Saturday, April 02, 2005

What the Investment Industry News is saying

Fascinating issue of IE news for March, 2005 issue.

Here are the interesting highlights I found, with my two cents worth of commentary added in italics behind each:

Page 6, article by James Langton, who is probably the best informed writer in the country on the investment business. Titled, "Executives to be less immune to regulatory actions".
It describes how upper executives at major firms rarely if ever get punished for regulatory abuses. They are able to hid behind underlings to remain untouched. This allows them to sometimes , "look the other way", at some of the practices of big producing brokers.
I have to agree with the premise of this article. The upper executives are also compensated by the revenues brought in by the big producing brokers, so not only can they rarely be held responsible for client abuses, they are motivated by money to allow client abuses. It is a flawed system that will be addressed when Canada's regulators are separated completely from industry. It is time a few Investor Advocates took over in regulatory roles, instead of the revolving door of industry participants who help the status quo to remain.

Page 12, "advisors swing into Portus damage-control mode"
It is too bad that salespersons are allowed to represent themselves as advisors to the public. In my opinion, it was the commission merits and not the investment merits of the Portus product that allowed 26,000 Canadians to become investors in this scheme. There is still effectively zero investor protection or regulator action at the individual investor level in Canada in my experience.

Page 31, "Advisors turn to fund wraps, boosting growth". This article quotes members of industry speaking of how fast they are growing their proprietary and non proprietary wrap products. RBC Capital Markets spokesperson is quoted as saying that these kinds of products are growing three times faster than stand alone mutual funds in the nest few years. The unspoken but major underlying reason for the industry growth can be found in the OSC Fair Dealing Model, appendix F, page 10, that points out that by converting assets under administration into assets under management by the firm in a proprietary product, they can increase the percentage of revenues that flow to the firm by between TWELVE AND TWENTY SIX TIMES GREATER. (fourth paragraph on the page)
Some of the most abusive advisors I watched while in the industry even charged the client a commission, to move them into the higher paying proprietary products. Double and triple dipping made them some of the firms top producers and earned them a "vice presidential" title.

US regulators and courts are now starting to hold firms accountable for this, "self serving" investment advice. see:
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.

In Canada this kind of thing is "standard industry practice" as the investment firms call it, despite being blatantly self serving to the revenues of the firm, and punishing to the public they serve.

Page 36, article by Glorianne Stromberg, the godfather of mutual fund common sense commentary in Canada. Whatever you read from her will eventually be proven to be true.