not have been
placed at risk. Remember, even though Josh’s heart was in the
right place, his mind was not.
Protecting seniors is a top priority for securities regulators
While there is a great opportunity to grow your business
selling to seniors, the regulators have made protecting seniors
their top priority. Baby boomers are beginning to retire and this
sector of the population is living longer, delaying retirement and
disenchanted with the stock market volatility that left a hole in
their lifetime savings. The one asset that has held, and increased
in value, is their home and therefore real estate can be very
attractive to this sector of the population.
If you have clients who are seniors, you need to understand
that you cannot paint all seniors with the same brush. Like all
clients, you need to get to know each senior client as individuals
and understand their knowledge and experience investing,
appetite for risk and ability to suffer loss of capital. People are living
longer and therefore, seniors may experience several decades of
retirement; working full time through “retirement”, working part-time, not working and traveling or enjoying hobbies and ultimately
medical issues become the focus of their life. At each stage,
clients have different needs and worries, however, the dealing
representative’s job, after determining whether the person is a
true prospect, depending on the laws of the jurisdiction in which
the person resides, is to understand which stage or “retirement”
they are in and whether this prospect is right for the products on
the dealing representative’s EMD’s product shelf.
Q: Did you know that you could lose all your
money in this investment?
A: Heavens no, what do you mean?
Q: Did the dealing representative explain that you
were investing in a high risk investment?
A: No. I am sure he knew what he was doing.
Q: Did the dealing representative explain the risks
of investing using leverage?
A: I’m not sure.
Q: Did the dealing representative explain that part of
the income you were receiving was the money
that was borrowed to invest?
A: I really have no idea what you mean.
Q: Did you know that you were investing with
A: Well I signed some documents, that could have
been one of them.
Q: Do you know?
A: No, not really.
Q: Mrs. Smith, did you complete high school?
A: Yes and then secretarial school but then I got married
and had a family.
Q: Did you ever invest in anything before this?
A: No, I left everything to my husband.