Advisors may recommend their clients take advantage of low interest rates and suggest borrowing to invest with goals to have investments grow at a higher rate than tax deductible borrowing costs. This may appear enticing, however, borrowing to invest involves heightened risk, can lead to accelerated losses and cause significant client issues should the investments lose money, under-perform the costs of borrowing or interest rates rise.
The Financial Services Commission of Ontario (“FSCO”) published a bulletin, “Borrowing to Purchase Life Insurance Products – Risks and Suitability” as a reminder to life insurance agents of their responsibilities when recommending insurance related investment products and strategies to clients. While issued by FSCO, the Bulletin is representative of the responsibilities, obligations and regulatory expectations of agents and advisors in the insurance and investment industries (MFDA, IIROC) throughout Canada.
When recommending a leverage strategy, it is the responsibility of the advisor to:
- Determine the client’s risk tolerance and only make recommendations that are appropriate to that risk tolerance;
- Ensure the products and strategies recommend to clients are suitable; and
- Explain the increased risks of borrowing to purchase investment products to the client.
The bulletin also reminds advisors that, in the event of a complaint, they will be required to provide documentation which demonstrates the rationale for the recommendation and prove the client was adequately informed about the product and the risks of borrowing to invest.
A copy of the "FSCO Borrowing to Purchase Life Insurance Products – Risks and Suitability bulletin" and the other documents referenced in the bulletin; “The Approach”, “IVIC Suitability" and “Borrowing to Invest”, are available on HUBLINK.
HUB Financial has developed tools and disclosure documents that are available on HUBLINK to assist you in meeting your suitability obligations and ensure clients have clear understanding of their leverage strategy and associated risks. A “Leveraging Risk Disclosure” template, “Leveraging Worksheet” and “Guidance for Advisors” checklist are available on HUBLINK.
Sound business practices add value and builds client trust.
Remember,
Good Business is Compliant and Compliance Matters!