Sunday, October 14, 2007

Adam Smith had "best practices" figured out 200 years ago

"The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.

To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they would naturally be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.

It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have upon many occasions, both deceived and oppressed it."

The above comes from ADAM SMITH (1776) over 230 years ago. From "THE WEALTH OF NATIONS"

As I continue to research how and why the investment industry is the way it is I am struck by the lines above by Adam Smith. They are so simple, and so obvious, and yet so far from how the financial system in Canada is operated.

I guess I am just upset and amazed at how far smart men will stray from known best practices when pushed or pulled by self interest. By my calculations (with help from Harvard, Osgood School of business, Georgia Tech, London Business School and others) Canada is being taken advantage of by between $30 billion and $60 billion each and every year due to financial people serving themselves. Not accidently serving themselves over the clients they promise to serve. "Knowingly" serving themselves first. Knowingly selling products and advice to clients which is false, misleading and not in the interests of the clients who are paying for the advice in good faith. The bargain they are getting in return is that they are being taken advantage of. Abused financially. That is what self regulation in Canada has given us, and it will not be corrected by one securities commission or one hundred. Correcting self dealing, self serving, self regulation requires taking away the priviledge of regulating themselves. It means no longer being able to "babysit" themselves, now that they have demonstrated they are not responsible enough. It means having independant oversight placed upon the industry.

Failure to follow known best practices. Failure to identify known conflicts of interest. This leads to a failure to place client interests first, and self regulation allows this to flourish time and time again. Witness the recent Asset Backed Commercial Paper crisis, which turned out so differently in Canada, than in other countries.

So the bog here will relate to best practices, as compared to not so good practices, and will try and look at a few examples to let you decide which category gets more business in Canada. Why am I bothering? Because this was my industry, my career, my passion. What is my motivation now? I tried for ten years to work within the industry to embrace best practices, and to encourage the industry to live up to its wish to be called a profession. I failed. I was punished for trying to place the interests of clients first. I am here to try and prove that it is still the right thing to do, to place clients interest first. That is my position, that is my bias. If I need a label placed on my mission it is that.

My first awakening that something was wrong, occured in the early 1990's. The Globe and Mail was writing about a mutual fund industry practice of sending the big seller's of funds off on free trips to exotic locations. From my position within the industry this was clearly a conflict of interest in the game of giving envestment advice. I thought that others would agree and want the bad practice revealed and removed. I was wrong. My manager at that time, was attending the Indy 500 each year, courtesy of Mackenzie mutual funds, and he told me that "anyone who talks about this is fired". Not only him, I learned later, that the entire company was on alert against letting the press find out about this practice, including internal telephone record monitoring of calls to the Globe and Mail etc. It was my first eye opener that told me the industry did not necessarily walk the talk they promise.

I began to campaign quietly within the company to separate the roles of "salesperson" from the role (and the title) of "investment advisor". This separation was not welcome. In fact, rather than help move toward any form of higher education requirement, and higher duty of care for the client, I found that my bank owned firm was moving in exactly the opposite direction. They had internal plans to keep the 1000 or so, "advisors" that they already had, but to also convert the 15,000 or so, bank employees who were acting as account mangers over to financial planners and investment advisors. They were "renaming" the entire workforce as professional advisors, without so much as meeting the educational or the experience requirements. In a self regulating industry this is not so much of a problem.

Today, we find from web site http://www.osc.gov.on.ca/ on the topic of "registration", that about 90 plus percent of people in Canada calling themselves investment advisors, are actually (and legally) registered with the government as "salespersons". This is an illegal and unlawful practice according to the law, as well as the self regulatory standards, not to mention that it misrepresents to the public (illegal to misrepresent under the competition act of Canada). None-the-less, it is accepted in an industry where self regulation allows it to occur.

This is example number one of 'knowingly" using poor industry practices when best practices are overlooked in favor of profits.

Thursday, September 06, 2007

Perfect Storm

I think I am starting to figure it out. Self regulation in Canadian financial, legal and accounting professions have allowed conditions to grow to the point where these three entities can control a pool of capital in excess of a trillion dollars in Canada.

While doing this, they are given the keys to the kingdom in the form of self regulation powers. It is not exactly the same, but similar in principle to allowing the Hells Angels organization to be self policing in matters of crack cocaine. The reasoning is that they are the largest market participants and therefore the best qualified and most interested in maintaining an orderly market.

The article in todays Post about Spinrite Income trust being bought back for cents on the dollar, by the same good folks who earlier bought them for "cents on the dollar' the first time, then dressed them up and sold them to the public for "tens of dollars on the dollar", helped bring it all into perspective. The public is being abused financially to the tune of $30 to $60 billion dollars each year, and in large part this is being done "knowingly" in the reckless pursuit of "more" by professionals who are allowed to abuse the system.

With support from the various interested parties, the accounting, finance and legal professions, anything can be packaged up and sold to Canadians. Knowingly tainted investment products can be compounded with knowingly tainted investment advice, and between the self policing accounting and auditing industry, the self policing legal industry, and the self policing financial services industry, riches will abound.

The fact that all too often the public is the "victim" of these financial services is just a side issue.

Friday, June 15, 2007

YOUR Retirement cut in half

It has been a year since I last updated this blog. I have been busy working on BREACH OF TRUST, a documentary film about the systemic abuses of the public by the financial services profession. I know more now than I ever did while working inside the industry.

I have worked with RCMP IMET on one particularly devious case, talked to numerous politicians, agencies, and concluded that a Royal Commission into white collar fraud in Canada is needed to even fully understand what is going on. The public is being gouged in Canada.

Below is a letter to the Toronto Star in response to a good article by them:


June 15, 2007

To: The Toronto Star

Editor: Mark HeinzlPhone: 416-869-4811 Fax: 416-865-3630 Email: business@thestar.ca

Here are some comments learned while doing research for a documentary film on Canada’s financial services industry. It relates to your good article “MILLIONS FACE OLD AGE POVERTY”, by Rita Trichur.

Breach of Trust, the documentary, continues to grow and get closer to becoming something. It is starting to look like it will provide an “Ontario Lottery Corp” style of disclosure to an industry badly in need. See www.breachoftrust.ca site for some preview material.

Also clear, from the research and study, is that Canadians are being badly gouged by our financial services system. Enough to fund the entire budget for my home province of Alberta each year. I am not talking about, nor am I interested in run of the mill criminals, who break the law and obviously steal things they should not steal. Those should be no-brainers for a seven year old to figure out.

Breach of Trust, is concerned with fraud and systemic abuse of clients, by professionals, by entire industries, major corporations, and at times with apparent assistance from financial regulators.
These things cause lives to be altered, persons to be used and abused, without the recourse of a normal crime. Police look the other way, since it "appears" that all is well. Politicians are not properly informed. Regulators in Canada try and make the record “look good” by not allowing proper investigations to take place. Ever wonder why every major case of securities fraud, or Conrad Black style of case, is investigated by U.S. authorities?

Breach of Trust, the film, is getting around to understanding some of the numbers, but for now, and to be rather conservative, facts would appear to support this statement:

"Abuse of clients, in subtle, often invisible self serving ways by financial service industry professionals, or those claiming professional status in this industry is responsible for enough cost to pay every man, woman and child in Canada at least $1000 dollars." "Each year."

Think about this the next time you hear of the quarterly profit figures announced by your favorite financial institution.
Here are some of the violations of professional conduct that occur daily in Canada’s financial industry:

Self dealing
Misrepresentation………..salesmen calling themselves advisors to mislead consumers into greater trust
Self policing………….(we police ourselves)………any wonder there are no Canadian investigations?
Double dipping……..charging fees on top of commissions, or vice versa
Acting on both sides of underwriting transactions (dual agency) without clear disclosure or understanding by the public.
Underwriting of "please dump this crap" products like some income trusts, ………Eatons...............$25 billion on some income trust analysis.
Intentionally tainted research to support underwritings……………..Nortel?
Mutual fund fees found to be 2% to 3% higher in Canada than world average costs......$15 to $22 billion each year
Proprietary funds....(selling your "house brand" funds)........$1 billion each year
DSC "HIGHEST COMP" selling of funds..........$1 billion each year
Legal exemptions granted to help move junk off the shelf........$X billionlions per yr……..(hundreds of exemptions each year are granted in private to financial firms so they can skirt the law)

Securites Act, industry rules, codes of conduct, mission statements all notwithstanding, these things occur daily inside Canada’s financial industry and are so systemic, to be thought of as “standard industry practice.”

It would be rather easy to find $33 billion in annual costs to Canadians for this kind of "intentionally tainted" investment product. The product is advice, and when the advice given is in the interests of the giver and not the person asking for, paying for, or receiving the advice, it is tainted.

No other industry in the world (outside of China) is allowed to get away with putting so much "tainted product" on the market knowingly for the public to consume.

Canada needs a full Royal Commission into white-collar crimes, frauds, and financial abuses by the industry that promises to serve Canadians.

Last, but not least, this fact. Each mutual fund survey done this year by independent universities from around the world suggests that Canadians pay the highest mutual fund fees in the world........BY FAR..........here is the cost to you.

Squeezing just 2% more profit from each client's mutual fund portfolio (which is included in every investment firms unwritten marketing strategy) will do the following two things:

1. It will cut IN HALF the amount of money each given dollar you invest can grow to after 35 years time.

2. It will place the other half of this cut in the hands of your trusted financial firm.

Results. If your personal retirement target was $1 million dollars, and you were on track to obtain that amount.........this simple 2% trick (which every firm is working hard on) will cut your future nest egg in half and put the other $500,000 into the hands of your retirement planner.

Now you know how those firms announce billion dollar profits.

Ask, no, TELL your member of parliament you want to see a public inquiry into the matter of Canadians being abused by white collar crime, fraud and financial abuse. Or vote for the party that acts like they care about this topic. The very rich of this country no longer need to be subsidized by average hard working Canadians.

Larry Elford (former CFP, CIM, FCSI, Associate Portfolio Manager, retired)
Investor advocate
Lethbridge, Alberta
403 328-0391
http://www.breachoftrust.ca/



Millions face old-age poverty
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RICK MADONIK/TORONTO STAR FILE PHOTO


Jun 14, 2007 12:52 PM
RITA TRICHUR BUSINESS REPORTERTwo out of three Canadians expecting to retire in 2030 are failing to save enough money to cover basic household expenses in their golden years, says a new study released today by the Canadian Institute of Actuaries.
The report, “Planning For Retirement: Are Canadians Saving Enough?,” warns the greying baby boomer generation to either scramble to sharply increase their annual savings or plan to work past age 65 to avoid financial hardship.
"The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement," said the Institute's president, Normand Gendron.
"Governments need to provide Canadians with more education about the role that different savings vehicles can play in generating retirement income, and provide tools and incentives that encourage more households to save."
Canada’s public pension system is not intended to provide all the income needed for an independent retirement, the study said, noting it is only geared to replace about 40 per cent of gross income for households earning the average industrial wage, which was about $40,000 in 2005.
Canadians must act fast to build on this income through some combination of workplace pension plans, registered retirement savings plans, home equity and personal savings, it added.
In fact, actuaries determined a 40-year-old single person earning about $40,000 would need to save as much as 20 per cent, or $8,000, of his or her gross income every year for the next 25 years to cover necessary expenses in retirement. The study found that only a third of Canadian households are currently on track.
The study's findings stand in sharp contrast to a recent opinion poll by Pollara Inc. that found 55 per cent of Canadians aged 40 or older feel some level of confidence that they will have the financial resources to retire comfortably.
Those with retirement savings feel more confident, as do those with a workplace pension plan. Three out of four people surveyed said they plan to retire at or before age 65.