Tricks of the Trade. Sales tricks, investment abuses.

[admin]

Tuesday, May 6, 2008
fee"dumb" 55
FEE-DUMB 55


WHEN IT COMES TO FINANCIAL PRODUCTS, TRUTH IN ADVERTISING IS A SPEED BUMP THAT RARELY SLOWS THE MARKETING MACHINE!

LET’S LOOK ATA FEW OF THE GREATEST MARKETING PROGRAMS IN FINANCIAL HISTORY! IN A PREVIOUS RANT WE DISSED THE CURRENT MARKETING SLOGANS OF THE BIG BANKS BUT WE DID NOT LOOK BACK AT SOME OF THE BIGGEST WINNERS IN CANADIAN HISTORY!

“FEE-DUMB 55”: AN INNOVATIVE PROGRAM OF MUTUAL FUND AND SEGREGATED FUND SALES DESIGNED TO ENSURE YOUR ADVISOR IS INDEPENDENTLY WEALTHY BY THE TIME THEY ARE 55 YEARS OF AGE!

The real cool part about this marketing program is the fact that it was the type of marketing that would naturally appeal to people nearing retirement; and yet that is the segment that it could do the least to assist. Unless you suddenly win a lottery at age 45, you will be hard pressed to find freedom from financial worry at age 55.

In fact this advertising should have been focused on graduating students who, depending on student loans, might be able to survive the high fee mutual fund market and retire at age 55. In fact a student who graduated at 20 and put $1,000./yr in an RRSP earning 6% would have a not very significant $125,000 to retire on at age 55. That is actually less than $50,000 in today’s dollars. So if you wanted to retire at 55 and visited your high fee sales person at age 40 you better be a mega income earner or have a great pension plan before you arrive.

In fact this campaign may single-handedly disappoint more Canadians than any in history. Retiring at 55 is not possible for most of us and even less possible if you have been paying 2.5% MERs!

Another great financial marketing scheme is being played our as we speak! Manulife is turning investing on its head with Income Plus! We can understand that a lot of blood has rushed to the investors head! How else do you explain an investment that is sold as a “guarantee” that will help you sleep at night; but has so many confusing twists and turns that it can keep you up at night just trying to figure out the odds you can ever reset and make a profit above what you put in!
At the end of the day one of the most common warnings comes to mind: if it is too complicated for investors to understand then the person selling it is making a huge commission. As with most “guaranteed” products, you pay a huge price to avoid an unlikely future loss over the life of the investment.

These two marketing schemes stand out as great examples of marketing to the unlikely dream on the one hand and the unlikely fear on the other! Greed that you can find a quick easy way to retire early and fear that the market will suddenly crash just as you retire! Both fear and greed can cause investors to look past fees and the skeptic might even think the ads count on that!

Let me know what marketing scheme is catching your eye these days!

http://unbiasedportfolio.blogspot.com/2 ... chive.html

[admin]

To: kirzner@rotman.utoronto.ca
Received: Thursday, October 23, 2008, 11:54 AM


RE: Joint Standing Committee seeks investor feedback on product suitability

http://www.osc.gov.on.ca/Media/NewsRele ... bility.jsp


Eric:

Good morning.

During the conference call yesterday which you moderated, you stated, in response to one of my interventions, that research on the fees of mutual funds would be interesting.

In the event that you are not aware, much research has already been undertaken on this subject with the overall conclusion being that Canadians pay, by far, the highest fees for mutual funds. In a separate study conducted by Standard & Poors, the conclusion was that fully 85% of actively managed Canadian equity mutual funds underperform the passive index and after 5 years, this underperformance increases to 94%. I have enclosed the relevant study and the press release as attachments.

Other US based S&P studies on "persistence" conclude that there is little correlation between yesterday's winners and today's winners.
To quote from the release of the 2006 study: “Very few funds manage to consistently repeat top half or top quartile performance. Over five years ending mid-2006, only 58 (10.8%) large-cap funds, 12 (7.9%) mid-cap funds, and 19 (7.7%) small-cap funds maintained a top-half ranking over five consecutive 12-month periods. A total of 3 large cap funds (1.12%), zero mid-cap funds and 1 small-cap fund (0.81%) maintained a top-quartile ranking over the same period.” This would suggest that a significant investigation is needed by a truly impartial body (and not an industry-created foil) of the print and media advertising of the financial services industry. The food and health sectors are subject to independent regulatory control over advertising but why not for the financial services industry when the financial retirement health of Canadians is at risk?

Source:

http://www2.standardandpoors.com/spf/pd ... s&vlang=en

Another area for research would be to determine how the industry has successfully neutralized all forms of government regulation and oversight; in most cases supplanting it with its own “regulatory” bodies such as IIROC, MFDA, IFIC, OBSI which have been created, funded and controlled by the industry to provide a “public” good or service. Useful contrasts in public policy analysis would be:

-Integrity of the food supply: Regulated by Federal Government: CFIA
-Integrity of health and medical supplies: Regulated by Federal Government: Health Protection Branch
-Integrity of the water supply: Privatized in Ontario : Walkerton
-Integrity of Propane Inspection: Privatized in Ontario : Toronto Explosion

Do you think that the following type of announcement would ever be made by Canadian financial regulators to warn Canadians about unsafe or unhealthy products or services? If not, why not?

CFIA warns against brand of vending machine sandwiches

http://ca.news.yahoo.com/s/capress/0810 ... ich_recall

With respect to your comment about research on the subject of mutual fund fees in Canada , there are several relevant academic research studies that might be of interest to an independent academic institution such as yours to investigate further. Copies are attached.

Canadian mutual fund underperformance: A governance perspective by Samir Trabelsi and Lawrence He

Assessing the Costs and Benefits of Brokers in the Mutual
Fund Industry by Daniel Bergstresser, John Chalmers, and Peter Tufano

Mutual Funds Fees Around the World by Ajay Khorana, Henri Servaes and Peter Tufano

THE $25 BILLION ‘HAIRCUT’: HOW MUTUAL FUNDS SHRINK PENSIONS by Keith Ambachtsheer,

I think many would argue that the research has been done so that is not the problem. The problem is that the snake oil salesmen are in control of the regulatory process and have co-opted governments. As an academic, what role are you going to play to research and document this power imbalance?



James MacDonald MBA

Email: jamesmacdonald@rogers.com

[admin]

Back in 2002, the media reported on the case of 83 year old Maurice Phillips and his experiences in transferring fund company accounts. He just wanted to transfer his underperforming fund portfolio from Investors Group to BMO. He had ended up being sold funds with over 60% exposure to equities and wanted advice that better matched his age and risk tolerance. He was whacked with $1543.97 in mutual fund early redemption fees and $617.59 in termination fees which IG deducted from the transferred amount. IG took the position that the fees are clearly identified in the prospectus. He claims that the DSC issue was not discussed with him at the point of sale and he never received a prospectus. He says “ Even if I had , I probably wouldn’t have read the fine print. This is something that should have been explained to me. The people involved in RRIF’s are all 70 and over. They need things explained to them properly. This is money for their old age .I’m not the most brilliant person financially, but I’m not stupid .If it’s a 5-year contract I’m signing , say so upfront. And tell clients that if they want to get out before , penalties will be imposed. Not may, will”. Source: P. Delean , Feeling burned , and bitter about it, Canada.com News, July 22, 2002 [ there is also the question as to why the senior was sold a DSC fund in the first place but most of us know the answer]

from www.canadianfundwatch.com

[admin]

Investment Guide
Shoot The Messenger
Deborah Orr 12.08.08, 12:00 AM ET


In September, when hundreds of investors with more than $1 million in financial assets were surveyed, 57% said they planned to dump their current financial advisers and only 6% said they'd recommend him or her to a friend. "I've never seen this level of discontent, not even after the dot-com bust,'' says Russ Alan Prince, whose Redding, Conn. firm conducted the survey. "People are running from their financial advisers."

With stocks sinking and big brokers and banks brought low by their own bad investments, the rich folks Prince studies --and the less wealthy ones, too--are wondering whether the fat advisory fees they've been paying are worth it.

"They still get paid no matter how much money we lose," laments Scott Stevens, a Bend, Ore. ophthalmologist who just fired the firm to which he had been paying 1% of assets to manage his practice's pension fund. Stevens, 47, insists he told the partner handling the account that his main goal was preservation of capital, but that, as the stock market rose through last year, the adviser didn't rebalance to reduce his equity exposure. In September, Stevens says, with the account down 10% from its Jan. 1 balance of $650,000, he called the adviser and was told to sit tight because his stock allocation was already as conservative as the adviser would recommend (at a bit below 60%). Finally, in early November the disaffected doc moved the $440,000 left to another firm.

Is your adviser earning his keep? Here are some factors to consider in deciding whether to fire (or hire) a financial pro.

Underperformance

"Investors have always given financial advisers too much credit for results in bull markets and too much blame for losses in bear markets," says Jack B. Waymire, cofounder of PaladinRegistry.com, which matches investors with advisers. His service screens advisers for education, professional accreditation and a clean regulatory record, but not performance, since it hasn't found a practical way to compare or verify their claims. Still, you as the individual client do have a way: Your money manager should be ready to set benchmarks against which you can judge the performance of various segments of your portfolio. For example, your blue-chip value holdings might be benchmarked against the Russell 1000 Value Index. Make sure to measure performance net of the adviser's fees. And settle on the comparison index in advance.

If your pro has consistently underperformed, get a satisfactory explanation why, find another one or move your money into low-cost index funds. While you're discussing benchmarks, make sure your adviser has paid attention to your individual needs and risk tolerance, rather than giving you a cookie- cutter asset allocation.

Undisclosed or excessive fees

You might prefer a financial adviser who works on a "fee-only" basis, taking compensation only from you--for example, 1% of assets under management each year. (Fee-only advisers are listed at www.fpanet.org.) But most advisers, whether they work for a big financial firm or on their own, take commissions on the sale of stocks, funds and/or insurance and annuities. You might not object--if your adviser discloses all commissions and (even better) credits at least some of them against any fees he charges you. Ask your pro to go over with you how he makes his money, and get it in writing. If the written version has something you didn't know, or that makes you uncomfortable, it could be a warning sign.

Conflicts of interest with duty

Advisers affiliated with a big firm often earn larger commissions from selling their own firm's funds and products, placing their interests at odds with yours. "These large firms are mostly sales mills," asserts Michael Edesess, author of The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know. "There is constant pressure on advisers to sell products and maximize revenues,'' he adds. At the least, such conflicts should be fully disclosed and discussed. Waymire's service lists only advisers it considers independent of any product vendor.

An adviser can be biased by his professional background. "Everyone calls themselves a financial planner these days. Most of them are just stockbrokers who want to put your money in stocks or insurance agents who want to sell you insurance," complains Karl Amstadt, 53. When Amstadt, who runs a Cleveland Internet marketing company, and his wife, a dentist, went shopping for a retirement planner recently, one they interviewed recommended they put most of their $30,000 a year of savings into a whole-life insurance policy. No mystery what that fellow gets commissions to sell.

"We found a fee-based adviser who took the time to create a financial road map for us," Amstadt says.

Excessive trades or funds

If your adviser takes commissions, look at the turnover in your portfolio. Too much trading can generate extra income for him, but unnecessary fees and taxes for you. (Some extra shuffling of your holdings this year may make sense as a way to harvest tax losses.)

Check whether you hold a large number of mutual funds with similar objectives. "Sometimes advisers do this to increase their fees," says Edesess. Problem is, many funds have tiered pricing; the more you invest, the lower your cost. Moreover, if you hold a large selection of actively managed equity mutual funds with the same objective, Edesess says, the net result might look a lot like owning a far cheaper index fund. (Managed U.S. equity funds charge an average of 1.4% of assets a year, while the Vanguard Total Stock Market Index fund costs only 0.15%.)

Neglect or administrative lapses

"Did you have to call them twice about anything?" asks Carol Fabbri, a financial planner who left Merrill Lynch in April to start her own Denver firm, Fair Advisors. This isn't just a matter of dodging your calls when the market is down. Presumably, you're paying for more than just stock- and fund-picking advice--you're paying for help dealing with essential investment chores. For example, if your pro neglects to tell you about a required minimum distribution from a retirement account or bungles a rollover from one retirement account to another, you could get hit with a tax penalty.

Buzzwords or bluster

When you ask questions, does your pro lapse into buzzwords or suggest it's all too complicated for you to understand? "Remember the Wizard of Oz? Look behind the curtain," says Fabbri. Leslie Jeanne Kelly, cofounder of American Financial Advisors in Orlando, Fla., worked for years at a big Wall Street firm with a colleague who fancied himself just such a wizard. When clients questioned him, "he would pound the table and say, 'I'm a vice president. What do you know? You should listen to me,'" she recalls. If you feel intimidated or your adviser doesn't listen, or can't explain his ideas, it's time for a divorce.

Inappropriate investments

This includes an asset allocation that's simply too conservative or too risky for your age, wealth and personal-risk tolerance. Are you a 60-year-old with 80% of the money you need for retirement in equities? Maybe that's where you personally want to be, but be wary of an adviser who hasn't discussed with you the outsize risks you're taking and how your allocation differs from what's considered prudent at your age.

A continuing problem is with the sale of complicated variable annuities to investors who don't understand what they are buying and probably shouldn't be buying annuities. (For one new variation, read "The High Cost of Security".)

Steven Trager, now 62, owns a pizza shop in Santa Monica. In 2006, on the advice of an insurance agent who billed himself as a "Senior Financial Advisor", Trager sank $1.4 million from the sale of real estate into five equity-indexed annuities from Sun Life of Canada and Midland National. Trager says the agent told him he was guaranteed a minimum 3% annual return and that the policies, which track the S&P, had earned 12%. "Music to my ears," he says.

What Trager says he didn't understand was that the potential gain was just a fraction of that from the S&P; that he wouldn't receive dividends, as he would from stocks; that he faced surrender penalties for as long as 14 years; and that any gains would eventually be taxed as ordinary income, not lower-taxed capital gains. Steven E.M. Roth, whose fee-only firm, Wealth Management International, was hired by Trager to analyze the annuities he had already bought, figures if the S&P 500 returned 12% (including dividends), Trager's annuities would earn 4%. He estimates the adviser earned $125,000 in commissions.

The insurance agent, for his part, says Trager, was a "sophisticated investor" who knew what he was buying and was never promised a minimum 3% return--the guarantees are actually for less. Trager is asking the companies to refund his investment without penalties. Sun Life has refused, saying provisions of the annuities were adequately disclosed. Midland says it's waiting to receive Trager's response to the agent's denials.

[admin]

PH&N rolls out higher-cost series with higher trailers
by Rudy Luukko | 17 Nov 08 | | Click the print icon in your browser to print this report.

Plus news from Mackenzie, Franklin, CMD, Desjardins and Claymore

Phillips, Hager & North Investment Management Ltd. has upped the ante in its bid for advisor-driven fund sales. Effective today, subject to regulatory approval, the wholly owned Royal Bank of Canada subsidiary will start selling a new Series C that will qualify for much higher trailer commissions than previous PH&N offerings.

Series C versions will be available for all 25 of PH&N's retail mutual funds. They are no-load, as are all other PH&N purchase options. Setting the Series C funds apart are its provisions for trailer fees that are in line with those paid by the leading independent firms that sell primarily through third-party advisors.

Specifically, trailer fees payable on Series C sales will be a full percentage point for equity and balanced funds, 50 basis points for fixed-income funds and 25 basis points for money market funds.

PH&N and its RBC parent decided against making Series C a load-fund offering, figuring that there is enough of a PH&N following among full-service advisors that would be satisfied with higher trailers alone.

"The primary focus of our business is to sell on a no-load basis, with full recognition of the value of the advisor relationship," RBC Asset Management Inc. president Brenda Vince told Morningstar last week. "We like the transparency of that model."

While RBC has a presence in load funds through its optional-load RBC Advisor series, Vince noted that these funds represent only a small portion of the total assets in the RBC family of funds. Of the estimated $76.7 billion in RBC funds, the Advisor series constitutes $1.6 billion.

Coinciding with the launch of Series C, PH&N's Series B -- its original series of trailer-paying funds that first went on sale in July 2007, will be closed to new investors. Series B currently has about $75 million in assets, or less than 1% of the roughly $16.5 billion in retail funds currently managed by PH&N.

PH&N's trailer fees for Series B are only half of what it will pay advisors for selling Series C, and the trailer fee for Series B of PH&N's two money market funds is only 10 basis points.

Reflecting the increased costs to PH&N of the higher trailer fees, management fees for nearly all of the Series C funds will be higher than for Series B. However, PH&N will absorb part of the cost of the trailers itself, rather than recouping all of it by charging correspondingly higher fees.

For most Series C funds, the management fees will be between 10 basis points and 50 basis points higher than Series B. One of the exceptions is PH&N Global Equity, where the 1.75% management fee for Series C will be the same as for Series B. In the case of PH&N Community Values Global Equity, the management fee will be 1.75% for Series C, or 10 basis points lower than the Series B fee.

Another difference between Series C and the now capped Series B is a much lower minimum investment of $1,000 for the new series. That compares with a $5,000 minimum per fund for anyone who bought Series B.

Meanwhile, there is a change in naming convention and some new restrictions on the availability of PH&N's 25 direct-sales funds. These funds, previously known as Series A, are being redesignated as Series D and will no longer be available through third-party financial advisors.

PH&N has never paid trailer fees on sales of the formerly named Series A, nor will there be trailer fees under the new Series D designation. The funds will continue to be offered directly by PH&N or through discount brokers.

Purchases of Series D will remain subject to a minimum account size of $25,000, which can be invested in more than one fund. When purchased through discount brokers, the minimum for Series D purchases is $5,000 per fund.

In another change effective Dec. 1, subject to regulatory approval, PH&N will be permitted to pay a trailer commission on Series D units held through discount brokerages. Management fees charged to the funds will remain unchanged.

The new pricing initiatives are consistent with RBC's strategy of maintaining its RBC and PH&N families as distinct families. For self-directed investors, the cheapest distribution channel to gain access to both families is the discount brokerage RBC Direct Investing. Along with selling PH&N's Series D, the discounter is also the exclusive distributor of RBC's Series D funds, whose management fees are lower than the Series A sold through RBC bank branches.

[admin]

(advocate says, here is as honest and as accurate analysis of investing 101, as you are going to get today)

Mike Macdonald's
TheUnbiasedPortfolio.blogspot.com/


12-10-08: Reading the paper each day, the business sections are starting
to make my skin crawl. Too much “financial smut” is demoralizing and that
seems to be the way the industry communicates.
Wednesday, December 10, 2008
Financial Pornography
Most people find pornography offensive! That has been true for the past few thousand years of course. That is why it is so confusing as to how so much of it survives, even though nobody buys it or watches it.

Financial pornography is the same, but with charts instead of pictures!

In both cases the reality is not nearly as stimulating as the "doctored" graphics try to portray.

Financial pornography is represented by the distortions, misrepresentations, phony fund commercials, stupid bank claims, and all the other obviously bogus claims being delivered by phony senior citizens claiming to be retiring to France when they are actually working into their late 70's because they bought the stupid mutual funds they are flogging.

Nobody would ever listen to "Mad Money" nor follow the crazy advice, yet I keep hearing people talk about what they heard from a "friend" who watched the show. Stop watching that stuff, its morally and financially corrupt.

The financial markets have always had a way with words and graphs. In the past, it was all rather innocent since "good" people were not exposed to the financial smut. Then along came the Internet, cable T.V., thousands of financial planners and, yes, blogs! Now the financial world has gone nuts and products that were once in the restricted world of professionals are now discussed by Joe Trader as if he actually understood them!
Since when did retirees read 80 page legalese on a split-share issue and understand the leveraging (hint: the answer is never), and
when did your local lawn care guy start trading in options because a "covered call" is free money?
I heard a caller on Business News Network today who claimed he never lost money on a single option trade and could not understand why everyone was not writing puts and calls.
Well enough of this smut! Here is the truth you need to listen to and learn from!

Day traders live in their mothers basement and are really just degenerate gamblers.

Active trading by an investor works only when the average investor is Warren Buffett and has billions to cover his mistakes....and yes, he does make mistakes. Active trading without a billion dollar corporate team behind you is just stupid....yes, I mean you!

Managed or structured products are a fee looking for someone to pay it. The only way to win is to be the salesperson skimming the investments! Yes, mutual funds are a managed product so figure it out.

Wraps are the way small time investors get exposure to fully diversified fees. You pay everybody in good times and bad. You make benchmark returns almost never. Duh!

Financial Planners do not often do financial planning. They get the qualification because the title "Mutual Fund Fee Skimmer" was too difficult to fit on their cards. They are paid to collect your money and deliver it to big corporations. They do not manage your money, they collect "vig" on the deposits.

Bankers are like a stealthy thief sneaking into your house and stealing the silverware one piece at a time. Before you know it your eating with your fingers and the bank is offering you a cutlery loan at 18% interest. Service charges on proprietary funds are obnoxiously high and the people selling the funds are proof that the bottom of the class can still find work somewhere. Stop feeding the beast and thinking the teller is your friend. Friends don't refer friends to bank planners.

There, now I feel better. I hope that I have offended a few bankers, advisors, and planners because that way I feel like there is a purpose to life. If you are ready to handle the ugly truth, wait for 2009 when the real stuff starts to fly and markets test 7,000 and lower! Then the real smut will come to the fore! See you in 2009!


Tired of 2008.....sois mike

…my final rant for 2008…..I think!

[admin]

Advisor.ca
When selling DSC funds, err on the side of disclosure

By Kanupriya Vashisht / March 26, 2009


Over the short term, you might be doing your cash-crunched client a favour by suggesting back-end-load mutual funds, but during this downturn, clients with recession-ravaged portfolios might be in a hurry to redeem. They won't be too pleased with having to pay a hefty redemption fee on money-losing DSC funds.
So do yourself a favour and make sure your clients understand that in the case of DSC funds they’ll need to lock in for at least six to seven years, or risk paying redemption fees, which usually start at 6% and can be as high as 3% in the sixth year.
And do yourself an even bigger favour: take notes, notes and more notes.
A recent DSC dispute that escalated to the Ombudsman for Banking Services and Investments (OBSI), was decided in favour of the aggrieved clients due to ambiguity in the paperwork and flimsy file notes about fee discussions.
So here's the case as it unfolded (case study provided by OBSI):
Mr. and Mrs. Singh*, a couple in their mid-50s, had registered investments worth about $190,000. The money was invested in a combination of GICs and no-load mutual funds. In early 2007, a friend referred the Singhs to Roger Gantry*, an investment advisor at another firm. Gantry recommended a number of changes, which the couple agreed to. After transferring their accounts, Gantry invested their money in a combination of no-load and low-load mutual funds. At first, the investments showed an increase in value, but later the Singhs' statements showed the market value of their portfolio had declined. They asked about the investments and claim it was only then they found out about the loads.
When the Singhs complained to Gantry about their losses and the load fees, he recommended a number of switches between funds, which did not trigger a redemption fee. However, the investments continued to decline. The Singhs redeemed the funds and transferred to another firm. They lost approximately $17,000 from their original investment with Gantry and incurred an additional $2,500 in DSC fees.
The Singhs complained to the firm. They said Gantry led them to believe they had gained on their investments when they actually lost money. They also said he told them there would be no fees, but they were charged fees to redeem their funds.
The firm said there had been a miscommunication about the gain on the Singhs' account. However, it said the sales charges were disclosed on the transactional paperwork and in the simplified prospectus.
The Singhs escalated their complaint to OBSI. In an initial interview, the couple acknowledged they had been looking for medium-term growth and were willing to accept a moderate degree of risk. OBSI found the investments recommended were in line with the Singhs' investment objectives and time horizon, and it confirmed there had been wrong information given to the couple about the account value. But, OBSI also found it was not deliberate and did not result in any losses to the Singhs.
OBSI also found that low-load mutual funds were not inappropriate given the Singhs' investment time horizon. However, the paperwork did not clearly state the clients were purchasing DSC funds and there were no file notes indicating the advisor had disclosed the DSC fee.
OBSI discussed the lack of documented evidence of disclosure with the firm. The firm agreed the paperwork was not completed correctly and there were no file notes of the discussion of fees with the Singhs. Given the lack of evidence of disclosure, the firm agreed to reimburse the full DSC fees. The clients accepted that they had agreed to hold moderately risky investments and accepted a facilitated settlement for reimbursement of the DSCs.
In the course of the investigation, the firm sent OBSI a copy of a new fee disclosure document, which described in plain language the various fee options. The document requires clients to initial beside their selected fee option and sign an acknowledgement at the bottom. The firm indicated its advisors are now using the form to improve and document disclosure of fees to clients.
When dealing with DSC complaints, OBSI does not generally accept that in most circumstances simply giving clients a simplified prospectus is sufficient evidence of fee disclosure.
Instead, it first considers if DSC funds were appropriate and then reviews all evidence of disclosure. If DSC funds were inappropriate (for example because the clients' investment time horizon was less than the DSC schedule) OBSI will generally recommend compensation. If DSC funds were not inappropriate, OBSI will consider evidence of disclosure.
* All names have been changed to protect identities.
Filed by By Kanupriya Vashisht, editor@advisor.ca

[admin]

I just talked to a retiree named Mary Diwell, of Quebec, and read of her story in the financial post which I will put on this site. It brought up the following thoughts about another method by which investors can be abused.

The idea of putting forth confusing, illegible investment statements, which do not speak in a language that some people understand, and thus completely baffle them.

I was employed in the industry for over twenty years, and my staff will tell you that I, myself had difficulty with our own company statements. I don't think I ever had a margin account, and those that I saw, were not even clear what they -meant. For example crthis line is written -in some of the lingo that Icr found debit on my investment statement. It is written by back office secretary types, often in their twenties, using accounting language, and abbreviated type, to as to not take up space on a busy statement. In other words, it was written in a language for our own back office people, and not for our clients.

When my dad started to get alzheimers, I noticed how badly these reports were written. He stopped being able to comprehend them at all, and it contributed to much worry, and I fear, a tremendous amount of dependency on ones "salesperson" to explain and assure. This can lead to tremendous abuse, when a customer cannot understand what is going on, and they depend on a salesperson to explain. I have known many, many customers to go for years, being kept in the dark about what they own, how they invest, and being repeatedly told, "you are fine".

This type of situation caused my to start writing up a "one page summary" for clients who needed a different explanation of their accounts. It was something, written in plain english, from the information on a clients account, and spelled out in a manner they could understand. That I felt to be part of my job. I gave any client, any time they asked, a written paragraph, telling them how much money they had invested, how it was invested, how much income to expect from it, and so on and so forth. It also was a further measure of protection for both myself (protection from client misunderstanding) and for the client (protection from broker malfeasance). It put everything in writing, and it required this to match the written investment policy we also gave to clients.

I see some people who blame clients, for not understanding what they own, and what it is worth. These people are too judgmental in my opinion, and they are not understanding of what some peoples level or type of understanding is. Not all of us can read what a -dr, -cr, is supposed to mean intuitively.

I am on the board of a helicopter air ambulance charity, in Alberta, and after the "entire board" lost site of about $200,000 due exactly to the kinds of accounting reporting we were given, I asked the chairperson, if we would in future, write up a one paragraph summary of how much money we have today, verses hoe much we had last month, how much income we took in, verses how much we took in last month. In english. In words. Readable by anyone.

If the financial industry would help its customers in this manner, to better understand what trusting, vulnerable, and often elderly clients have (75% of the wealth in Canada is in the hands of seniors), then perhaps we would not have as much confusion from what your licensed salesperson tells us. (see topics of salesperson who misrepresent themselves as "advisors" elsewhere in this flogg)

[admin]

From: WhereDoesAllMyMoneyGo@gmail.com
To: kenkiv@gmail.com

Wheredoesallmymoneygo.com

Advisors Ostracized For Passive Investing Opinions
Posted: 13 May 2009 07:48 PM PDT


With billions upon billions of dollars generated in trailer fees and commissions every year in Canada, it should come as no surprise that there are a lot of people making a lot of money selling active management. Active management costs more because you have to compensate managers and research staff, and you have to pay for more transactions (either directy if you own individual stocks, or indirectly if you own mutual funds which themselves trade positions). You also have to pay for advertising, marketing and ancillary services (in some cases).
If you have been reading up on investing for a while now, you will have seen the mountain of academic research which indicates that passive investing (investing in ETFs or index mutual funds) will outperform the majority of active investors (on a dollar weighted basis). You will have seen how fees can kill performance. You will have seen how lower portfolio turnover reduces tax drag, and so on. Yet when financial advisors promote passive investing, there is a tonne of backlash both from within official channels from financial advisory firms, and indirectly from other financial advisors who have built their careers peddling active funds and active management exclusively.
The problem is that the rebuttals are rarely based on academic support (because there is none). So it’s a sad commentary on the state of affairs that the advisors who stand behind science, common sense and due diligence get ostracized by their colleagues. Shouldn’t it be the other way around? Shouldn’t anyone who promotes active management be subject to the same direct and indirect scrutiny (and quite frankly, malice) for supporting a philosophy that has failed for decades when applied in most advisor-client relationships?
To be clear, I believe there is room for passive AND active management within investor portfolios - it’s not an either-or proposition. For some people, active is the way to go. For others, they are 100% passive. The massive middle will probably be better served with a mix of the two.

[admin]

Wrap accounts are just like mutual funds except that they are proprietary; meaning that they are 
managed and promoted by the same firm your advisor works for.  (More about conflicts of interest later. 
) You also need to know that most have short track records and are difficult to compare to mutual funds 
because their returns aren’t reported to mutual fund databases.  That said, it is unlikely that wrap 
products are any better at beating the benchmark than mutual funds because their costs are higher, 
especially those offered through full‐service advisors.  
from: http://www.investors-aid.coop/


From the Investment Funds Institute we see that mutual fund wrap accounts consist of only 17% of total mutual fund industry assets. That makes sense since they are the new kid on the block, and most people have their money in regular, independent mutual funds.

Recent sales statistics, indicate that 91% of today’s sales are putting client assets into wrap accounts……..presumably a large percentage of which consist of “house brand” or proprietary products. Are these the new fad, fashion, or are they a vast improvement over the old?

The answer is yes and no. No for clients. Yes for salespersons. The Ontario Securities Commission has produced studies which show that by advising clients to purchase the “house brand” fund, (wrap accounts included) the firm and the salesperson share in increased revenues of between twelve to twenty six times. (OSC Fair Dealing Model, Appendix F, on compensation bias in mutual fund sales)

Of course the industry made sure that the Fair Dealing Model was never put into place. It was felt that it was too…………..well um,………..fair.

It is factors such as this which lead me to conclude that four out of five investment “advisors” are misrepresenting this title and are in fact acting with a selfish sales interest.

This misrepresentation is illegal, unethical, and not in the public interest. Further evidence to this argument can be found by searching for the exact registration category of each “advisor” registered in Canada. Four out of five of these will be found to be also using the “advisor” title improperly, and they are in fact licensed and legally registered in the category of “salesperson”

[admin]

Ken Kivenko submits this excellent study of the mutual fund selling industry, the promises, vs the performance. I certainly wish I had known this information when I was a 24 year old rookie investment salesperson.

enjoy

“I thought I wanted a Mutual Fund”
Mutual Funds firms are revving up their marketing machines. They‘re again catching the
attention of retail investors. You‘ve heard the story before, and no doubt some assertions seem
compelling. Before you get on board with Mutual funds, explore the facts.

Price ASSERTION: Costs don‘t count
FACT: Costs count; they gnaw away at returns over time. Many costs such as early
redemption penalties and transaction expenses combine to reduce returns.
Performance ASSERTION: Professional management leads to superior returns relative
FACT: Over the long-term 80-90 % of funds fail to meet their benchmark return
Transparency ASSERTION: Mutual ETFs are more transparent because regulators require
comprehensive disclosure
FACT: Transparency is about unreadable prospectuses
Tax efficiency ASSERTION: Mutual funds are tax-sensitive
FACT: Portfolio managers pay little heed to tax-efficiency.
Diversification ASSERTION Mutual funds offer complete diversification.
FACT Mutual funds too often mirror an index to play it safe
ETF‘s do the same thing for a fraction of the cost
Price
Mutual fund‘s assert that the MER is the cost of owning a mutual fund... But MERs don‘t
represent the full cost of a mutual fund. The hidden cost of a mutual fund is in the transaction
fees (TER) and fees such as early redemption fees or warp fees. John Bogle in The Little Book
of Common Sense Investing estimates the cost of portfolio turnover of the average equity mutual
fund adds 1% in annual costs (cost of broker fees, bid-ask spreads, and market impact costs).
Check the portfolio turnover and TER before investing.
The cost of so-called ―advice‖ is charged whether or not you need, want or use the advice. With
an ETF, the costs are visible and limited. If you want advice you can pick your own advisor, one
2

that won‘t be conflicted by sales commissions. Do advisers put their clients in the best funds or
the funds that pay the best trailer commissions?
• A survey sponsored by the Financial Planners Standards Council (FPSC) showed only 40% of
certified financial planners did financial plans for ―most‖ of their clients in 2006, down from
53% in 2002
• At least five studies from the academic community conclude financial advisers don‘t add value
to the selection of mutual funds – indeed, it appears they subtract value.
It‘s not just high fees, churning and portfolio underperformance. Some black hat advisors have
―misappropriated‖ money from clients and, recommended wholly unsuitable investments. These
actions have devastated the lives of those impacted .In 2007, the B.C. Securities Commission
found that former mutual fund advisor Ian Thow of Victoria, B.C. defrauded his clients of
millions of dollars by inducing them to invest in several bogus investment schemes.

“This case represents one of the most callous and audacious frauds this province has seen,”
the BCSC panel concluded. “Thow preyed on his clients by offering them non-existent
securities, instead using the funds to support his lavish lifestyle. He took their money and
betrayed their trust. He has left a trail of financial devastation and heartbreak.”

Most embedded compensation mutual fund companies say that trailers are for ‗advice, yet they
pay them just as surely for non-advice. Discount brokers for instance are paid trailers even
though they don‘t offer any advice. To make matters worse, we had a truly laughable situation a
month or so ago with Sprott. When one of the discounters showed some integrity and started
rebating trailers to clients (since they had the temerity to acknowledge that they had no business
collecting trailers in the first place), Sprott severed its relationship with that discounter. This is a
clear case of the guy in the black hat harming the guy in the white hat for having basic corporate
decency. It happened before when E* Trade tried to do the right thing for Main Street. DIY
investors can buy ETFs at their low fees whereas it's not possible to buy low-cost F class funds
without extra costs

The mutual fund vs. ETF debate often just focuses on stock funds. There are tens of billions of
dollars in money market and bond funds. And they are where mutual funds fees really hurt.
Money market funds charge MERs that average half or more the interest earned, while bond
funds MERs average close to 1.5% when yields currently range 2% to 4.5%. One could also add
balanced mutual funds. In non-equity funds, the comparison of long run returns more clearly
favour ETFs.
"You're taking 70 per cent of the returns, and that won't work .If you're hitting a period of
time where more people are investing in fixed income, then that has to change the fee
structure." –Bill Holland, President of CI Financial
http://v1.theglobeandmail.com/servlet/s ... ERS21ART18
34/TPStory/TPBusiness/
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Performance
Mutual fund‘s assert that professional management can outperform the index net of fees.
Therefore, it‘s better to avoid a passive strategy. Not so fast.
Standard & Poor's, the world's leading index provider, recently announced the latest results for
the Standard & Poor's Indices Versus Active Funds Scorecard (SPIVA) for Canada. For the first
half of 2009, only 34.5% of Canadian Equity active funds outperformed the S&P/TSX
Composite Index. However, 62.0% of active funds in the Small/Mid Cap Equity category beat
the S&P/TSX Completion Index. Similarly, in the Canadian Focused Equity category 71.4% of
active funds outperformed the blended benchmark of 50% S&P/TSX Composite + 25% S&P 500
+ 25% S&P EPAC LargeMidCap Index. The majority of active funds underperformed their
respective Standard & Poor's benchmark over longer time periods. Only 16.7% and 7.6% of
active Canadian Equity funds were able to outperform the S&P/TSX Composite Index over the
three and five-year periods. Over the one year time period, active Canadian Equity funds fared
better with 54.6% outpacing the S&P/TSX Composite Index. For active funds in the U.S. Equity
category, 27.1%, 19.6% and 10.6% of funds outpaced the S&P 500 over the one, three- and five-
year periods respectively.
. "The results for Midyear 2009 continue to echo past results. Over shorter time periods we see
active funds adding value but over longer time periods active fund outperformance is a rare
observance. Investors face the hurdle of finding this extraordinary fund, and then have to
hope that it will continue to repeat this performance" - Jasmit Bhandal, director at Standard &
Poor's http://finance.alphatrade.com/story/2009-09-
02/CNW/200909021000CANADANWCANADAPR_C9379.html
As for relatively better performance in sectors like small caps and International Equity, the odds
of picking an outperforming fund may be higher but then again, it is hard to identify in advance
which funds will do so (or at least avoid management changes, style drift, closure, etc.)
Survivorship over the past five-years is 43.8% for Canadian Equity, 39.8% for U.S. Equity,
58.1% for International Equity, and 41.3% for Global Equity. In other words, a significant
percentage of the funds in these four categories has been merged or liquidated over the past five
years.
The ETF vs. mutual-fund debate often overlooks the stability of the products. After an investor
purchases a mutual fund or ETF, it may change in various ways. But the changes for ETFs
appear to be on a much smaller scale compared to mutual funds. Examples of the changes
affecting mutual funds include:
4

• turnover in portfolio managers – many investors may buy into a fund because of a well-
regarded manager only to see the star later jump ship for another fund, leaving unitholders faced
with the decision to stay with a less skilled manager or redeem and pay a back-end load fee
• changes in the manager‘s investing style (style drift) – portfolio managers may stay put but
then start trying investment approaches different from what unitholders expected, increasing, for
example, the proportion of risky securities in an attempt to juice returns
• termination or merging of a fund with another fund – which again presents unitholders with a
disruption in their investing plans
The father of Index Investing, John. Bogle has written a new book called, appropriately enough,
"The Little Book of Common Sense Investing‖ in it he argues that Indexing has to be the gold
standard as a way to invest. If the stock market produces, let's say, an 8 % annual return,
investors will clearly obtain the average- all investors together, will earn 8 %. But they won't
receive 8 %. They'll earn net about 5.5 %, because the costs of investing come out of that market
return. And investors pay those costs. On talking about fees he says ‘"You get what you DON'T
pay for".
Transparency
Mutual funds assert they provide better disclosure than ETF‘s because they must comply with
securities regulations. ETFs disclose their holdings on a daily basis to emphasize their claims of
transparency. However, true transparency is not simply about portfolio disclosure. Transparency
is also an area that deserves a complete discussion, although it is great that the industry has
finally started to acknowledge how important it is to investors. Genuine transparency is really
about two key things. First, know what you own at all times. Secondly, transparency means
knowing what you are paying for, how much you are paying, and to whom. The old business
model involves bundling together fees for products with fees for advice. Experience has
demonstrated that this is not optimal for the retail investor. Packaging the two together has the
effect of limiting transparency, flexibility, and investor choice.

When mutual funds display returns they do so without including transaction fees, front-end loads
and the impact on taxes on distributions. They assume all distributions are reinvested which may
not be valid, say for income and dividend Funds.
IFIC's strong opposition to meaningful CSA POS disclosure is evidence the industry doesn't
really want too much transparency.
Tax efficiency
Tax efficiency is about paying less tax. The taxation of mutual funds can be bizarre,
administratively burdensome, fairly complex and hazardous to your nest egg. Some estimates put
5

the amount of mutual funds in non-registered, taxable accounts near 50 % so the issue is not
trivial. An excellent paper by Milevsky, Mawani and Panyagometh, “The impact of personal
income taxes on returns and rankings of Canadian equity mutual funds”, March, 2003 is
available at http://www.ifid.ca/pdf_workingpapers/WP2003.pdf The study analyzed the returns
of 343 equity and balanced mutual funds over 10 years, from 1992 to 2001. They concluded that
"Taxes exceed management fees and brokerage commissions in their ability to erode long-term
investment returns". The authors also noted ―ranking of funds on a pre-tax return basis is
significantly different from ranking of funds on an after-tax basis.". On liquidation after 10 years,
the average Canadian fund moved 11 or 18 spots higher or lower in rank, depending whether
they were measured pre- or post-liquidation.
David Swensen‘s book Unconventional Success shows that the average annual distribution of
S&P 500 index mutual funds was 1.8% of assets from 1993 to 2002, compared to 0.01% for the
SPDR S&P 500 (SPY)
Nevertheless don‘t automatically assume that a corresponding ETF is more tax-efficient. Any
change to an index – mergers, acquisitions, de-listings, new listings, etc., – requires the ETF to
buy and sell shares to match, spinning out taxable distributions to investors as a consequence.
Mutual funds offer products that allow for tax efficiency such as capital class structure and
efficient yield products that pay returns of capital, which ETFs do not have. They may incur
additional fees but they‘re worth checking out.

DIVERSIFICATION
Mutual-fund defenders say Canadian equity ETFs) expose investors to the risk of stocks growing
to a large weighting in the index, (Nortel effect) and in the case of Canadian broad-market
indexes, ii) leave investors weighted toward financial and resource stocks. Let‘s deal with these
two points in turn:
• as for the ―Nortel effect,‖ Canadian ETFs are no longer exposed to such risk; the fundamental
ETFs offered by Claymore in Canada are not market-capitalization weighted and ETF families
using market-cap weighting now limit the weights of individual stocks so that none can have the
influence Nortel once had.
• as for achieving a portfolio less weighted toward energy and financial stocks, that would seem
to be an asset allocation choice perhaps better left to the individual investor (they can custom
tailor exposures to their preferences better than an equity mutual fund can); ETF investors
typically achieve their desired level of diversification through holding a portfolio of ETFs
tracking a variety of asset classes such as small caps, U.S. stocks, and international stocks.
Note also that mutual fund impurity is also a big issue. Fund purity is the degree to which an
actively –managed mutual fund stays true to its name and investment objectives. Canadian funds
were never very pure The existing CIFSCwww.cifsc.com. categories are relatively broad. An
impure fund may hold securities that are at variance to its objectives or name. For instance, a
6

Dividend fund may hold a non-dividend paying tech stock to boost returns. Impurity is a problem
because:
 it gives a false impression of how well the fund is performing in its asset class
 it makes the benchmark index less relevant as a guidepost
 it may result in excessive fees being paid/charged e.g. A closet indexer
 it complicates the asset allocation decision e.g. a ―Canadian ‖ Equity fund holding 40
percent non- Canadian stocks and cash
 It may give investors a false sense of safety and risk level e.g. foreign exchange is an
added risk for an impure Canadian Equity fund that invests in the U.S.
 it raises the question of whether or not been investors are getting the best professional
management if a manager expert in Canadian stocks, starts buying U.S., UK or German
stocks
CONCLUSION
Here are five things you should keep in mind.
1. Mutual fund costs do not include transaction fees, DSC penalties or optional services
2. Most fund managers do not outperform and many miss benchmarks by a wide margin.
3. Transparency involves full and ongoing disclosure about fees, holdings and returns, not just an
opaque disclosure document like the so-called Simplified Prospectus
4. Corporate class Mutual funds are able to produce tax efficiency – products which are not
available from ETFs.
5. Good diversification is more about having the right asset allocation, not simply a basket of
actively –managed mutual funds striving to beat a benchmark.
Mutual funds are not as flexible as actively managed mutual funds. The more one can tailor an
investment vehicle to their needs, the more one can maximize their utility; having extra options
is a valuable trait to many investors. Some examples:
 ETFs can be bought and sold at a known price throughout the trading day while mutual
funds are bought and sold at the price prevailing at the end of the day.
 ETF‘ purchase orders can be placed at a desired price or sold via a STOP LOSS order
 ETFs can be purchased on margin, sold short, and combined with ETF options to create
covered trades and other hedging strategies
The mutual-fund vs. ETF debate tends to overlook the high level of heterogeneity in product
classes and investors
7

• Not all ETFs are good — for example, sector and leveraged ETFs may raise suitability
questions; actively- managed and balanced ETF‘s hold promise for the future .
• Not all mutual funds are bad – for example, mutual-fund families without marketing and
advertising overheads can keep MERs low while providing advice through in-house reps; other
useful mutual fund categories may be corporate class (tax advantages)
• Since mutual funds reinvest dividends and allow regular deposits without commissions, they
could be more cost effective for the small investor with regular, small amounts to contribute
• Some investors don‘t have the time, competency or desire to manage their personal finances so
they may need a professional advisor , but one that is not tied to mutual fund sales commissions
and other sales incentives
"Most investors, both institutional and individual, will find the best way to own common
stocks is through an index fund that charges minimal fees." -Warren Buffet, 1996 Letter to
Shareholders at Berkshire Hathaway
Just make sure the ease of trading ETF‘s doesn‘t get in the way of sound portfolio management.
Some Do-it-Yourselfers have built a 60/40 portfolio for a relatively low all-in cost of 1%. They
use a couple of passive products and some cheap active funds. Some have built ETF/F series
portfolios that come in at 60 basis points. When you strip out the standard cost structure and
introduce some ETF flexibility, you suddenly get a mostly actively- managed portfolio for only a
moderate fee premium to an all passive option. The comparison becomes much less of an issue
at that level.




Commissions, trailing commissions, management fees and expenses all may be associated with mutual
fund investments. Please read the prospectus before investing. The indicated rates of return are the
historical annual compounded total returns as of July 31, 2009 including changes in unit value and
reinvestment of all distributions and do not take into account sales, redemption, distribution or optional
charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds
are not guaranteed, their values change frequently and past performance may not be repeated.
Acknowledgements : www.independentinvestor.com,
www.wheredoesallthemoneygo.com and www.canadianfundwatch.com

[admin]

Is this a joke or what? from Ken K at http://www.canadianfundwatch.com


Mackenzie Financial’s new brochure I Thought I Wanted an ETF cites 10 Global Equity Funds pointing out that 8/10 have beat the index over the past 10 years. Of the remaining 8 , 4 had negative returns over the period. One that did outperform the Index was the Mackenzie Ivy Foreign Equity with a average compound return of 1.70 % to July 31, 2009 . Since 1992, the rate of CPI inflation in Canada has fluctuated around 2 per cent. This load fund has a MER of 2.43 %.

When we put these numbers into the InvestorEd.ca fund fee impact calculator we found that 54 % of the potential return was lost to fees and the lost return potential was 11 %. Just 35 % made it into investor`s pockets.

(advocate comment)
FEES COME FIRST should be the advertising slogan of the investment industry. Instead of YOU FIRST, which used to be the RBC slogan. (I notice they have stopped saying YOU FIRST at RBC, should we take this a step towards more honest disclosure?)

[admin]

From Canadian Business Online Blog, Oct 21, 2009
“I thought I wanted a mutual fund” (III)
By: Larry MacDonald

A reader sent in an email with an interesting supplementary to the claim that trailer fees represent the cost of financial advice (in Part I). As you may recall, MacKenzie Financial’s publication claimed that an apples-to-apples comparison of ETFs to mutual funds required that the ETF orange be converted into an apple by adding in the cost of financial advice (i.e. trailer fees).


I pointed out that several academic studies had found mutual-fund advisers added no value to the selection of funds (indeed, likely subtracted it). So why did ETFs need to be adjusted for trailer fees when doing comparisons with mutual funds? Reader John De Goey (a fee-only financial advisor) took this a little further. He noted:

“Call virtually any discount brokerage in Canada … you will find that they all require their investor clients to use A-Class funds. In other words, investors are obligated to pay the trailing commission on a product for advice that is neither received nor requested. This is scandalous! Imagine if Canadian Tire charged people for a muffler and installation if they simply bought a muffler! The Competition Bureau would step in.”

This arrangement further raises questions concerning the view that trailer fees are the cost of financial advice. In this context, it appears to be more part of the cost structure of the mutual fund company. No financial advice or service is provided to the buyer.

In the discussion of trailer fees in Part I, attention had also been drawn attention to a survey that found a minority of financial planners did financial plans for their clients – again raising questions about the value of services obtained through trailer fees. Since then I have come across a post by a financial advisor who paints an even bleaker picture. To quote:

“While many financial planners claim to do financial planning and provide holistic advice, very few actually provide comprehensive planning with written financial plans, as taught in the CFP courses.”

More on this topic (What's this?)
The Future Of Fund Ratings (Index Universe, 10/20/09)
Role of Exchange Traded Funds in Investor’s Portfolio (Dividend Tree, 10/22/09)
Read more on Mutual Funds, Exchange Traded Fund (ETF) at Wikinvest

[admin]

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Mutual fund practices look a bit like Ponzi schemes


BY DON JOHNSON, FOR THE CALGARY HERALDOCTOBER 23, 2009


Bernie Madoff, the Lord of the Ponzi kingpins in the United States, obviously profited from American regulators sleeping while he destroyed the financial lives of many, many people. The regulators even snoozed through clear warnings --and very loud alarm bells-- from experts in the financial-services industry.

Canada, we now discover, is not immune to alleged Ponzis. Where are our regulators? Are they also asleep?

For example, there is something about Canadian mutual-fund industry numbers and practices that are troubling this investor. Some numbers don't add up and the industry talks to us in a language I call "fund-speak" about mysterious stuff like "trailers" which are hitched to "MERs"--Management Expense Ratio.

The Investment Funds Institute of Canada (IFIC) says "assets under management by the . . . industry were $652.5 billion at June 30, 2009."

About 47 per cent of us owned them, directly or indirectly, in 2008. We're talking about very big money and roughly half the Canadian population here.

Some of their numbers appear "fudged," as if to say that 10 plus 10 can equal 15. It's like asserting the world is both flat and round and Canada geese fly at the speed of light.

Last Sept. 16, the Bank of Montreal mutual fund website reported its BMO Monthly Income Fund units (or shares) went up in value by eight-tenths of a cent that day to a new price of $8.2184.

But if you checked the previous day's reported value, on the same website, the price that day was $8.2704. So if you subtracted 8.2184 (on the 16th) from 8.2704 (on the 15th) that's a drop of .052 cents and not an increase as claimed.

The numbers simply did not compute, no matter how many provincial securities-commission officials and statisticians explain that up can also be down simultaneously.

Another aspect of the roughly 2,000-fund industry is a thing called a "trailer," which is sometimes attached to a "MER." It is pronounced "merr" and stands for "Management Expense Ratio."

Trailers and MERs? Not terribly informative, you say. Hey, have you ever read mutual fund prospectuses cover-to-cover and lived to talk about it?

They make train and bus schedules look exciting and easy to understand.

Making prospectuses simple to grasp appears very low on the industry agenda, perhaps deliberately so.

The MER is what the fund company charges you to manage the fund. MERs run in the area of about one or two per cent of the value of the fund every year.

Some MERs are higher, some lower.

Let's say one of your funds' MER is 2.5 per cent. The trailer portion may be a quarter to a third of that. The trailer is paid to your financial adviser as a sort of reward (or fee or commission) for keeping you and your money in that particular fund. Different funds pay different rates of reward. Some pay none at all.

Google this: "The Truth on Trailers" (including quotation marks). It will take you to an article by John DeGoey of Assante Capital Management Ltd. The item mentions the word "bribery."

Trailers remind me of how the issuers of toxic mortgage-backed securities in the United States got triple-A risk ratings from the securities-rating agencies on effectively garbage, triple-Z assets. That was because the issuers paid for the ratings.

It's simple. You pay the piper. You call the tune.

The next time you're talking to your financial planner cum adviser, ask him/her how much he/she received last year in trailer rewards based on your investments. You may be shocked at who may be calling the tune.

In my view, trailers are a huge potential conflict between the interests of the investor and those of the adviser. If not prohibited altogether, the rewards should be reported by advisers to clients in writing at least quarterly, openly and in simple--repeat simple--English.

The mutual fund industry in Canada is regulated by the provinces. They do a poor job, probably because of low securities-commissions budgets and shockingly low expertise within. An inquiries officer I spoke to at the Ontario Securities Commission did not appear to understand the word "expertise," when I asked what his expertise was.

It's time for major changes in our oversight systems and regulations. It's time to catch the Ponzis before they loot our lives. A properly-funded national regulator complete with substantial expertise, in my view, would be part of the solution. I urge you to rock the Ponzi and trailer-fee boat in both Edmonton and Ottawa.

Don Johnson Is A Retired Journalist Living In Victoria, B.c.

[admin]

Manager sued over fees


Barry Critchley, Financial Post

Friday, October 30, 2009
A $19-million lawsuit has been filed against Richardson Partners Financial and Clarke A. Steele, one of the firm's investment advisors, by a group of clients, many of whom are elderly.

The 40-page statement of claim alleges "Steele and Richardsons acted in a high-handed, arrogant, dismissive, insulting, cavalier purposefully difficult, irresponsible and indifferent manner towards the plaintiffs," a collection of 23 people, one estate and nine personal holding companies. The average age of the people is more than 70. (One is 94.)

None of the allegations has been proven in court and Richardsons and/or Steele has yet to file a statement of defence. Calls to Richardsons weren't returned. A call was made to Shipley Righton, the firm acting for the plaintiffs. It declined comment.

The statement details the relationships and duties among the plaintiffs and defendants and says "each of Richardsons and Steele owed a fiduciary duty to each and every one of the plaintiffs to act in accordance with the best interests of each and every one of the plaintiffs." The statement also said Richardsons and Steele "owed each and every plaintiff both a contractual and a common law duty.... " It added that "Richardsons is vicariously liable for the acts of Steele made in the course of his normal duties and responsibilities.... "

The statement alleges that while the plaintiffs paid a fee for investment advice, account-management services and trade and tax-reporting services -- the so-called 1% radius fee -- "no written agreement was ever executed by any of the plaintiffs concerning the radius fee."

The statement added that "contrary to their fiduciary, contractual and common-law duties to each and every one of the plaintiffs, Richardsons and Steele improperly engaged in trades in the accounts of each and every one of the plaintiffs in the number of securities," the so-called impugned securities, a group of three types of investments.

n First, there are those securities which were inappropriate investments because Steele and his employer "were earning service and or trailer fees in addition to the radius fee, which were not disclosed;"

n there are those investments that were inappropriate because Richardsons and/or Steele “was an agent or underwriter such that they were earning fees in addition to the radius fee which were not disclosed;”

and finally

n shares of Opti Canada, which were "inappropriate investments" because ... Richardsons and/or Steele were associated with or related to Opti Canada, but where this association or relationship was not disclosed."

The statement of claim alleges that none of the plaintiffs understood or comprehended the "true nature" or "the true risks" of the impugned securities. The statement also alleges the true nature or the true risks of the investments were not explained.

The statement lists seven securities owned where Richardsons and/ or Steele were earning service and or trailer fees in addition to the radius fee The statement also details $6.04-million of plaintiff holdings on which the defendants acted either as an "undisclosed agent or underwriter."

******************************************