This Post writer is well experienced with the industry, having written the definitive book on financial advisors, "THE PROFESSIONAL INVESTMENT ADVISOR".
A professional should act like one
Clients deserve to know how their advisor is paid (summary)
John De Goey
Financial Post
Monday, March 28, 2005
Having spent more than a decade as an extremely active member of what is now Advocis, I eventually despaired at the association's unwillingness to accept the notion of compensation transparency. To date, Advocis has fought the OSC's Fair Dealing Model at every stage of the process. This is largely, but not entirely, due to the FDM's desire to make advisor compensation more transparent for consumers. Advocis believes it is inappropriate to clearly disclose how and how much advisors are paid. The organization generally wants its payment structures to remain a mystery to the client.
When a person uses the services of a lawyer or accountant, that person knows how much the service costs because that person gets a bill for services rendered. Too many financial advisors think and act like sales agents; they believe it is none of their clients' business how or how much they get paid.
Monday, March 28, 2005
Saturday, March 26, 2005
Four Questions Investors Deserve Answered
As part of my continuing research into the financial services industry, I come up with a few questions that I hope can be posed to the Ontario Securities Commission at an upcoming town hall meeting they are hosting to try and improve conditions. I am encouraged by any and all attempts to do so, and I will try and update you as to any answers, or non-answers received to the following:
1. Why are transactions that are considered fraudulent or bordering on fraud in the United States allowed to continue as "standard industry practice" here in Canada? Specifically the practice of advisors recommending the highest compensating mutual fund class (the DSC class) to clients, despite there being lower cost alternative choices in the identical fund product that clients would be better served with.
see washinton post article [1]
see US court cases [2]
see IFIC and MFDA stats on Cdn fund sales practices [3]
2. Why are investment salespeople who are officially registered as "registered representatives", or as "salespeople", at the Securities Commission, allowed to represent themselves to the public as "investment advisors", indicating a different level of fiduciary duty to the public, when the Securities Act is clear on which titles are allowed and which are not?
3. Why are investment firms allowed to promise and advertise a high level of public trust, or as one firm's code of ethics states, "trust through integrity in everything we do", and then claim no responsibility to a 90 year old client who is mistreated by an advisor. The advisor was subsequently terminated by the firm, but still the firm denied any responsibility to the client. How is it that they are allowed to get away with this level of misrepresentation? [4]
4. Why are Canada's investment dealers allowed to, "buy silence" on matters, sometimes of a criminal nature, sometimes fraudulent, by offering to exchange money for silence from the victims of commercial crime. Is allowing the cover-up up of fraud in the spirit and intent of the Securities Act, or are steps being taken to disallow this type of criminal cover-up?
[1]
washingtonpost.com
Citigroup, Others Pay Fines Over Mutual Funds
By Brooke A. MastersWashington Post Staff WriterWednesday, March 23, 2005; 5:29 PM
In their continuing effort to clean up mutual fund sales, federal and industry regulators yesterday fined three large brokerage firms and a fund company a total of $81 million for improper sales practices and required them to make restitution to tens of thousands of investors.
The regulatory actions covered alleged abuses in two areas but shared a common theme: investors were steered into fund purchases that benefited their brokers, often at the investors' expense. The Securities and Exchange Commission and the industry regulator NASD have been investigating both issues for more than 18 months as part of a wide-ranging probe of the $7 trillion mutual fund industry.
Citigroup, JPMorgan Chase and American Express Financial Advisers paid a total of $21.25 million to the NASD, formerly known as the National Association of Securities Dealers, to settle allegations that they collected excess commissions from more than 50,000 households by selling high-fee "class B" mutual fund shares when the investors could have bought another class of the same funds for less. In addition to the fines, all three firms will convert the shares into the class that pays lower ongoing fees, and reimburse customers who have already sold the shares for the extra fees they paid.
Citigroup also paid $20 million to the SEC to settle similar allegations plus an additional charge that they took secret "shelf-space" payments from more than 70 mutual fund companies to recommend their products.
One fund company, Putnam Investments, agreed yesterday to pay a $40 million penalty for failing to tell its board and investors that it was rewarding brokerage firms for pushing Putnam products. That money will be put back into the Putnam funds for distribution to shareholders, the SEC said.
As is customary in securities industry settlements, the firms neither admitted nor denied wrongdoing.
Regulators have been investigating sales of class B shares since 2003 because of concerns that many investors did not understand how this kind of share worked. Unlike more common Class A shares, where investors pay a commission or "load" up front, Class B shares carry a "back end" load that must be paid when the investor sells. This arrangement, which is legal, allows investors to put off paying the commission, or avoid it entirely if they hold the shares for 6 years or longer.
Problems arose because some fund companies discount or waive commissions for Class A shares when the investment is large enough, usually $50,000 or more, but don't do so for Class B shares. According to allegations in the settlements, brokers sold Class B shares and failed to tell customers that Class A shares would be cheaper.
This is the largest Class B case the NASD has ever brought, said its enforcement chief Barry Goldsmith.
More cases are imminent, but most of the problems stem from past sales rather than ongoing abuses, the regulators said. Citigroup's Smith Barney brokerage unit now automatically flags class B transactions to double check whether investors would do better buying another class of shares, said spokeswoman Kim Atwater
"Since we've focused on this issue, we've seen positive changes at other firms in how these products are sold," said Goldsmith. "Practices have improved."
The SEC is trying to eliminate the problem of under-the-table payments by mutual funds to brokers by banning the most common method of payment, a practice known as "directed brokerage." Fund companies may no longer steer stock and bond transactions to particular brokerage firms in exchange for having their funds promoted by the brokers to their retail customers. Putnam paid directed brokerage fees, and Citigroup received them, the regulators said.
Investors who were harmed by B share sales practices do not have to take action to receive reimbursement. Under the settlements, brokerage firms must bear the costs of identifying and contacting investors, regulators said.
"The Commission's enforcement focus in the B Share area has improved the industry's self-policing," said Ari Gabinet, regional director of the SEC's Philadelphia office which spearheaded the investigation.
© 2005 The Washington Post Company
[2]
Jacob Zamansky, a securities lawyer in New York, represented the Huffs in their case against Prudential Securities (NEW YORK TIMES April 18, 2004, A BROKERS EMPTY PROMISE, A RETIREE's SHATTERED DREAM", by Gretchen Morgenson, view at www.regulators.itgo.com/PI/903.htm
"All the investors were placed in fee-based accounts, with annual charges of at least 1% going to the brokerage firm."
"Major Wall Street firms have targeted and preyed on unsophisticated 'buy and hold' Ohio investors, placing them in inapropriate fee-based accounts that generat huge annual revenue streams for the brokers," Mr. Zamansky said. "They put their own financial interest ahead of their customers'."
In a recent notice to members, the NASD warned that "it could be a violation of industry rules to put a customer in a fee-based account that costs more than an alternative".
"US brokers censured and fined for pushing DCS mutual funds"
By James Langton, Investment Executive, Thursday, April 19, 2001
"fines for improperly recommending deferred sales charge funds over front end load funds"
"which would have been more cost effective"
"The sales commissions would have been less than half this amount had they sold Class A shares"
NASD news release dated Wednesday, April 18, 2001, at www.nasdr.com/news/pr2001/ne_section01_026.html
"unsuitable recommendations of class B shares to customers..............when it would have been more cost effective for those customers to purchase Class A shares"
NASD INVESTOR ALERT, "Class B Mutual fund Shares: Do They Make the Grade?"
Speaks to DSC mutual funds. "The only differences among these classes is how much you will pay in expenses and how much your broker will be paid for selling you the fund." www.nasd.com/Investor/Alerts/alert_classb_funds.htm
[3]
When comparing two otherwise identical mutual funds, except for the compensation paid to advisor, a popular Deferred Service Charge (DSC) fund, which pays 5% to the advisor without disclosure on client confirmation or client statement, has grown over SEVENTY TIMES as large as an identical fund that has no hidden commission structure. This growth was achieved despite a higher management cost to the client, and a multi-year penalty to the client to exit the fund. (Source, Ontario Securities Commission Fair Dealing Model proposals, appendix F, "Compensation Bias", page 12)
Mutual fund industry association statistics (MFDA, IFIC) point out that approximately 80% of advisor assisted mutual fund sales in Canada have taken place using the higher pay to advisor, DSC choice, rather than using other less costly choices available since commissions became fully deregulated.
[4]
See Ontario Court Norah Cosgrove vs. RBC
1. Why are transactions that are considered fraudulent or bordering on fraud in the United States allowed to continue as "standard industry practice" here in Canada? Specifically the practice of advisors recommending the highest compensating mutual fund class (the DSC class) to clients, despite there being lower cost alternative choices in the identical fund product that clients would be better served with.
see washinton post article [1]
see US court cases [2]
see IFIC and MFDA stats on Cdn fund sales practices [3]
2. Why are investment salespeople who are officially registered as "registered representatives", or as "salespeople", at the Securities Commission, allowed to represent themselves to the public as "investment advisors", indicating a different level of fiduciary duty to the public, when the Securities Act is clear on which titles are allowed and which are not?
3. Why are investment firms allowed to promise and advertise a high level of public trust, or as one firm's code of ethics states, "trust through integrity in everything we do", and then claim no responsibility to a 90 year old client who is mistreated by an advisor. The advisor was subsequently terminated by the firm, but still the firm denied any responsibility to the client. How is it that they are allowed to get away with this level of misrepresentation? [4]
4. Why are Canada's investment dealers allowed to, "buy silence" on matters, sometimes of a criminal nature, sometimes fraudulent, by offering to exchange money for silence from the victims of commercial crime. Is allowing the cover-up up of fraud in the spirit and intent of the Securities Act, or are steps being taken to disallow this type of criminal cover-up?
[1]
washingtonpost.com
Citigroup, Others Pay Fines Over Mutual Funds
By Brooke A. MastersWashington Post Staff WriterWednesday, March 23, 2005; 5:29 PM
In their continuing effort to clean up mutual fund sales, federal and industry regulators yesterday fined three large brokerage firms and a fund company a total of $81 million for improper sales practices and required them to make restitution to tens of thousands of investors.
The regulatory actions covered alleged abuses in two areas but shared a common theme: investors were steered into fund purchases that benefited their brokers, often at the investors' expense. The Securities and Exchange Commission and the industry regulator NASD have been investigating both issues for more than 18 months as part of a wide-ranging probe of the $7 trillion mutual fund industry.
Citigroup, JPMorgan Chase and American Express Financial Advisers paid a total of $21.25 million to the NASD, formerly known as the National Association of Securities Dealers, to settle allegations that they collected excess commissions from more than 50,000 households by selling high-fee "class B" mutual fund shares when the investors could have bought another class of the same funds for less. In addition to the fines, all three firms will convert the shares into the class that pays lower ongoing fees, and reimburse customers who have already sold the shares for the extra fees they paid.
Citigroup also paid $20 million to the SEC to settle similar allegations plus an additional charge that they took secret "shelf-space" payments from more than 70 mutual fund companies to recommend their products.
One fund company, Putnam Investments, agreed yesterday to pay a $40 million penalty for failing to tell its board and investors that it was rewarding brokerage firms for pushing Putnam products. That money will be put back into the Putnam funds for distribution to shareholders, the SEC said.
As is customary in securities industry settlements, the firms neither admitted nor denied wrongdoing.
Regulators have been investigating sales of class B shares since 2003 because of concerns that many investors did not understand how this kind of share worked. Unlike more common Class A shares, where investors pay a commission or "load" up front, Class B shares carry a "back end" load that must be paid when the investor sells. This arrangement, which is legal, allows investors to put off paying the commission, or avoid it entirely if they hold the shares for 6 years or longer.
Problems arose because some fund companies discount or waive commissions for Class A shares when the investment is large enough, usually $50,000 or more, but don't do so for Class B shares. According to allegations in the settlements, brokers sold Class B shares and failed to tell customers that Class A shares would be cheaper.
This is the largest Class B case the NASD has ever brought, said its enforcement chief Barry Goldsmith.
More cases are imminent, but most of the problems stem from past sales rather than ongoing abuses, the regulators said. Citigroup's Smith Barney brokerage unit now automatically flags class B transactions to double check whether investors would do better buying another class of shares, said spokeswoman Kim Atwater
"Since we've focused on this issue, we've seen positive changes at other firms in how these products are sold," said Goldsmith. "Practices have improved."
The SEC is trying to eliminate the problem of under-the-table payments by mutual funds to brokers by banning the most common method of payment, a practice known as "directed brokerage." Fund companies may no longer steer stock and bond transactions to particular brokerage firms in exchange for having their funds promoted by the brokers to their retail customers. Putnam paid directed brokerage fees, and Citigroup received them, the regulators said.
Investors who were harmed by B share sales practices do not have to take action to receive reimbursement. Under the settlements, brokerage firms must bear the costs of identifying and contacting investors, regulators said.
"The Commission's enforcement focus in the B Share area has improved the industry's self-policing," said Ari Gabinet, regional director of the SEC's Philadelphia office which spearheaded the investigation.
© 2005 The Washington Post Company
[2]
Jacob Zamansky, a securities lawyer in New York, represented the Huffs in their case against Prudential Securities (NEW YORK TIMES April 18, 2004, A BROKERS EMPTY PROMISE, A RETIREE's SHATTERED DREAM", by Gretchen Morgenson, view at www.regulators.itgo.com/PI/903.htm
"All the investors were placed in fee-based accounts, with annual charges of at least 1% going to the brokerage firm."
"Major Wall Street firms have targeted and preyed on unsophisticated 'buy and hold' Ohio investors, placing them in inapropriate fee-based accounts that generat huge annual revenue streams for the brokers," Mr. Zamansky said. "They put their own financial interest ahead of their customers'."
In a recent notice to members, the NASD warned that "it could be a violation of industry rules to put a customer in a fee-based account that costs more than an alternative".
"US brokers censured and fined for pushing DCS mutual funds"
By James Langton, Investment Executive, Thursday, April 19, 2001
"fines for improperly recommending deferred sales charge funds over front end load funds"
"which would have been more cost effective"
"The sales commissions would have been less than half this amount had they sold Class A shares"
NASD news release dated Wednesday, April 18, 2001, at www.nasdr.com/news/pr2001/ne_section01_026.html
"unsuitable recommendations of class B shares to customers..............when it would have been more cost effective for those customers to purchase Class A shares"
NASD INVESTOR ALERT, "Class B Mutual fund Shares: Do They Make the Grade?"
Speaks to DSC mutual funds. "The only differences among these classes is how much you will pay in expenses and how much your broker will be paid for selling you the fund." www.nasd.com/Investor/Alerts/alert_classb_funds.htm
[3]
When comparing two otherwise identical mutual funds, except for the compensation paid to advisor, a popular Deferred Service Charge (DSC) fund, which pays 5% to the advisor without disclosure on client confirmation or client statement, has grown over SEVENTY TIMES as large as an identical fund that has no hidden commission structure. This growth was achieved despite a higher management cost to the client, and a multi-year penalty to the client to exit the fund. (Source, Ontario Securities Commission Fair Dealing Model proposals, appendix F, "Compensation Bias", page 12)
Mutual fund industry association statistics (MFDA, IFIC) point out that approximately 80% of advisor assisted mutual fund sales in Canada have taken place using the higher pay to advisor, DSC choice, rather than using other less costly choices available since commissions became fully deregulated.
[4]
See Ontario Court Norah Cosgrove vs. RBC
Thursday, March 24, 2005
Open letter to Investment Industry
an open letter to Canada’s investment industry
PLEASE OPEN YOUR BUSINESS CONDUCT AND PRACTICES TO THE LIGHT OF DAY
We regret having to make this plea in public, but the practice of hiding financial irregularities behind confidentiality agreements, gag orders and industry codes of silence is far too prevalent and the undersigned have lobbied far too long with no result.
We are talking about examples where ordinary Canadians do not get treated with the professionalism they deserve, and rather than fix the problem, they are beaten down using legal methods and a seemingly inexhaustible imbalance of strength over the client. We wish to ask you to start to do the right thing, as all industry participants promise to do, but some fail to live up to.
Specific examples include
Please apologize to 92 year old Norah Cosgrove, an Ottawa resident who trusted her financial advisor, and was disappointed in this trust. Your firm terminated the advisor in question, but when Mrs Cosgrove took her claim for $10,000 to small claims court (case ???) your defense was that you felt you did not owe this elderly client a duty of care. Your entire industry promises a duty of care to a professional standard of conduct to it's clients, and to state less in a court filed legal document is simple wrong. Please allow this woman to understand why you would let her advisor go, supposedly with some cause, and yet deny, deny, deny any wrongdoing to her, the client. Please correct this.
Please cease your legal action against 80 yr old Pola Goldfluss of Toronto. She has already survived the loss of her husband, as well as her ordeal during the holocaust. She also has already been granted a settlement of some $250,000 from her investment dealer for investment advice that was supposedly not represented properly to her. To turn around, and then sue this client, for the same $250,000 on a legal technicality is simply harsh, unusual and unfair to the clients you serve. Why, pray tell did you agree to give her back her money in the first place if she did not have legitimate concerns, and now to say that the settlement agreement that she signed, was not signed by you, and need not stop you from pursuing her is simply irresponsible abuse of your level of power. Please cease and desist. (see TD Waterhouse vs Pola Goldfluss.
Please stop asking clients who have been abused by the industry to sign confidentiality agreements promising to never reveal details of the wrong they suffered, or the settlement they received. Asking them to do this is in violation of at least one firm's code of ethics which states, "each and every transaction we are involved in will stand the test of complete and open public scrutiny". All the other firms no doubt have similar promises of ethical behavior in the public interest. We simply ask that you now live up to them.
For example, when the 92 year old Kelowna, BC resident this last year was helped into an assisted living facility by his financial advisor, and told by his advisor that he would help him sell his condo, he was not aware that it would ultimately end up registered in the name of the advisor. Nor was he fully aware of much of the details of the transaction. The fact that it was done with no money going to the elderly client, no appraisal of value, at far below market comparable properties, and at a zero percent interest loan to the advisor was not only hidden from the client, but from his family, the public, and the regulatory authorities. It remained hidden for as long as possible, and was not properly revealed to regulatory authorities except by private industry advocates who expressed concern for this client. What were you thinking and where was your responsibility to act properly? This is not behavior appropriate to a business that claims, "the highest standards of trust and integrity".
Please stop using money to purchase silence and escape from prosecution over things that should be fully and openly investigated and properly prosecuted. Members of the public are not allowed to buy their way out of the situations they find themselves in, and nor should our most trustworthy financial institutions. For the gentleman in Kelowna to receive title to his own condominium back, he was required to sign an agreement that started out, "for value received". I consider giving the man his home back after removing it from his fraudulently, and calling it giving him something of value is adding insult to injury. Please immediately reconsider and remove all future bans on open and honest transparency in your company and your industry. It will assist in restoration of public trust in our financial firms.
Please remove internal rules that prevent industry employees from speaking out on issues in the public interest. This is holding back the move towards trust and integrity that this industry so loudly proclaims. How can we possibly expect complete trust and integrity when there still exist internal rules forbidding employees from revealing indiscretions without approval of management. This internal code of silence has acted in the past kind of like asking an abused child to take his complaints to his abuser. Until this policy of keeping everything "inside the firm", is updated to our times, violations of trust and integrity will be an ongoing problem.
If you will recall when mutual fund sellers used to be able to obtain free vacations if they sold enough dollars worth of one fund or the other.
When Bud Jorgensen of the Globe and Mail started to investigate this practice many years ago, I was told by my then manager, "anyone who talks to the press about this is fired immediately. I found that a rather unsettling and startling comment to come from someone in and industry of trust. I have since learned that this same manager was enjoying his annual trips to the Indy 500, courtesy of a mutual fund company. Please remove internal codes of quiet, codes of silence or gag orders on ethical irregularities. they belong with the Cosa Nostra, not one of our most important industries.
Please remove the internal policy, written or unwritten of not informing clients of the most economical methods of investing. The promise made to most clients is to place their interest ahead of those of the industry, and to do otherwise is a failure of this promise. How many clients have been told that mutual fund commissions were deregulated in 1987, and that clients now have choices as to whether or not to pay commissions when buying most mutual funds? If the industry is truly in the business of serving as trusted professional advisors serving the client interests, I am at a loss to understand why no full service investment dealer that I am aware of has advertised this fact to clients. Is it because they are stuck in the uncomfortable position of claiming the status of trusted professional advisor, while having to act out the role and earn a living as commission salespersons?
Do clients realize that fully 80% of the mutual funds sold in the last five years were sold utilizing the highest choice of remuneration available to the advisor? Is this service in the client interest or in the industry interest? For data source view the sales figures on mutual funds at the Mutual Fund Dealers Association of Canada website.
If you multiply the 5% commission earned on every DSC (deferred sales charge) mutual fund choice by the amount of sales, it will partially explain the ease with which some members of your industry are able to earn billions of dollars each year. Perhaps it is time to address the details of those many mutual fund choices available to your trusting clients before class action parties force you to do so.
PLEASE OPEN YOUR BUSINESS CONDUCT AND PRACTICES TO THE LIGHT OF DAY
We regret having to make this plea in public, but the practice of hiding financial irregularities behind confidentiality agreements, gag orders and industry codes of silence is far too prevalent and the undersigned have lobbied far too long with no result.
We are talking about examples where ordinary Canadians do not get treated with the professionalism they deserve, and rather than fix the problem, they are beaten down using legal methods and a seemingly inexhaustible imbalance of strength over the client. We wish to ask you to start to do the right thing, as all industry participants promise to do, but some fail to live up to.
Specific examples include
Please apologize to 92 year old Norah Cosgrove, an Ottawa resident who trusted her financial advisor, and was disappointed in this trust. Your firm terminated the advisor in question, but when Mrs Cosgrove took her claim for $10,000 to small claims court (case ???) your defense was that you felt you did not owe this elderly client a duty of care. Your entire industry promises a duty of care to a professional standard of conduct to it's clients, and to state less in a court filed legal document is simple wrong. Please allow this woman to understand why you would let her advisor go, supposedly with some cause, and yet deny, deny, deny any wrongdoing to her, the client. Please correct this.
Please cease your legal action against 80 yr old Pola Goldfluss of Toronto. She has already survived the loss of her husband, as well as her ordeal during the holocaust. She also has already been granted a settlement of some $250,000 from her investment dealer for investment advice that was supposedly not represented properly to her. To turn around, and then sue this client, for the same $250,000 on a legal technicality is simply harsh, unusual and unfair to the clients you serve. Why, pray tell did you agree to give her back her money in the first place if she did not have legitimate concerns, and now to say that the settlement agreement that she signed, was not signed by you, and need not stop you from pursuing her is simply irresponsible abuse of your level of power. Please cease and desist. (see TD Waterhouse vs Pola Goldfluss.
Please stop asking clients who have been abused by the industry to sign confidentiality agreements promising to never reveal details of the wrong they suffered, or the settlement they received. Asking them to do this is in violation of at least one firm's code of ethics which states, "each and every transaction we are involved in will stand the test of complete and open public scrutiny". All the other firms no doubt have similar promises of ethical behavior in the public interest. We simply ask that you now live up to them.
For example, when the 92 year old Kelowna, BC resident this last year was helped into an assisted living facility by his financial advisor, and told by his advisor that he would help him sell his condo, he was not aware that it would ultimately end up registered in the name of the advisor. Nor was he fully aware of much of the details of the transaction. The fact that it was done with no money going to the elderly client, no appraisal of value, at far below market comparable properties, and at a zero percent interest loan to the advisor was not only hidden from the client, but from his family, the public, and the regulatory authorities. It remained hidden for as long as possible, and was not properly revealed to regulatory authorities except by private industry advocates who expressed concern for this client. What were you thinking and where was your responsibility to act properly? This is not behavior appropriate to a business that claims, "the highest standards of trust and integrity".
Please stop using money to purchase silence and escape from prosecution over things that should be fully and openly investigated and properly prosecuted. Members of the public are not allowed to buy their way out of the situations they find themselves in, and nor should our most trustworthy financial institutions. For the gentleman in Kelowna to receive title to his own condominium back, he was required to sign an agreement that started out, "for value received". I consider giving the man his home back after removing it from his fraudulently, and calling it giving him something of value is adding insult to injury. Please immediately reconsider and remove all future bans on open and honest transparency in your company and your industry. It will assist in restoration of public trust in our financial firms.
Please remove internal rules that prevent industry employees from speaking out on issues in the public interest. This is holding back the move towards trust and integrity that this industry so loudly proclaims. How can we possibly expect complete trust and integrity when there still exist internal rules forbidding employees from revealing indiscretions without approval of management. This internal code of silence has acted in the past kind of like asking an abused child to take his complaints to his abuser. Until this policy of keeping everything "inside the firm", is updated to our times, violations of trust and integrity will be an ongoing problem.
If you will recall when mutual fund sellers used to be able to obtain free vacations if they sold enough dollars worth of one fund or the other.
When Bud Jorgensen of the Globe and Mail started to investigate this practice many years ago, I was told by my then manager, "anyone who talks to the press about this is fired immediately. I found that a rather unsettling and startling comment to come from someone in and industry of trust. I have since learned that this same manager was enjoying his annual trips to the Indy 500, courtesy of a mutual fund company. Please remove internal codes of quiet, codes of silence or gag orders on ethical irregularities. they belong with the Cosa Nostra, not one of our most important industries.
Please remove the internal policy, written or unwritten of not informing clients of the most economical methods of investing. The promise made to most clients is to place their interest ahead of those of the industry, and to do otherwise is a failure of this promise. How many clients have been told that mutual fund commissions were deregulated in 1987, and that clients now have choices as to whether or not to pay commissions when buying most mutual funds? If the industry is truly in the business of serving as trusted professional advisors serving the client interests, I am at a loss to understand why no full service investment dealer that I am aware of has advertised this fact to clients. Is it because they are stuck in the uncomfortable position of claiming the status of trusted professional advisor, while having to act out the role and earn a living as commission salespersons?
Do clients realize that fully 80% of the mutual funds sold in the last five years were sold utilizing the highest choice of remuneration available to the advisor? Is this service in the client interest or in the industry interest? For data source view the sales figures on mutual funds at the Mutual Fund Dealers Association of Canada website.
If you multiply the 5% commission earned on every DSC (deferred sales charge) mutual fund choice by the amount of sales, it will partially explain the ease with which some members of your industry are able to earn billions of dollars each year. Perhaps it is time to address the details of those many mutual fund choices available to your trusting clients before class action parties force you to do so.
Wednesday, March 23, 2005
improper mutual fund practices lead to $81 mil fines
From Wednesday, March 23, 2005 Washinton Post newspaper comes the following:
By Brooke A. MastersWashington Post Staff WriterWednesday, March 23, 2005; 5:29 PM
"Citigroup, JPMorgan Chase and American Express Financial Advisers paid a total of $21.25 million to the NASD, formerly known as the National Association of Securities Dealers, to settle allegations that they collected excess commissions from more than 50,000 households by selling high-fee "class B" mutual fund shares when the investors could have bought another class of the same funds for less. In addition to the fines, all three firms will convert the shares into the class that pays lower ongoing fees, and reimburse customers who have already sold the shares for the extra fees they paid."
Here in Canada we have yet to awaken to the similar sounding and acting sales practices, being disguised as professional investment advice. The fact is that 80% of the mutual fund sales in Canada for many years now have gone into the higher compensating (and higher penalty to client) DSC funds, which have the deferred sales charge.
Further, when comparing two otherwise identical mutual funds, except for the compensation paid to advisor, a popular Deferred Service Charge (DSC) fund, which pays 5% to the advisor without disclosure on client confirmation or client statement, has grown over SEVENTY TIMES as large as an identical fund that has no hidden commission structure[1]This growth was achieved despite a higher management cost to the client, and a multi-year penalty to the client to exit the fund. [1] . (Source, Ontario Securities Commission Fair Dealing Model proposals, appendix F, "Compensation Bias", page 12)
This does not speak very highly of the amount of professionalism in todays financial services industry.
By Brooke A. MastersWashington Post Staff WriterWednesday, March 23, 2005; 5:29 PM
"Citigroup, JPMorgan Chase and American Express Financial Advisers paid a total of $21.25 million to the NASD, formerly known as the National Association of Securities Dealers, to settle allegations that they collected excess commissions from more than 50,000 households by selling high-fee "class B" mutual fund shares when the investors could have bought another class of the same funds for less. In addition to the fines, all three firms will convert the shares into the class that pays lower ongoing fees, and reimburse customers who have already sold the shares for the extra fees they paid."
Here in Canada we have yet to awaken to the similar sounding and acting sales practices, being disguised as professional investment advice. The fact is that 80% of the mutual fund sales in Canada for many years now have gone into the higher compensating (and higher penalty to client) DSC funds, which have the deferred sales charge.
Further, when comparing two otherwise identical mutual funds, except for the compensation paid to advisor, a popular Deferred Service Charge (DSC) fund, which pays 5% to the advisor without disclosure on client confirmation or client statement, has grown over SEVENTY TIMES as large as an identical fund that has no hidden commission structure[1]This growth was achieved despite a higher management cost to the client, and a multi-year penalty to the client to exit the fund. [1] . (Source, Ontario Securities Commission Fair Dealing Model proposals, appendix F, "Compensation Bias", page 12)
This does not speak very highly of the amount of professionalism in todays financial services industry.
Alberta Securities Commission comes under investigation
from todays Financial Post comes an article about our Alberta Securities Commission being held to account by numerous insiders and former employees who allege improprieties within. "Securities watchdog turmoil
Alberta commission facing review, lawyer denies claims"
Theresa Tedesco
National Post
Wednesday, March 23, 2005
This article explains a lot to me, as I had worked with the ASC enough times to realize that they were rather dysfunctional in the role of public protection.
The following is my letter of support to Alberta Finance Minister Shirley Mclellan, who is coming under fire in the legislature for her tough approach:
March 23, 2005
To: Finance Minister for Alberta Shirley McLellan Fax: (780) 428-1341
From: Larry Elford, CFP, CIM, FCSI Associate Portfolio Manager (retired 2004)
Re: Alberta Securities Commission
Dear Mrs. McLellan,
I write to thank you for your bold efforts on behalf of the public interest in the province. I understand the pressure you must be under for taking on this problem, and I want you to know I support you.
I am aware that some of those accused will simply take the Bill Clinton (or the Lord Conrad Black) approach of , “deny, deny, deny”, and that this will not hold up forever.
I have no knowledge of the personal side of the issues in question, but my professional life required me to be in close contact at times with the Alberta Securities Commission, and to watch them in action.
I feel that my experiences with the Commission lend credibility to allegations made by others that the Commission was simply not doing it’s job as advertised.
I will keep it short for now, but I have a few examples of my own which show the Commission brushing aside, and selectively enforcing or choosing to not enforce our provincial Securities Act.
Given the recent resignation of the Ontario Securities Commission head, after being caught in deceptive public statements about his department (six days prior to his announcement), and the following news: Toronto, March 17, 2005
Michael Lauber, the CEO and Ombudsman of the Ombudsman for Banking Services and Investments, will retire June 30th, the organization announced today……………….it appears that there is a bit of a wholesale change of guard taking place, and it could not happen at a better time.
Canadians have been too long victims of financial predators and the current crop of regulators is as much part of the problem as the predators. Please accept my congratulations on your steps in this direction and my offer of support in any way that I may be of assistance.
Best regards.
Larry Elford, 521 Fairmont Blvd, Lethbridge, Alberta T1K 7G3, lelford@shaw.ca
Alberta commission facing review, lawyer denies claims"
Theresa Tedesco
National Post
Wednesday, March 23, 2005
This article explains a lot to me, as I had worked with the ASC enough times to realize that they were rather dysfunctional in the role of public protection.
The following is my letter of support to Alberta Finance Minister Shirley Mclellan, who is coming under fire in the legislature for her tough approach:
March 23, 2005
To: Finance Minister for Alberta Shirley McLellan Fax: (780) 428-1341
From: Larry Elford, CFP, CIM, FCSI Associate Portfolio Manager (retired 2004)
Re: Alberta Securities Commission
Dear Mrs. McLellan,
I write to thank you for your bold efforts on behalf of the public interest in the province. I understand the pressure you must be under for taking on this problem, and I want you to know I support you.
I am aware that some of those accused will simply take the Bill Clinton (or the Lord Conrad Black) approach of , “deny, deny, deny”, and that this will not hold up forever.
I have no knowledge of the personal side of the issues in question, but my professional life required me to be in close contact at times with the Alberta Securities Commission, and to watch them in action.
I feel that my experiences with the Commission lend credibility to allegations made by others that the Commission was simply not doing it’s job as advertised.
I will keep it short for now, but I have a few examples of my own which show the Commission brushing aside, and selectively enforcing or choosing to not enforce our provincial Securities Act.
Given the recent resignation of the Ontario Securities Commission head, after being caught in deceptive public statements about his department (six days prior to his announcement), and the following news: Toronto, March 17, 2005
Michael Lauber, the CEO and Ombudsman of the Ombudsman for Banking Services and Investments, will retire June 30th, the organization announced today……………….it appears that there is a bit of a wholesale change of guard taking place, and it could not happen at a better time.
Canadians have been too long victims of financial predators and the current crop of regulators is as much part of the problem as the predators. Please accept my congratulations on your steps in this direction and my offer of support in any way that I may be of assistance.
Best regards.
Larry Elford, 521 Fairmont Blvd, Lethbridge, Alberta T1K 7G3, lelford@shaw.ca
Sunday, March 13, 2005
I should mention that this site is intended to catalogue my trials and tribulations during the time I have tried to bring increased ethics to the investment business. It is my responsibility to do this, similar to that of every single member of the industry to work towards preserving and protecting our clients and the reputation of the business. Looking the other way, and covering up abuse only works to profit in the short term, not the long term.
If I can be of any help through these stories, to members of the public who are, or have been abused by this industry, I offer my services and my experience to assist, without compensation. I am qualified to act as an expert witness in litigation, but if I were paid to do this, my opinions may come into question. I am happy to tell the truth as I know it, and happy to see if that can in any way improve conditions in the investment industry and for the public.
Thanks for reading along, and best regards.
investoradvocate@shaw.ca
If I can be of any help through these stories, to members of the public who are, or have been abused by this industry, I offer my services and my experience to assist, without compensation. I am qualified to act as an expert witness in litigation, but if I were paid to do this, my opinions may come into question. I am happy to tell the truth as I know it, and happy to see if that can in any way improve conditions in the investment industry and for the public.
Thanks for reading along, and best regards.
investoradvocate@shaw.ca
Mutual funds and profit motivators……….how your investment advisor’s personal compensation may have clouded the “professional advice” to you the client………
When you deal with a firm and an advisor that promises professional investment advice that is in the best interests of the client……………..is this what you actually get, or are you the victim of some puffy advertising? You be the judge.
Prior to 1987, investment commissions were regulated, and non-negotiable. Life was good if you were an advisor, although we called ourselves, “stockbroker’s”, back then.
Clients who wished to purchase a mutual fund were required to pay whatever the prospectus called for. Templeton purchasers paid a 9% commission to buy the fund back then.
They came deregulation and the market crash of 1987. Things changed. RBC Financial took away my business cards calling me a stockbroker, and gave me cards which referred to my title as one of, “investment advisor’.
No regard to the fact that “investment advisor”, is a registered title with Securities Act guidelines and requirements that virtually none of us met, nor today do most RBC advisors meet. It was deemed to be a “more acceptable” title to refer to us by, than that of “stockbroker” after the crash. People were afraid of the word, “stock”, after the crash.
Fast forward to 2004. Commissions have been deregulated for a time period coming up upon nearly two decades. The internet has allowed people to buy investments faster and cheaper. Clients are more sophisticated, better informed, and have access to information in their homes that was unheard of in 1987. (internet, CNN, CNBC, exchange quotes, business news)
Some advisors have grown and changed with the times, morphing from investment salesperson to investment advisor. However some have tried to play in both venues, that of pretending to be a professional advisor to the client, while actually acting the role of a commission product salesperson. The bulk of industry compensation schemes is still largely compensation incentive based.
Case in point. Have you ever, in the last twenty years seen one of the large, bank owned investment dealers state publicly that commissions are deregulated, and that you can buy your mutual funds without sales cost? No you have not. Why not?
Because offering mutual funds without sales charge was a topic banned from discussion at most large firms. More than one firm has given me this rule either verbally or in writing. I am currently in litigation with one of the firms I worked for that forbid the airing of commission free or even commission reduced mutual funds. They are so far denying ever acting in this manner, (as it violates their code of ethics) however it is a fairly well known fact in the industry. Why are short sighted management types able to convince themselves that lying is a better alternative than admitting the truth, I will never know.
Some of the independent dealers are able to offer commission reduced or free mutual funds, since trailer fees pay them quite well, and make a very decent living, while the major bank owned IDA firms, have a “gag order”, which forbids anyone in the firm from talking publicly about these client friendly forms of competition. Speaking of competition, this seems to fly in the face of the Canadian Competition Act, does it not?
Yes, however, no matter how much the bank owned firms treat advisors as independent agents, they also call them employees when they need to, and the Canadian Competition Act does not apply to employees. So they once again get the best of both worlds. They get to ignore the competition act, while claiming, “trust through integrity in everything we do” (RBC Financial), which is following one law while simultaneously violating the heck out of the spirit and the intent of the law.
If you as an investment advisor, make an error, or have a bad client, the firm will make you pay for this error, in violation of employment regulations, as this is in their (firm's) favor. But if calling you an employee is to their advantage, they will as quickly change gears and state this as the relationship. They call this double dealing, “standard industry practice”, which is another way of saying, “we are large enough to change the rules to suit ourselves, and to hell with you if you do not like it”. Unfortunately this attitude often applies to clients as well as employees.
But I digress…………….I was on the topic of how the large firms get away with charging the highest fees or commissions that they have to choose from, while at the same time telling you that they are your agent, advisor, or expert, acting on your behalf to help you meet your financial goals. (see any IDA firm’s advertising for confirmation of this premise)
Some specific examples of how your advisor places his or her interest ahead of yours:
You decide to buy a mutual fund. Rather than pick one out of a hat, you decide to trust an expert and get some advice. The expert has any one of several ways to buy mutual funds, since the market is now deregulated (remember 1987?). Does the expert advisor advise you to buy the one with the lowest cost to you, and the greatest return potential………..or do they abrogate their professional responsibility and advise you to buy the one that pays them the most?
From industry stats, which state that given identical funds, with identical holdings, and managers, but with different compensation structures to the advisor:
The funds with the higher compensation to the advisor sold at a rate of 74 times higher than the original, lower cost fund choice, in the last ten or so years.
Source
Ontario Securities Commission Fair Dealing Model, appendix F, pages 12 and 13 on Compensation Biases. http://www.osc.gov.on.ca/
These two pages that provide an interesting look at what happened when a new style of compensation was introduced to mutual funds back in the '90's. (DSC's) It shows that between otherwise identical funds, the one with more hidden and higher compensation to the advisor sold SEVENTY FOUR TIMES as much in assets over the following ten years than the identical fund with lower and less hidden compensation.
Statistics hold that over 80% of sales of mutual funds in Canada are made with the DSC option, despite the fact that advisors promise to place the interests of the client first and foremost. This promise is evidently not being lived up to.
Another real life example from http://www.globeinvestor.com/
Trimark’s flagship fund began in 1981, had front end fee option only, MER of 1.62%, total assets of over $3 billion, accomplished in 23 years.
Trimark’s Select Growth fund was introduced in 1989, as a clone fund to the above with a DSC sales compensation model as its key-differentiating feature. It’s MER is higher at 2.39%, costing the client more, in part to help finance the up front commission that advisors earn. This compensation is more easily hidden, in that the advisor earns his 5% commission without the client seeing it in writing (outside of reading a 334 page legal prospectus). It has total assets of over $6 billion, accomplished in 15 years. (double the size of the original and cheaper run Trimark fund)
Clients pay more in annual fee’s to have this fund. Clients are tied to a deferred sales charge that is easily hidden from them. Advisor earns more.
Why is your investment advisor telling you to buy the DSC option??
Is it because it is in your better interest? Or theirs?
I hope this information can be of use to Canadian Investors.
Larry Elford CFP, CIM, FCSI, Associate Portfolio Manager (retired 2004)
Future articles will look at the trend towards fee based accounts, which according to industry stats, earn between twelve to twenty six times as much profit for the firm offering them as do independent third party mutual funds.
Follwing this, perhaps an article will investigate the addiction of something called double dipping, whereby a few unscrupulous advisors have found ways to earn both the maximum commission from a client who comes to them for advice, and then add insult to injury by additionally charging the client an annual fee based advisory charge on this same investment. Two (or more) earnings from one client investment.
When you deal with a firm and an advisor that promises professional investment advice that is in the best interests of the client……………..is this what you actually get, or are you the victim of some puffy advertising? You be the judge.
Prior to 1987, investment commissions were regulated, and non-negotiable. Life was good if you were an advisor, although we called ourselves, “stockbroker’s”, back then.
Clients who wished to purchase a mutual fund were required to pay whatever the prospectus called for. Templeton purchasers paid a 9% commission to buy the fund back then.
They came deregulation and the market crash of 1987. Things changed. RBC Financial took away my business cards calling me a stockbroker, and gave me cards which referred to my title as one of, “investment advisor’.
No regard to the fact that “investment advisor”, is a registered title with Securities Act guidelines and requirements that virtually none of us met, nor today do most RBC advisors meet. It was deemed to be a “more acceptable” title to refer to us by, than that of “stockbroker” after the crash. People were afraid of the word, “stock”, after the crash.
Fast forward to 2004. Commissions have been deregulated for a time period coming up upon nearly two decades. The internet has allowed people to buy investments faster and cheaper. Clients are more sophisticated, better informed, and have access to information in their homes that was unheard of in 1987. (internet, CNN, CNBC, exchange quotes, business news)
Some advisors have grown and changed with the times, morphing from investment salesperson to investment advisor. However some have tried to play in both venues, that of pretending to be a professional advisor to the client, while actually acting the role of a commission product salesperson. The bulk of industry compensation schemes is still largely compensation incentive based.
Case in point. Have you ever, in the last twenty years seen one of the large, bank owned investment dealers state publicly that commissions are deregulated, and that you can buy your mutual funds without sales cost? No you have not. Why not?
Because offering mutual funds without sales charge was a topic banned from discussion at most large firms. More than one firm has given me this rule either verbally or in writing. I am currently in litigation with one of the firms I worked for that forbid the airing of commission free or even commission reduced mutual funds. They are so far denying ever acting in this manner, (as it violates their code of ethics) however it is a fairly well known fact in the industry. Why are short sighted management types able to convince themselves that lying is a better alternative than admitting the truth, I will never know.
Some of the independent dealers are able to offer commission reduced or free mutual funds, since trailer fees pay them quite well, and make a very decent living, while the major bank owned IDA firms, have a “gag order”, which forbids anyone in the firm from talking publicly about these client friendly forms of competition. Speaking of competition, this seems to fly in the face of the Canadian Competition Act, does it not?
Yes, however, no matter how much the bank owned firms treat advisors as independent agents, they also call them employees when they need to, and the Canadian Competition Act does not apply to employees. So they once again get the best of both worlds. They get to ignore the competition act, while claiming, “trust through integrity in everything we do” (RBC Financial), which is following one law while simultaneously violating the heck out of the spirit and the intent of the law.
If you as an investment advisor, make an error, or have a bad client, the firm will make you pay for this error, in violation of employment regulations, as this is in their (firm's) favor. But if calling you an employee is to their advantage, they will as quickly change gears and state this as the relationship. They call this double dealing, “standard industry practice”, which is another way of saying, “we are large enough to change the rules to suit ourselves, and to hell with you if you do not like it”. Unfortunately this attitude often applies to clients as well as employees.
But I digress…………….I was on the topic of how the large firms get away with charging the highest fees or commissions that they have to choose from, while at the same time telling you that they are your agent, advisor, or expert, acting on your behalf to help you meet your financial goals. (see any IDA firm’s advertising for confirmation of this premise)
Some specific examples of how your advisor places his or her interest ahead of yours:
You decide to buy a mutual fund. Rather than pick one out of a hat, you decide to trust an expert and get some advice. The expert has any one of several ways to buy mutual funds, since the market is now deregulated (remember 1987?). Does the expert advisor advise you to buy the one with the lowest cost to you, and the greatest return potential………..or do they abrogate their professional responsibility and advise you to buy the one that pays them the most?
From industry stats, which state that given identical funds, with identical holdings, and managers, but with different compensation structures to the advisor:
The funds with the higher compensation to the advisor sold at a rate of 74 times higher than the original, lower cost fund choice, in the last ten or so years.
Source
Ontario Securities Commission Fair Dealing Model, appendix F, pages 12 and 13 on Compensation Biases. http://www.osc.gov.on.ca/
These two pages that provide an interesting look at what happened when a new style of compensation was introduced to mutual funds back in the '90's. (DSC's) It shows that between otherwise identical funds, the one with more hidden and higher compensation to the advisor sold SEVENTY FOUR TIMES as much in assets over the following ten years than the identical fund with lower and less hidden compensation.
Statistics hold that over 80% of sales of mutual funds in Canada are made with the DSC option, despite the fact that advisors promise to place the interests of the client first and foremost. This promise is evidently not being lived up to.
Another real life example from http://www.globeinvestor.com/
Trimark’s flagship fund began in 1981, had front end fee option only, MER of 1.62%, total assets of over $3 billion, accomplished in 23 years.
Trimark’s Select Growth fund was introduced in 1989, as a clone fund to the above with a DSC sales compensation model as its key-differentiating feature. It’s MER is higher at 2.39%, costing the client more, in part to help finance the up front commission that advisors earn. This compensation is more easily hidden, in that the advisor earns his 5% commission without the client seeing it in writing (outside of reading a 334 page legal prospectus). It has total assets of over $6 billion, accomplished in 15 years. (double the size of the original and cheaper run Trimark fund)
Clients pay more in annual fee’s to have this fund. Clients are tied to a deferred sales charge that is easily hidden from them. Advisor earns more.
Why is your investment advisor telling you to buy the DSC option??
Is it because it is in your better interest? Or theirs?
I hope this information can be of use to Canadian Investors.
Larry Elford CFP, CIM, FCSI, Associate Portfolio Manager (retired 2004)
Future articles will look at the trend towards fee based accounts, which according to industry stats, earn between twelve to twenty six times as much profit for the firm offering them as do independent third party mutual funds.
Follwing this, perhaps an article will investigate the addiction of something called double dipping, whereby a few unscrupulous advisors have found ways to earn both the maximum commission from a client who comes to them for advice, and then add insult to injury by additionally charging the client an annual fee based advisory charge on this same investment. Two (or more) earnings from one client investment.
Double Dipping
Is your advisor charging twice for advice?
As the investment world evolves, I find that the changes happen so fast, that the regulatory environment cannot keep up. This leaves only the ethics of an advisor or an organization to handle the conflicts that arise on a daily basis. Here is one situation that I have witnessed from my twenty year position within the industry that is being conveniently overlooked by firms and regulators to the detriment of clients, much to the advantage of advisors.
It is called double dipping and it is the practice of earning fees twice on the same investment. Here’s how it goes:
Your advisor comes to you, “advising” that you sign up for a new type of investment management process, where an annual fee is charged for services, rather than a per transaction charge. You agree that it sounds sensible and tell them to go ahead and convert your current investments over to this style of payment. The double dipping test is, “will your account pay a transaction charge either to sell or redeem your current investments, in order to change to the annual fee arrangement?” If so, there may be something rotten going on. The other double dipping method I have seen is to first sell the client a DSC (deferred sales charge) mutual fund where your advisor earns fee number one, and then change these investments into a fee based account, thereby earning fee number two.
Either way you have just been double dipped. In the case of the mutual fund, given that there is usually a trailer fee earned (a percentage of the annual management fee) by the firm and the advisor, you may actually be enabling your trusted advisor to earn three fees on the same investment.
As far as this writer is concerned, since about 1987, when commissions were deregulated and firms changed the title (as well as the promise) on their business cards from, “stockbroker”, to “advisor”, they brought with them a duty of care to place the interests of those they were advising first and foremost. It is simply not in the best interest of the client to pay two or three fees to their “advisor”, and it is most definitely in the best interest of the advisor as well as the firm who shares in each dollar earned.
These practices are considered unethical as well as illegal in the United States. In Canada I have seen them occur since the practice is slightly ahead of the regulations, (or the regulations in Canada are a bit behind). Ethics would of course dictate it not be done, but as we have seen, some firms and advisors (as well as regulators) only look at the rules and not at the ethics of a practice if that makes them look better.
The sad fact is that while you may have paid a commission to purchase your current investment, or your advisor may have earned a commission, it does very little for your advisor after this. You may be holding it for it’s intended purpose, say long term growth. This “holding” earns nothing for your broker or advisor, as they may be earning a commission only upon making a transaction. This is partially the reason for the industry trend towards annual fee based accounts. Moving to annual fee’s can be an advantage to avoid the potential conflict of interest of commissions, but it may also be advantageous to the dealer who will have an, “annuity”, if you will, from these annual fee’s. They have positives and negatives, as does anything, but disclosure is a bit lacking on these managed accounts and regulation as we have seen in Canada is mostly self interested industry theatrics.
Double dipping is the invisible client killer that occurs in some cases, and I look forward to the day when firms and regulators recognize this and stop looking the other way because of the revenue it generates.
If your account fails the double dipping test, I would suggest you make up a firm but politely worded letter to your investment firm, with a copy to the provincial securities commission. They may take your enquiry seriously and you should be offered a full refund as well as an apology. Unfortunately, I have also seen legitimate complaints in this area brushed aside by both, as firms and regulators are loath to ever admit to ethical lapses. After all, integrity is the highest value that the firm lays claim to. It is yet to be seen if they will ever fully live up to it.
Written by an anonymous member of the investment community. It is with regret that this need be done anonymously, but until the investment industry begins to walk the talk of integrity and ethics, this kind of client friendly discussion is still considered grounds for dismissal at some IDA firms.
Is your advisor charging twice for advice?
As the investment world evolves, I find that the changes happen so fast, that the regulatory environment cannot keep up. This leaves only the ethics of an advisor or an organization to handle the conflicts that arise on a daily basis. Here is one situation that I have witnessed from my twenty year position within the industry that is being conveniently overlooked by firms and regulators to the detriment of clients, much to the advantage of advisors.
It is called double dipping and it is the practice of earning fees twice on the same investment. Here’s how it goes:
Your advisor comes to you, “advising” that you sign up for a new type of investment management process, where an annual fee is charged for services, rather than a per transaction charge. You agree that it sounds sensible and tell them to go ahead and convert your current investments over to this style of payment. The double dipping test is, “will your account pay a transaction charge either to sell or redeem your current investments, in order to change to the annual fee arrangement?” If so, there may be something rotten going on. The other double dipping method I have seen is to first sell the client a DSC (deferred sales charge) mutual fund where your advisor earns fee number one, and then change these investments into a fee based account, thereby earning fee number two.
Either way you have just been double dipped. In the case of the mutual fund, given that there is usually a trailer fee earned (a percentage of the annual management fee) by the firm and the advisor, you may actually be enabling your trusted advisor to earn three fees on the same investment.
As far as this writer is concerned, since about 1987, when commissions were deregulated and firms changed the title (as well as the promise) on their business cards from, “stockbroker”, to “advisor”, they brought with them a duty of care to place the interests of those they were advising first and foremost. It is simply not in the best interest of the client to pay two or three fees to their “advisor”, and it is most definitely in the best interest of the advisor as well as the firm who shares in each dollar earned.
These practices are considered unethical as well as illegal in the United States. In Canada I have seen them occur since the practice is slightly ahead of the regulations, (or the regulations in Canada are a bit behind). Ethics would of course dictate it not be done, but as we have seen, some firms and advisors (as well as regulators) only look at the rules and not at the ethics of a practice if that makes them look better.
The sad fact is that while you may have paid a commission to purchase your current investment, or your advisor may have earned a commission, it does very little for your advisor after this. You may be holding it for it’s intended purpose, say long term growth. This “holding” earns nothing for your broker or advisor, as they may be earning a commission only upon making a transaction. This is partially the reason for the industry trend towards annual fee based accounts. Moving to annual fee’s can be an advantage to avoid the potential conflict of interest of commissions, but it may also be advantageous to the dealer who will have an, “annuity”, if you will, from these annual fee’s. They have positives and negatives, as does anything, but disclosure is a bit lacking on these managed accounts and regulation as we have seen in Canada is mostly self interested industry theatrics.
Double dipping is the invisible client killer that occurs in some cases, and I look forward to the day when firms and regulators recognize this and stop looking the other way because of the revenue it generates.
If your account fails the double dipping test, I would suggest you make up a firm but politely worded letter to your investment firm, with a copy to the provincial securities commission. They may take your enquiry seriously and you should be offered a full refund as well as an apology. Unfortunately, I have also seen legitimate complaints in this area brushed aside by both, as firms and regulators are loath to ever admit to ethical lapses. After all, integrity is the highest value that the firm lays claim to. It is yet to be seen if they will ever fully live up to it.
Written by an anonymous member of the investment community. It is with regret that this need be done anonymously, but until the investment industry begins to walk the talk of integrity and ethics, this kind of client friendly discussion is still considered grounds for dismissal at some IDA firms.
Friday, March 11, 2005
FURTHER TO DUTY OF CARE OWED TO CLIENTS
(easy steps to elder abuse in Canadian financial services industry)
My time working in the financial services industry gave me some interesting insights into the relationship between client and advisor or salesperson.
It reminded me a great deal of the dependant kind of relationship that exisits in a few other fields I am aware of. One is my local flight instructor, who holds my life in his or her hands, my future ability to fly, perhaps to earn my licence, perhaps to earn my living in this area. Another is the local hockey coach who may have players who hope to have a future in hockey. The player, as well as the flyer become so dependant on the good graces, good references and support of the instructor/coach that never will they think of questioning the behavior, the advice, or the activities of that person. Even when they cross over to improper behavior. To speak out might seriously impair the ability to progress and proceed to your goals.
Similar relationships exist between investment expert and client. The typical elderly client, may be trusting, vulnerable, alone, uninformed, basically a very easy target for a financial predator. The advisor is usually, young, informed, confident, backed by a very large firm, and full of promises of care and service. The balance of power between these two parties is so significant that those who fall victim to the odd financial services predator have virtually no chance in Canada. They often rely so heavily on their financial person, that they may never find out that they were ever abused. Firms are not yet doing the proper job of protecting clients, and in fact are far more active in self protection, secrecy, and limiting their liability if one looks at the many cases on record.
Those few who would abuse clients know this, and as an added bonus, are aware that the oldest, most vulnerable, most alone clients out there, may also have the most money. It is a relationship that requires the highest standards of care, and so far all I can point to is that we have the highest standards of talk and advertising promises in Canada. The care is yet to come.
To learn more visit
www.sipa.to small investor protection association
www.regulators.itgo.com website of industry indiscretions
(easy steps to elder abuse in Canadian financial services industry)
My time working in the financial services industry gave me some interesting insights into the relationship between client and advisor or salesperson.
It reminded me a great deal of the dependant kind of relationship that exisits in a few other fields I am aware of. One is my local flight instructor, who holds my life in his or her hands, my future ability to fly, perhaps to earn my licence, perhaps to earn my living in this area. Another is the local hockey coach who may have players who hope to have a future in hockey. The player, as well as the flyer become so dependant on the good graces, good references and support of the instructor/coach that never will they think of questioning the behavior, the advice, or the activities of that person. Even when they cross over to improper behavior. To speak out might seriously impair the ability to progress and proceed to your goals.
Similar relationships exist between investment expert and client. The typical elderly client, may be trusting, vulnerable, alone, uninformed, basically a very easy target for a financial predator. The advisor is usually, young, informed, confident, backed by a very large firm, and full of promises of care and service. The balance of power between these two parties is so significant that those who fall victim to the odd financial services predator have virtually no chance in Canada. They often rely so heavily on their financial person, that they may never find out that they were ever abused. Firms are not yet doing the proper job of protecting clients, and in fact are far more active in self protection, secrecy, and limiting their liability if one looks at the many cases on record.
Those few who would abuse clients know this, and as an added bonus, are aware that the oldest, most vulnerable, most alone clients out there, may also have the most money. It is a relationship that requires the highest standards of care, and so far all I can point to is that we have the highest standards of talk and advertising promises in Canada. The care is yet to come.
To learn more visit
www.sipa.to small investor protection association
www.regulators.itgo.com website of industry indiscretions
Do advisors owe clients a duty of care?
In a recent case where Norah Cosgrove of Ottawa challenged her advisor on her investment accounts in small claims court, one of the defense statements submitted by the investment firm's lawyers was something to the effect that they felt they did not owe this 90 something year old client a duty of care.
Reading it gave me the impression that they were attempting to "wriggle" away from responsibility on this account, due to the technicality that the client had not signed over total discretion on the account. This, despite having terminated the advisor responsible and supposedly for some cause in relation to this case. Since 90% of the investment accounts in Canada would be similar to this elderly client's account, are we to infer, contrary to industry advertising and promotion, that Canada's largest and most highly trusted corporations truly feel they owe clients no duty of care? No duty to place their interests first?
Unfortunately this seems to be the case, as difficult as that sounds from an ethical standpoint. More and more investment employees are standing up to (or stepping away from) an industry that according to Bank of Canada governer David Dodge, has a worldwide reputation of being the lawless, "Wild West".
This "wriggle ability", strikes this writer as being a position that should not be supported if we were to look carefully at the promises that the industry makes to clients overall. Courts have held professional advisors to a very high standard, and often to a fiduciary standard where there is a level of trust placed in the hands of the advisor, a level of vulnerability on the part of the client, and other guidelines. In fact, when an 80 or 90 year old widow (or anyone for that matter) comes to a someone representing themselves as a professional advisor, the relationship very often immediately becomes one of total faith and trust in that advisor. It can be no other way. The client is often very uninformed as to the intracacies of investing, the advisor claims to not only be a professional, but also an expert to guide the client. Any statement to the contrary is denying the obvious. Denying the obvious is either lying, or misleading and should nto be tolerated by the largest corporations in Canada any longer.
When I was an investment person in the industry I would not accept a client who would not take my advice, much like a doctor may not accept a patient who did not follow the doctors advice. If an advisor is claiming to be a professional (and not simply a salesperson) they will do no less.The relationship often becomes very quickly one of a vulnerable, trusting soul, becoming quite reliant upon the strength, wisdom, experience and skill of the professional. If that professional then chooses to abuse the trust placed in them and put their interests ahead of that of the client, the entire system comes into question. It happens very easily of too often.That is what we are seeing in the newspapers on an almost weekly basis, and it should be telling us something is wrong and it is time for a change.
I will wrap this up here, with a promise to explain further in my next blog the topic of just how dependant and vulnerable an elderly client may become on the advisor they deal with. Written in the interests of righting wrongs. Thanks for reading along. If you like what you read, pass this site to those on your mailing list and we will change things for the better. If you don't like what you read, feel free to share your thoughts. I have been wrong before and probably will again. I welcome the chance to learn and grow.
In a recent case where Norah Cosgrove of Ottawa challenged her advisor on her investment accounts in small claims court, one of the defense statements submitted by the investment firm's lawyers was something to the effect that they felt they did not owe this 90 something year old client a duty of care.
Reading it gave me the impression that they were attempting to "wriggle" away from responsibility on this account, due to the technicality that the client had not signed over total discretion on the account. This, despite having terminated the advisor responsible and supposedly for some cause in relation to this case. Since 90% of the investment accounts in Canada would be similar to this elderly client's account, are we to infer, contrary to industry advertising and promotion, that Canada's largest and most highly trusted corporations truly feel they owe clients no duty of care? No duty to place their interests first?
Unfortunately this seems to be the case, as difficult as that sounds from an ethical standpoint. More and more investment employees are standing up to (or stepping away from) an industry that according to Bank of Canada governer David Dodge, has a worldwide reputation of being the lawless, "Wild West".
This "wriggle ability", strikes this writer as being a position that should not be supported if we were to look carefully at the promises that the industry makes to clients overall. Courts have held professional advisors to a very high standard, and often to a fiduciary standard where there is a level of trust placed in the hands of the advisor, a level of vulnerability on the part of the client, and other guidelines. In fact, when an 80 or 90 year old widow (or anyone for that matter) comes to a someone representing themselves as a professional advisor, the relationship very often immediately becomes one of total faith and trust in that advisor. It can be no other way. The client is often very uninformed as to the intracacies of investing, the advisor claims to not only be a professional, but also an expert to guide the client. Any statement to the contrary is denying the obvious. Denying the obvious is either lying, or misleading and should nto be tolerated by the largest corporations in Canada any longer.
When I was an investment person in the industry I would not accept a client who would not take my advice, much like a doctor may not accept a patient who did not follow the doctors advice. If an advisor is claiming to be a professional (and not simply a salesperson) they will do no less.The relationship often becomes very quickly one of a vulnerable, trusting soul, becoming quite reliant upon the strength, wisdom, experience and skill of the professional. If that professional then chooses to abuse the trust placed in them and put their interests ahead of that of the client, the entire system comes into question. It happens very easily of too often.That is what we are seeing in the newspapers on an almost weekly basis, and it should be telling us something is wrong and it is time for a change.
I will wrap this up here, with a promise to explain further in my next blog the topic of just how dependant and vulnerable an elderly client may become on the advisor they deal with. Written in the interests of righting wrongs. Thanks for reading along. If you like what you read, pass this site to those on your mailing list and we will change things for the better. If you don't like what you read, feel free to share your thoughts. I have been wrong before and probably will again. I welcome the chance to learn and grow.
Rules For Fools
Further on the topic of investment industry rules of two basic types. Type one are rules intended to protect investment clients from harm. Type two are rules intended to protect investment firms from harm. I contend that some investment firms do a much better job of enforcing rules that are to their own benefit, while often ignoring rules that are to client benefit. Here is but one example.
Today, march 11, 2005, the Globe and Mail contained a story titled, "RBC's Blackberry-addicted feel withdrawal pangs". It described how a "new" RBC policy, driven by regulatory requirements to overse electronic communications was causing RBC to question employees use of blackberry devices. It seems employees could send or receive e-mails without them residing on the RBC computer servers and this is a no-no.
Is it a no-no because of client interests, or due to the interests of the firm? Here is one opinion. As a nearly twenty year veteran of the firm in question, my experience has been that there has always been a rule that all outside communications by employees must be monitored. The rule was often haphazardly enforced due to new technologies making it difficult to do so. Managers of each office simply cannot read and monitor each type of letter, e-mail or correspondence coming from each salesperson to thousands of clients, so the rule is often ignored. (the rule would typically be intended to protect clients from receiving false or misleading investment promises etc)
However, now that CIBC has discovered that ignoring these types of employee communications can be detrimental to the firm, others are jumping to attention and trying to enforce a rule that they have conveniently ignored for a decade or more. Ignored due in part because it was intended as a rule to protect clients and not of particular concern to the firm's interests. Now that the interests of the firm, and not just the customer, have been demonstrated by the CIBC case, things will just have to change. Big brother will have to step in and folow this one, rather than choose to ignore it. I am adding it to the list of several dozen industry rules that are either ignored or enforced on a daily basis, depending upon the benefits or the preferences of the firm. I wont bore you with all the details. I will save the extended list for a Senate Committee on Banking and Finance.
Today, march 11, 2005, the Globe and Mail contained a story titled, "RBC's Blackberry-addicted feel withdrawal pangs". It described how a "new" RBC policy, driven by regulatory requirements to overse electronic communications was causing RBC to question employees use of blackberry devices. It seems employees could send or receive e-mails without them residing on the RBC computer servers and this is a no-no.
Is it a no-no because of client interests, or due to the interests of the firm? Here is one opinion. As a nearly twenty year veteran of the firm in question, my experience has been that there has always been a rule that all outside communications by employees must be monitored. The rule was often haphazardly enforced due to new technologies making it difficult to do so. Managers of each office simply cannot read and monitor each type of letter, e-mail or correspondence coming from each salesperson to thousands of clients, so the rule is often ignored. (the rule would typically be intended to protect clients from receiving false or misleading investment promises etc)
However, now that CIBC has discovered that ignoring these types of employee communications can be detrimental to the firm, others are jumping to attention and trying to enforce a rule that they have conveniently ignored for a decade or more. Ignored due in part because it was intended as a rule to protect clients and not of particular concern to the firm's interests. Now that the interests of the firm, and not just the customer, have been demonstrated by the CIBC case, things will just have to change. Big brother will have to step in and folow this one, rather than choose to ignore it. I am adding it to the list of several dozen industry rules that are either ignored or enforced on a daily basis, depending upon the benefits or the preferences of the firm. I wont bore you with all the details. I will save the extended list for a Senate Committee on Banking and Finance.
Wednesday, March 09, 2005
"CODE OF SILENCE"
Is It Time To Change Investment Advisor Behaviour, Bank Behavior?
Larry Elford, CFP, CIM, FCSI, Associate Portfolio Manager, (retired)
There have always been written or unwritten rules dictating silence within the ranks of the investment industry. Employees experience threats of termination if they say anything that may embarrass the industry or the firm. But this raises a quandary: What does an industry member do when he or she witnesses client abuse or code of ethics violations? What if management ignores, or worse, sanctions the behaviour? What happens when the very people you are required to report to are part of the problem?
Management compensation in the industry is partially determined by sales or revenues, which puts the industry in the position of walking the line between, acting as professionals to benefit the client and acting as salespersons to maximize revenues. These are two different horses, and both cannot be ridden at the same time by the same rider. The industry code of silence is one of the largest impediments preventing the industry from becoming truly professional. It grew out of the days when investment dealers called themselves "stockbrokers", buying and selling shares. While many feel and act as if they are professional, the code of silence allows a few to act as financial predators hiding inside a business that runs on trust.
Today, the investment industry in Canada advertises the duty of care and trust to benefit the client. Are they delivering this duty to clients? When things go wrong, they are often hidden by the industry’s code of silence, or by confidentiality agreements purchased with clients’ own funds. These allow the industry to talk the talk of trusted professionals possessing high levels of honesty and integrity while walking the walk of commission based salespeople. Need examples? They’re easy to find.
Example #1: Free mutual fund trips. When Globe & Mail reporter Bud Jorgensen began writing articles about advisors sent on holiday junkets by mutual fund companies in the '90's, my manager announced that anyone who spoke to the press on the topic would be fired. At the time, he was about to enjoy his free annual trip to the Indy 500 courtesy of a fund company. After our entire industry was embarrassed by this kind of greed, the practice changed.
Example #2 - Double dipping. When advisors sell a fee-based account, clients are supposed to avoid commissions on subsequent transactions. I have witnessed several cases, however, where advisors have reversed the process for their own benefit. By investing a client's assets into a commission based account and later advising them to move to the new asset-based or fee-based account sets no compliance bells ringing. If the move results in no change except adding a new fee on top of the commissions already paid, the client has been double-dipped. It is unethical, but since it doubles an advisor’s revenue and thus his income, it happens over and over.
Example #3 - "No duty of care owed to clients". Industry literature talks about the duty of care owed to the client, claiming, "Client interest comes first". It also specifies a clear duty of care and a fiduciary responsibility to a "professional standard". When 90-year-old Norah Cosgrove took her bank owned investment dealer to small claims court in Ontario for a $10,000 problem, however, the dealer’s statement of defence was that, "At no time were the defendants acting in a fiduciary capacity", and "The plaintiff was responsible for directing the course of investments in her account". To a 90-year-old client, they were claiming no duty, nor any responsibility. She was totally on her own. That is not what their advertising leads investors to believe. The largest and most supposedly trusted financial institution in the nation claimed they owed no duty of care for this type of account - exactly the same type of investment account held by the majority of Canadian investors. Will this defence be submitted if others run into a problem?
Example #4: Gag orders to cover up abuse or crime. When an investment firm is finally pushed into acknowledging wrong behaviour (usually after years and many thousands of dollars in legal fees), they often offer to award the client cash to make the problem "go away". Part of this settlement process involves a confidentiality agreement requiring the client to promise never to reveal the facts of the case. Does this mean corporations in the financial/investment field can cover fraud or criminal acts by buying silence with the client's own money? It surely appears that way.
There was no disclosure when a 90-year-old Kelowna man lost his home to his trusted investment advisor, who helped the gentleman into an assisted living facility. Family members later found that the elderly client’s home was transferred into the advisor's name at less than market value, without benefit of appraisal and at a zero interest rate. In order to get his home back, the client had to sign a release saying, "for value received...........". What value did the client receive for signing this document Answer: He received his OWN HOME back. For further evidence of the internal code of silence, consider that the IDA (Investment Dealers Association of Canada) was notified of this and were met with non-co-operation by the firm involved. The company’s code of ethics, by the way, states that, "every transaction or activity we are involved in must stand the test of complete and open public scrutiny".
Example #5: Hidden mutual fund commissions. Rather than the clear disclosure that the industry requires, much of the compensation paid to advisors by mutual funds remains hidden behind a legal prospectus. This might explain why a popular Deferred Service Charge (DSC) fund, which pays 5% to the advisor (without commission disclosure on client purchase confirmation or on client statement), has grown over SEVENTY TIMES as large as the otherwise identical fund that has no hidden commission structure[1]This growth was achieved despite a higher management cost to the client, and a hidden penalty to the client to exit the fund. Which fund choice does your advisor suggest to you the DSC version, or non-DSC? Why? In whose interest? Where is the disclosure that the industry rules require?
Example #6: employees forbidden to reveal commission-free funds. Although against both the spirit and intent of the Competition Act of Canada[2], as well as the written company policies, neither policy was followed at my company. Furthermore, I was told that the actual policy followed is not to inform the public that they can purchase mutual funds without commission. Since commissions were officially deregulated in about 1987, can you point to a single industry advertisement in which bank owned investment dealers showed the options available when purchasing a mutual fund?
Conditions will improve when legislators and judges forbid gag orders, codes of silence, and written or unwritten sanctions against people who speak out in the public interest. With almost daily revelations of investment scandals, corruption, and other evidence of corporate, "psychopathic" behaviour among some members of the industry, it is time to eliminate the dark corners that hide these abuses.
Until then, the claim that financial advisors qualify for the term “professional” will remain a painful and unfunny joke.
[1] . (Source, Ontario Securities Commission Fair Dealing Model proposals, appendix F, "Compensation Bias", page 12)
[2] Competition Act-Misleading Advertising and Deceptive Marketing Practices at www.ig.gc.ca
Is It Time To Change Investment Advisor Behaviour, Bank Behavior?
Larry Elford, CFP, CIM, FCSI, Associate Portfolio Manager, (retired)
There have always been written or unwritten rules dictating silence within the ranks of the investment industry. Employees experience threats of termination if they say anything that may embarrass the industry or the firm. But this raises a quandary: What does an industry member do when he or she witnesses client abuse or code of ethics violations? What if management ignores, or worse, sanctions the behaviour? What happens when the very people you are required to report to are part of the problem?
Management compensation in the industry is partially determined by sales or revenues, which puts the industry in the position of walking the line between, acting as professionals to benefit the client and acting as salespersons to maximize revenues. These are two different horses, and both cannot be ridden at the same time by the same rider. The industry code of silence is one of the largest impediments preventing the industry from becoming truly professional. It grew out of the days when investment dealers called themselves "stockbrokers", buying and selling shares. While many feel and act as if they are professional, the code of silence allows a few to act as financial predators hiding inside a business that runs on trust.
Today, the investment industry in Canada advertises the duty of care and trust to benefit the client. Are they delivering this duty to clients? When things go wrong, they are often hidden by the industry’s code of silence, or by confidentiality agreements purchased with clients’ own funds. These allow the industry to talk the talk of trusted professionals possessing high levels of honesty and integrity while walking the walk of commission based salespeople. Need examples? They’re easy to find.
Example #1: Free mutual fund trips. When Globe & Mail reporter Bud Jorgensen began writing articles about advisors sent on holiday junkets by mutual fund companies in the '90's, my manager announced that anyone who spoke to the press on the topic would be fired. At the time, he was about to enjoy his free annual trip to the Indy 500 courtesy of a fund company. After our entire industry was embarrassed by this kind of greed, the practice changed.
Example #2 - Double dipping. When advisors sell a fee-based account, clients are supposed to avoid commissions on subsequent transactions. I have witnessed several cases, however, where advisors have reversed the process for their own benefit. By investing a client's assets into a commission based account and later advising them to move to the new asset-based or fee-based account sets no compliance bells ringing. If the move results in no change except adding a new fee on top of the commissions already paid, the client has been double-dipped. It is unethical, but since it doubles an advisor’s revenue and thus his income, it happens over and over.
Example #3 - "No duty of care owed to clients". Industry literature talks about the duty of care owed to the client, claiming, "Client interest comes first". It also specifies a clear duty of care and a fiduciary responsibility to a "professional standard". When 90-year-old Norah Cosgrove took her bank owned investment dealer to small claims court in Ontario for a $10,000 problem, however, the dealer’s statement of defence was that, "At no time were the defendants acting in a fiduciary capacity", and "The plaintiff was responsible for directing the course of investments in her account". To a 90-year-old client, they were claiming no duty, nor any responsibility. She was totally on her own. That is not what their advertising leads investors to believe. The largest and most supposedly trusted financial institution in the nation claimed they owed no duty of care for this type of account - exactly the same type of investment account held by the majority of Canadian investors. Will this defence be submitted if others run into a problem?
Example #4: Gag orders to cover up abuse or crime. When an investment firm is finally pushed into acknowledging wrong behaviour (usually after years and many thousands of dollars in legal fees), they often offer to award the client cash to make the problem "go away". Part of this settlement process involves a confidentiality agreement requiring the client to promise never to reveal the facts of the case. Does this mean corporations in the financial/investment field can cover fraud or criminal acts by buying silence with the client's own money? It surely appears that way.
There was no disclosure when a 90-year-old Kelowna man lost his home to his trusted investment advisor, who helped the gentleman into an assisted living facility. Family members later found that the elderly client’s home was transferred into the advisor's name at less than market value, without benefit of appraisal and at a zero interest rate. In order to get his home back, the client had to sign a release saying, "for value received...........". What value did the client receive for signing this document Answer: He received his OWN HOME back. For further evidence of the internal code of silence, consider that the IDA (Investment Dealers Association of Canada) was notified of this and were met with non-co-operation by the firm involved. The company’s code of ethics, by the way, states that, "every transaction or activity we are involved in must stand the test of complete and open public scrutiny".
Example #5: Hidden mutual fund commissions. Rather than the clear disclosure that the industry requires, much of the compensation paid to advisors by mutual funds remains hidden behind a legal prospectus. This might explain why a popular Deferred Service Charge (DSC) fund, which pays 5% to the advisor (without commission disclosure on client purchase confirmation or on client statement), has grown over SEVENTY TIMES as large as the otherwise identical fund that has no hidden commission structure[1]This growth was achieved despite a higher management cost to the client, and a hidden penalty to the client to exit the fund. Which fund choice does your advisor suggest to you the DSC version, or non-DSC? Why? In whose interest? Where is the disclosure that the industry rules require?
Example #6: employees forbidden to reveal commission-free funds. Although against both the spirit and intent of the Competition Act of Canada[2], as well as the written company policies, neither policy was followed at my company. Furthermore, I was told that the actual policy followed is not to inform the public that they can purchase mutual funds without commission. Since commissions were officially deregulated in about 1987, can you point to a single industry advertisement in which bank owned investment dealers showed the options available when purchasing a mutual fund?
Conditions will improve when legislators and judges forbid gag orders, codes of silence, and written or unwritten sanctions against people who speak out in the public interest. With almost daily revelations of investment scandals, corruption, and other evidence of corporate, "psychopathic" behaviour among some members of the industry, it is time to eliminate the dark corners that hide these abuses.
Until then, the claim that financial advisors qualify for the term “professional” will remain a painful and unfunny joke.
[1] . (Source, Ontario Securities Commission Fair Dealing Model proposals, appendix F, "Compensation Bias", page 12)
[2] Competition Act-Misleading Advertising and Deceptive Marketing Practices at www.ig.gc.ca
Some findings based on my twenty years in the Canadian Financial Services Industry.
Executive Summary:
1. Bank and Investment Industry rules get followed disparately, selectively and haphazardly, depending upon whether the rule is in the industry interest or in the public interest.
2. Self-regulation allows the industry to be self-arresting, self-judging, and self-punishing, and has resulted in the selfish interests of the industry to abuse the public interest and the public trust.
3. Industry, “codes of silence”, written or unwritten, allow indiscretions to remain hidden or covered up.
4. Abuse, fraud and inappropriate financial treatment of clients are also covered up with cash settlements rather than disclosed, discussed, deterred.
5. Until industry interests, people and players are separated from the role of industry referees, the game will always be stacked against the public interest, and trust in our financial services industry will continue to decline.
6. The industry is allowed to act like a bully, or to live up to the "wild west", comments of one Bank of Canada governor due to the sheer size they possess, the strength, and the freedom to make and enforce their own rules.
I have little faith in the process until it is built on a more sound foundation. To quote but one self appointed self regulatory industry association, “ The Mutual Fund Dealers Association of Canada is the self-regulatory organization for Canadian mutual fund dealers. The MFDA regulates the operations, standards of practice and business conduct of its 183 members and their approximately 70,000 representatives with a mandate to protect investors and the public interest.”
When I read this two concepts jump out at me. One is that this is a self regulatory body, and two that it’s stated mandate is to protect investors and the public interest. In my opinion if we follow the money trail of how they were started, funded, and by whom, as well as the public track record of how well or how poorly investors and the public interest has been treated, I can make no other conclusion that this and similar self appointed, self regulatory organizations are flawed from foundation.
When legislation changes regarding who is allowed to guard the financial henhouse in Canada, and prevents those wealthy foxes from volunteering for the role or appointing themselves, I believe we will make some progress toward the public interest. Until then the personal nest eggs of Canada’s public are at risk of abuse by financial predators.
It would appear that of the thousands of rules the industry is subject to, most are likely to be unused for years, many are ignored, and some are pulled out to punish or be enforced only haphazardly or arbitrarily depending on the good or bad graces of the persons involved.
To be more exact, if the rule is intended to protect the public, and/or save them money, the rule is less likely to be enforced since ignoring violations of these rules are of benefit to firms and managers who are supposed to spot the violations (remember, we are “self regulating”). Much like having a referee on your own team, the calls are going to go your way more often. If the rule, however is to protect the industry or the firm, it is more likely to be enforced or even used in ways against employees who need bringing “into line”. It smacks of disparate treatment depending on who the rule is to benefit.
Larry Elford, CFP, CIM, FCSI, Associate Portfolio Manager (retired 2004)
521 Fairmont Blvd S
Lethbridge, Alberta
T1K 7G3
Executive Summary:
1. Bank and Investment Industry rules get followed disparately, selectively and haphazardly, depending upon whether the rule is in the industry interest or in the public interest.
2. Self-regulation allows the industry to be self-arresting, self-judging, and self-punishing, and has resulted in the selfish interests of the industry to abuse the public interest and the public trust.
3. Industry, “codes of silence”, written or unwritten, allow indiscretions to remain hidden or covered up.
4. Abuse, fraud and inappropriate financial treatment of clients are also covered up with cash settlements rather than disclosed, discussed, deterred.
5. Until industry interests, people and players are separated from the role of industry referees, the game will always be stacked against the public interest, and trust in our financial services industry will continue to decline.
6. The industry is allowed to act like a bully, or to live up to the "wild west", comments of one Bank of Canada governor due to the sheer size they possess, the strength, and the freedom to make and enforce their own rules.
I have little faith in the process until it is built on a more sound foundation. To quote but one self appointed self regulatory industry association, “ The Mutual Fund Dealers Association of Canada is the self-regulatory organization for Canadian mutual fund dealers. The MFDA regulates the operations, standards of practice and business conduct of its 183 members and their approximately 70,000 representatives with a mandate to protect investors and the public interest.”
When I read this two concepts jump out at me. One is that this is a self regulatory body, and two that it’s stated mandate is to protect investors and the public interest. In my opinion if we follow the money trail of how they were started, funded, and by whom, as well as the public track record of how well or how poorly investors and the public interest has been treated, I can make no other conclusion that this and similar self appointed, self regulatory organizations are flawed from foundation.
When legislation changes regarding who is allowed to guard the financial henhouse in Canada, and prevents those wealthy foxes from volunteering for the role or appointing themselves, I believe we will make some progress toward the public interest. Until then the personal nest eggs of Canada’s public are at risk of abuse by financial predators.
It would appear that of the thousands of rules the industry is subject to, most are likely to be unused for years, many are ignored, and some are pulled out to punish or be enforced only haphazardly or arbitrarily depending on the good or bad graces of the persons involved.
To be more exact, if the rule is intended to protect the public, and/or save them money, the rule is less likely to be enforced since ignoring violations of these rules are of benefit to firms and managers who are supposed to spot the violations (remember, we are “self regulating”). Much like having a referee on your own team, the calls are going to go your way more often. If the rule, however is to protect the industry or the firm, it is more likely to be enforced or even used in ways against employees who need bringing “into line”. It smacks of disparate treatment depending on who the rule is to benefit.
Larry Elford, CFP, CIM, FCSI, Associate Portfolio Manager (retired 2004)
521 Fairmont Blvd S
Lethbridge, Alberta
T1K 7G3
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