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
Sunday, March 13, 2005
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.
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