Solutions, Self Defense and Best Practices

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As a result of a request from a conservative party person, who wrote to me yesterday, asking me if I might give them a proposal of what needs to change to improve the public interest and public protection. Here is item number two that I send to him, short and sweet. Do not look for it to be enacted anytime soon, since the ability to purchase "exemptions" to securities laws is one of the greatest magic profit making machines ever invented for those who wish to sell financial products. Consumers are not thought of properly in this equation.
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Dear R,
A second item which would constitute something approaching “best practices”, would be to tighten up a loophole that allows conflicts of interest at the securities commission to flourish........namely the granting of legal exemptions to financial sellers and manufacturers of products without having to follow a public-safe procedure, provide public notice, nor allow public access to the reasons or rational used to grant permission to skirt our laws.

I enclose the short, simple sentence from the newly proposed federal securities rules for an example of how vague and open to interpretation this is. As it stands it has been used some 5000 times in the past decade, often at considerable benefit to those who apply and pay for legal exemption, and billions of dollars of damage to the unsuspecting and unprotected public.

Not one single securities commission in Canada will explain nor will answer simple questions nor provide “public interest” reasons as to why they allowed very damaging exemptions to infect our economy.

It is a secret.

It is in my opinion a crime of negligence, breach of trust and failure to provide honest services to the public, by the ASC.

This section should be expanded (or removed) to include conditions, public notices required, some professional process to be followed, and some protection on allowing the public to view fully this section anytime it is in use. Anything less is secretive and failure of professional practices.



Easiest web site I could find to give an example of this special loophole.
http://www.fin.gc.ca/drleg-apl/csa-lvm-eng.asp

Site of the regulations proposed for the new national securities regulator.

Exemptions
236. If the Chief Regulator considers that it would not be prejudicial to the public interest to do so, he or she may, on application or on his or her own initiative, make an order exempting a person, trade or security from any provision of Parts 3 to 10 or of the regulations.

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the first item I proposed is posted in this forum topic on Feb 11, 2010, and was a resolution for a federal party policy convention

[admin]

One of the solutions that I found, while attending investment conferences in the United States, was the UNIFORM CODE OF FIDUCIARY CONDUCT.

You can do a search for it on the net and you will open up an entire world of "best investment practices". I did, back a number of years and it really opened my eyes. It might be worth noting that when I was undertaking this journey, it would have been around or just prior to the days of things like "Google" etc, and investing in Canada back then felt a little like being in the dark ages, it was very much a learn as you go process. To find organizations in the US that were actively working on best practices all the time was like oxygen to a young investment "advisor" looking to learn and grow.

Sadly, here in Canada, we do not have to live up to a promise of "fiduciary" standards. The investment and banking industry can lead us to believe that they will, with advertising and such promises, but believe me, when you take them to court or try to hold them to these promises, you WILL lose trying to argue that they owed you any greater duty care than a used car salesman. That is pretty much my experience over thirty years anyway.

The reasons are this:

1. there is no agreed upon definition or application of "fiduciary" that allies to retail brokers or sellers of investment products in Canada (so to argue in court that they owe you any duty will be a losing game)

2. sadly, they can use your money and ten years of your life to out-lawyer you and delay until you are emotionally and financially exhausted. (this is a bully tactic and it is hoped someday that our banks will be responsible (legally) for not acting in a bully manner.

3. Speaking of lawyers, they retain more lawyers than you can, thus they connect socially with more judges than you can, thus there is a "loyalty bonus" that land in their favour. (speaking practically, it can mean that internal connections, cronyism and favouritism "might" play a part in your decision. Hey, I am not saying that judges and lawyers are bad, I am just saying they are human, and humans have been known to put such interests of self preservation and self promotion ahead of interests of professional service to you)

4. Even IF you are right, and even IF you should win, as one lawyer recently put it to me, "Larry, even with all those things in your favour, you might be asking a judge to alter the status quo, to go against the grain and change how "the system" operates. There are not too many judges out there who will stick their necks out in such a manner, regardless of right or wrong". Yes, this blew me away, but he is probably right and I probably have to learn someday that trying to change "the system" is an uphill battle where each and every step will be a fight with each and every participant. Why? Each and every person in the system (those who are not complaining, suggesting improvements etc) are fat and happy on the system, and each will be reluctant to change, even when change is needed. Welcome to the story of abuse by the Catholic Church as it applies to each and every institution on the planet.....namely........"protect the system at all costs, even if it is damaging the public". Where was I...........?

Oh yes, THE UNIFORM CODE OF FIDUCIARY CONDUCT, found in a bit of US legislation called the EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA). No kidding, they are so far of us in the states that they actually try to protect the public from financial abuse...........here in Canada, financial abuse is the name of the game by our top half dozen banks.

ERISA has a code of conduct for professional money management that everyone should at least read and try to understand. I did. I just was not allowed to put the principles into practice here in Canada while I worked as an "advisor" with a top Canadian bank.

they look like this:

UNIFORM CODE OF FIDUCIARY CONDUCT
♦ Prepare an Investment Policy Statement (IPS) and document all investment decisions. The IPS should be viewed as the business plan for the investment program, and a summary or minutes of all investment meetings should be kept.
♦ Diversify the portfolio according to the participants’ and beneficiaries’ risk /return profiles. Fiduciary portfolios should not be managed in a cookie-cutter fashion. Each portfolio will have unique cash flow requirements, legal restrictions, and risk and return objectives.
♦ Hire prudent experts to manage the investments. New fiduciary standards make it clear that it is neither the desire nor the intent to have the fiduciary actually make investment decisions, that responsibility being designated to managers. The fiduciary’s role is to manage the overall investment process, including the performance of due diligence and the selection of professional money managers.
♦ Control and account for investment expenses. The fiduciary is responsible for ensuring that the components of the investment program are reasonable prices, and that no one service vendor is being unduly compensated, including mutual funds, money managers, custodians, consultants, and brokerage firms.
♦ Monitor the activities of service vendors. The fiduciary MUST follow a due diligence process in selecting a money manager and then continue monitoring on an ongoing basis to ensure that the manager adheres to approved investment strategies. Likewise, the fiduciary MUST review the activities of their attorney and investment consultant to ensure that the plan’s interests are being served first and foremost.
♦ Avoid prohibited transactions and conflicts of interests. The most common breaches include investing assets in international securities outside the reach of U.S. Courts (for ERISA plans), or using the entrusted assets for unrelated business purposes or personal gain.

This is one of the best practices I sought and found by travelling and learning in the US and elsewhere. It is essential to know this standard, or deal with someone who knows it is you wish to truly find an independent professional to help you with your investments. Unless you do this, you will be dealing with a Canadian Bank who is allowing a former bank teller type person to sell you bank products intended to maximize the profits to the bank........not you. Welcome to investing in Canada, and welcome to systemized, legalized financial abuse.

[admin]

SEC will impose fiduciary standard on brokers: Barney Frank

Congressman makes prediction moments before House passes financial-reform bill; Senate up next

By Mark Schoeff Jr.

July 1, 2010
The overhaul of the U.S. financial system took a big step toward becoming law Wednesday evening when the House passed reform legislation 237-192. As a result, it's also looking more likely that brokers may soon be held to the same standard of care as investment advisers.

Indeed, just before the House vote, Rep. Barney Frank, D-Mass., highlighted the fiduciary duty section of the bill — a proposal Mr. Frank championed during two weeks of House-Senate negotiations on the final legislation.

The bill empowers the Securities and Exchange Commission to impose the same fiduciary duty on broker-dealers and insurance agents currently met by investment advisers. If the regulator chooses, it can require anyone providing personalized investment advice to retail clients to act in the client's best interests and to disclose any conflicts of interest.

“We gave the SEC the power to do it,” Mr. Frank said during the House floor debate. “And they're going to do it.”

Of course, the Senate still has to pass the bill — and that's hardly a lock. The upper chamber won't act on the 2,600-page measure, a combination of previously approved House and Senate bills, until after the weeklong congressional Independence Day recess. The fate of the measure in the Senate has been complicated by the death this week of Sen. Robert Byrd, D-W.Va.

The Senate Democratic caucus now numbers 58, two senators short of the number to overcome a Republican filibuster. Senate leaders this week have been working to secure the backing of all four GOP members who supported the original Senate bill in late May. Their votes are crucial because two Democrats opposed that measure.

The massive final bill, which touches on nearly every facet of the financial sector, must be approved by the Senate before it can be sent on to President Barack Obama to be signed into law.

The measure creates a mechanism for liquidating large institutions that pose a systemic threat to the economy, establishes a new consumer protection agency and imposes new rules for derivatives trading. It has been officially renamed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

“Today's House vote puts us on the cusp of passing a law that will give consumers greater protection and safeguard our economy against future financial crises,” Mr. Obama said following the House action. “It will put an end to the idea that any financial firm is too big to fail and therefore entitled to taxpayer bailouts.”

All but three House Republicans voted against the bill. Most GOP legislators criticized it for creating new government bureaucracies, increasing federal spending and taxes, restricting credit and failing to address the fundamental problems that caused the near collapse of the financial markets in 2008.

“Under the guise of financial reform, Democrats are pushing yet another bill that will kill jobs, raise taxes and make bailouts permanent,” Rep. Mike Pence, R-Ind., the third-ranking House Republican, said in a floor speech. “This legislation codifies the notion of ‘too big to fail.'”

To win over wavering Republican senators, the House-Senate conference was briefly reopened this week to remove a $19 billion fee on large banks to pay for the legislation.

Lawmakers replaced the tax with funds generated by shutting down the Troubled Asset Relief Program. That move is expected to raise about $11 billion. The rest of the bill would be financed by increasing the Federal Deposit Insurance Corp.'s assessment on insured deposits in financial institutions with more than $10 billion in assets. The FDIC would have until 2020 to ratchet up the charge from its current 1.15% level to 1.35%.

The change has not yet persuaded Sen. Scott Brown, R-Mass., to back the final bill. Mr. Brown supported the original Senate version.

“I appreciate the conference committee revisiting the Wall Street reform bill and removing the $19 billion tax,” Mr. Brown said in a June 30 statement. “Over the July recess, I will continue to review this important bill. I remain committed to putting in place safeguards to prevent another financial meltdown, ensure that consumers are protected and that this bill is paid for without new taxes.”

[admin]

PERSONAL FINANCE


Trailer fees are first to go
Jonathan Chevreau, Financial Post · Saturday, Jul. 3, 2010

This is the second installment in a series on the trends in the financial services industry to provide a safer environment for retail investors.

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Tainted financial advice is disappearing. Australia, India and the United Kingdom are leading the way by banning commissions on many financial products as of 2012.

North America is behind the curve, but the related concept of "fiduciary duty" -- putting the best interests of clients first -- is moving front-and-centre in the United States.

A week ago, U.S. legislators agreed to language that provides the Securities and Exchange Commission the authority to impose fiduciary standards of duty on brokers rendering investment advice. That means their customer's interests take precedence over their own.

If global trends prevail, embedded compensation, central to how most mutual funds are sold in Canada, may be on borrowed time. Consumer advocates have long denounced fund trailing commissions (or trailers) for providing skewed incentives for salespeople to favour funds that pay them -- over those that don't, regardless of performance.

The industry may be forced in the direction that advisor John De Goey suggests in his book The Professional Financial Advisor: away from commissions and toward a fee-based model clearly disclosed at the outset of a client/advisor relationship.

Such fees are visible, not hidden, negotiated and agreed on in advance.

Effective July 1, 2012 Australia will ban "conflicted remuneration structures."

The nation is also introducing a statutory fiduciary duty for financial advisors and a product-neutral advisor charging regime with clear and transparent fees disclosure.

Australia looked to the United Kingdom's Financial Services Authority and a 2006 review the FSA conducted of the industry's retail distribution system for financial services products.

The FSA worried that when product-makers pay advisors commissions for recommending their products, there results a "misalignment of interests between advisors and consumers."

While the issue of fiduciary responsibility for advisors is still up in the air in the United Kingdom, headway has been made on product distribution

In effect, financial products in the United Kingdom and Australia will be distributed to advisors at wholesale prices. The mark-up constituting their advisory fee must be agreed upon with clients in advance and, in the United Kingdom at least, renewed annually.

British investment firms must describe their services either as independent or restricted advice. If the former, they are held to a fiduciary standard and they must provide unbiased, unrestricted advice. Restricted means advisors only recommend products from a short list.

In Canada, the fiduciary concept has been raised by the Financial Planning Standards Council (FPSC), which represents certified financial planners, and the Foundation for the Advancement of Investor Rights (FAIR) Canada, which hosted a conference on the topic last March.

FAIR's associate director, Ilana Singer, says the United States is way ahead of Canada on the matter, especially after its most recent changes.

"There's no kind of communications from Canadian regulators moving in that direction," Ms. Singer says.

In its May 2010 issue of FP Standard, FPSC president Cary List says the "F" word -- fiduciary -- is now getting "unprecedented attention."

While accountants and lawyers in Canada have a fiduciary obligation, there is not yet a comparable obligation for sellers of securities or insurance.

Jim Rogers, a director of Vancouver-based Rogers Group Financial, says if stock brokers or mutual fund salespeople hold themselves out as anything other than salespeople -- eg., financial advisors -- they should be accountable, as are accountants and lawyers.

"If you charge in a certain way, you change the way you're perceived. You can't have it both ways," Mr. Rogers says.

This simple approach avoids the problem of complying with the true legal definition of a fiduciary.

Legally, two conditions must exist for a relationship to be fiduciary:

1. A client must be in a position where he trusts the advisor implicitly; and

2. the advisor must have complete control over the actions undertaken on behalf of the client.

Under that definition, discretionary portfolio management and investment counsel are considered fiduciary in nature.

To avoid a legal quagmire, the FPSC falls slightly short of declaring all CFPs to be fiduciaries. It recommends advisors who wish to be considered true professionals should embrace five principles of fiduciary duty and be held accountable to them.

They are:

1. Putting client interests first,

2. acting with the skill, care, diligence and good judgement;

3. providing full and fair disclosure of all important facts;

4. avoiding conflicts of interest; and

5. fully disclosing and fairly managing unavoidable conflicts in the client's favour.

Roger Wohlner, a Chicagobased fee-only advisor, says that as a member of the fee only National Association of Personal Financial Advisors, he is held to a fiduciary standard and signs an oath to uphold it.

But there are some fee only advisors who are registered investment advisors and not NAPFA members.

Despite the blurred lines, it all comes down to the fact that advisor compensation must not be dictated by product manufacturers.

Under the British regime, fee-based compensation still exists, but must be negotiated upfront with the client. A product-maker may even provide half the cost of advisor compensation, as long as the arrangement is fully disclosed and the client approves.

But moving beyond commissions is a giant step in the right direction.

jchevreau@nationalpost.com

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Roseman: Canadians need to strengthen their defensive game
Published On Wed Jun 30 2010

By Ellen Roseman
Personal Finance Columnist
I like scenery as much as anyone. But I don’t think about the landscape when I think about being Canadian on Canada Day.

I think about the people and their attitudes, often called the collective soul of Canadians — polite, courteous, civil and restrained. It’s what makes Canada the peaceful country it is and a beacon of hope for emigrants around the world.

But often, I find my fellow citizens too complacent, too trusting of authority, too willing to believe that every problem has a legislated solution.

Why do so many people sign long-term contracts for car leases or phone plans without reading the fine print or asking about the consequences if they have to cancel early?

Why do they trust the promises of door-to-door sellers pushing fixed-price energy deals or telemarketers offering lower credit card interest rates?

Why don’t they shop for financial advisers as carefully as they shop for plumbers, gardeners and roofers?

Why do they start and end their quest for financial products at their bank branch?

I’m exasperated to see people let go of their common sense when confronted by persuasive sales pitches or seductive marketing campaigns. And I’m trying to figure out why it happens.

Perhaps it’s the sense of entitlement you get in a country with strong social supports, leading you to assume there are strong laws to enshrine consumer and investor rights.

If only it were so.

Canada’s division of power between provincial and federal governments has resulted in fragmented legislation and enforcement.

Too often, government regulators hand over power to self-regulatory bodies funded by the industries they’re supposed to police.

Canada’s politicians pay little attention to consumer and investor issues until they erupt into protest marches, front-page news stories and questions they can’t duck in Parliament or provincial legislatures.

Years can go by without a controversy that forces legislators to act.

Remember the furor about Rogers making customers pay for bundled cable TV channels unless they said they didn’t want them? The story comes up a lot when you talk about consumer activism.

But it happened 15 years ago. And there’s still no law against negative-option billing by federally-regulated telcos and banks.

I want Canadians to stop assuming that large corporations and salespeople have their best interests at heart. I want them to put more emphasis on self-protection and less reliance on government to come to their aid.

That’s my Canada Day wish.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca, 416-945-8687 or ellenroseman.com

[admin]

Elizabeth Warren To Head Consumer Protection Bureau?

Elizabeth Warren

Ryan Grim
ryan@huffingtonpost.com | HuffPost Reporting
First Posted: 07-12-10 05:06 PM | Updated: 07-12-10 08:34 PM
Once President Obama signs Wall Street reform into law, the battle will move off the front pages, but it'll be far from over. Who the president picks to lead key agencies and commissions will determine the course and strength of those regulatory bodies, much as Joe Kennedy shaped a half century of tough financial industry regulations by setting the tone as the first head of the Securities and Exchange Commission.

Two positions are being watched closely by both sides: A new head of the Office of the Comptroller of the Currency (OCC) and the first head of the Consumer Financial Protection Bureau (CFPB).

Regardless of the regulator Obama picks to run OCC, banks will be losing one of their best friends. John Dugan consistently fought to protect banks from regulation, compiling a record of fealty to Wall Street impressive even by Bush-era standards. His term expires in August.

At the CFPB, Wall Street and the GOP have been working to prevent Elizabeth Warren from assuming the helm long before the body had been created. An amendment pushed by House Republicans in the Financial Services Committee was intended specifically to eliminate the possibility of her leading the agency.

It failed and Warren, a Harvard professor and the intellectual mother of the bureau, has the strong backing of committee chairman Barney Frank (D-Mass.), as well as Rep. Brad Miller (D-N.C.), who led the push in the House for tighter consumer protections in the mortgage lending industry. Many consumer advocates would view any appointment other than Warren as a disappointment.

"We wouldn't have had a financial crisis if the supposed watchdogs hadn't been ventriloquists' dummies for the banks. The CFPB is a huge win for consumers, but it will have been a waste of time if the CFPB is just one more agency controlled by the banks," Miller told HuffPost. "We need someone to head the CFPB who is smart, tough and independent-minded. Professor Warren fits the bill."

In its write-up of possible CFPB heads, the trade paper American Banker mentioned Warren first, followed by Michael Barr and Eric Stein, both senior Treasury officials, as well as Fed official Allen Fishbein, who focuses on consumer issues, and Ellen Seidman, a former regulator at the Office of Thrift Supervision and now a banker.

Barr was a lead Treasury negotiator during the crafting of Wall Street reform deliberations. His policy portfolio, where he focuses on financial institutions, makes him an apparently more suitable pick for the OCC than the CFPB.

Wall Street wouldn't be happy if he wound up at either body. Though he is viewed with some suspicion in progressive circles for having served as a special assistant to former Treasury Secretary Robert Rubin, Barr has reportedly earned the enmity of the Wall Street lobbyists, who say he refuses to take their phone calls. His economic research has focused on the relationship between Wall Street and low- and middle-income Americans. In 2009, he co-edited the book "Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Families."

If Obama chooses someone other than Barr to lead OCC, that makes Barr a leading candidate for CFPB, damaging Warren's chances. A Treasury spokesman declined to comment on the speculation, as did Warren.

In the Wall Street Journal's speculation about CFPB leadership, Warren is again mentioned first, followed -- again -- by Barr.

The WSJ also suggests as potential candidates Martha Coakley, the Massachusetts attorney general who theatrically lost her bid for the U.S. Senate in January. Lisa Madigan, the Illinois attorney general, and Lori Swanson, Minnesota's top cop, are mentioned, as are Susan Wachter and Nicolas Retsinas, academics with government backgrounds.

Coakley, however, thinks Warren would be the right pick. "I think, frankly, that Elizabeth Warren would be a terrific head of that agency," she said on Fox Business when asked if she herself would be interested in the gig. "She's thought a lot about the consumer protection piece."

Madigan, too, declined to be considered and threw her weight behind Warren. "Not only was it [Warren's] idea to create the Consumer Financial Protection Bureau, but she has long understood the need for such an agency to ensure that another financial crisis doesn't devastate the futures of millions of hardworking Americans," Madigan said in a statement.

Warren has distinguished herself over the past year and a half as the head of the Congressional Oversight Panel, the bailout watchdog, which earned her bipartisan praise.

(advocate asks, "where is Canada's Consumer protection, as it applies to consumer investment products?" "where is the competition bureau as it's act applies to misleading and misrepresenting consumers?" Answer, asleep at their bureaucratic desks, protecting their jobs.) (invest outside of Canada until consumer protection awakens)

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[admin]

THE WALL STREET JOURNAL wsj.com
WEEKEND INVESTOR
JULY 17, 2010
Congress Overhauls Your Portfolio
Hidden in Washington's Historic Finance Bill Are Major New Rules Affecting Nearly Every Corner of the Investing World
Ross MacDonald

Buried in the bill's 800-odd pages are the most sweeping regulatory changes for ordinary investors in decades, affecting everything from mutual funds and retirement plans to single-stock investments and other holdings.
The legislation has the potential to make brokers more accountable to their clients, shine light on hedge funds and improve the transparency of the complex derivatives on which many mutual funds and pension plans rely to hedge their risks.

With financial reform clearing Congress, the Fed has emerged as perhaps the pre-eminent financial regulator, but that could only bring it added blame if things go wrong again.
Several provisions promise to give investors a louder voice in policy-making circles and corporate boardrooms. Within the Securities and Exchange Commission, for example, the bill sets up an Office of the Investor Advocate designed specifically to assist retail investors, and the Investor Advisory Committee, which focuses on initiatives to protect investors' interest.

Brokerage Accounts
The bill gives the SEC authority to impose the same standard of "fiduciary" duty on brokers that currently applies to investment advisers. That would mean that brokers must provide advice that is in clients' best interest, whereas currently they are required only to recommend investments that are suitable for customers.

The SEC must first study the issue and deliver a report to Congress. But given that Ms. Schapiro, the SEC chairman, has voiced support for such a measure, investor advocates are optimistic that regulators will follow through.

—Gregory Zuckerman contributed to this article.
Write to Eleanor Laise at eleanor.laise@wsj.com

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Three steps away.......from being investment prey.
By Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired.

I worked for twenty years inside the investment industry. I have researched and documented it for thirty now. I am here to give you the benefit of all I have learned in hopes that the public will someday not be considered investment prey by some in the financial industry.

Here in three steps, or three web sites, is nearly everything I can give you as the fastest, easiest way to crawl inside the brain of the investment industry and see what goes on.

We will start overseas, where you can see what other countries are talking about to protect investors. From here I will let you decide whether Canada is ahead or behind the curve. First and most recent is an article from the London Daily Telegraph:
“£7billion a year skimmed off our savings”, July 30th, 2010.

http://www.telegraph.co.uk/finance/pers ... vings.html
It is a candid tale of how investment professionals take your money and their experience.........and attempt to make it more their money and your experience.

Second is the best kept secret in Canada, a story from the Globe and Mail by a University of Toronto professor titled the “$25 Billion Dollar Pension Haircut”. It too is a candid tale of how much additional money is skimmed by the Canadian investment industry.
http://www.theglobeandmail.com/report-o ... 758546.ece

You might find it interesting to learn that with todays “self regulating” investment industry, and with the help of “self-regulators” that look the other way at such professional indiscretions, your retirement account will likely grow to less than half of what it might in a country where investors are given protection from predatory practices.
(you investment dealer will have the other half)

Third is a free video documentary, nearly a home made project by myself, former investment broker turned whistleblower. It is online at http://www.breachoftrust.ca and there is no request to buy, join, or donate. It is just me giving freely of what I have learned in thirty years of study of the industry from the inside. See nine video chapters of about ten minutes each to learn most of the tricks of the investment selling trade. If you have ever wished you could sit down with an investment professional who would talk to you without you having to buy something, here it is. I hope you enjoy.

If you seek further knowledge from those who study best investment practices, rather than best selling practices, see http://www.investoradvocates.ca a forum for professional discussion of ethical (and disclosure of unethical) investment practices. See also http://www.investorvoice.ca for another top Canadian site dedicated to revealing best practices verses standard predatory financial practices.

Larry Elford is a former investment broker who dedicates himself to educating and informing the public about predatory investment practices by financial professionals. He can be reached at lelford@shaw.ca

[admin]


“ Mutual funds are sold not bought” - old industry adage
1. Introduction
Canadian retail investors are exposed to financial markets that are among the most developed yet poorly regulated in the world. They enjoy an overwhelming supply of products and services to address their financial and investment needs. Advice is a component of this unduly complex marketplace. Canadians historically have chosen to invest and manage their financial decisions with the help of advisors. But things are changing . According to J. D. Power and Associates, one third of full service brokerage clients also do some investing online, and 26% of bank mutual fund investors are also using the online channel.
Whether its investment dealer shenanigans, incompetent advisers, high mutual fund fees, the non-bank ABCP fiasco, poor fund performance , the Earl Jones Ponzi debacle, or advisor fraud, retail investors are looking at alternatives to the commission-driven advisor channel. Too many `advisors` are basically salespersons interested in collecting trailer commissions on mutual funds and other expensive packaged products. A recent Nanos Research poll found that 77 % of respondents rated medical doctors as "high" or "very high" when it comes to honesty and ethics in their profession; business executives 25% , bankers 31%. and Stockbrokers rated just 18%.
The Canadian public policy debate about retirement savings has demonstrated a surprising awareness of the impact embedded commission advice has had on small investors. Some of the reference works supporting stakeholder positions in this debate have systematically overvalued the advice component of private sector solutions for improving retirement savings in Canada. The cost of most mutual funds contains the opaquely disclosed cost of financial advice (i.e. trailer commissions paid to persons identified as financial advisors).These industry participants have claimed that public sector plans won't do the job and therefore compare unfavourably to private sector plans, with the implication that individualized service and advice, largely absent in the public plans, is of superior value.
A comprehensive study by Canadian pension fund expert Keith Ambachsheer has found that Defined Benefit pension plans in Canada achieved annual average returns at least 3.8% higher than mutual funds with comparable investments. Defined benefit pension funds outperformed the market by 1.23% per year, while mutual funds had average returns that were 2.6% below the market during the 1996 to 2004 period. Returns for most mutual fund investors were even less than this, as a result of sales fees and consistently poor selection of mutual funds by misinformed investors: buying high and selling low. This means that those with savings in mutual funds lost a total of about $25 billion a year from the higher management fees and lower returns compared to workplace pension funds. Higher management fees are responsible for about $15 billion of this. If these trends continue, those depending on private mutual funds will have retirement pensions that are about 40% lower than defined benefit pensions plans for the same amount invested. In the example used by the study of a $45,000 annual pension, this means $20,000 less per year for retirees. Mr. Ambachsheer concludes that most of the difference in returns is because of much higher management fees charged by the mutual fund industry [The $25 billion annual mutual fund ripoff]] http://cupe.ca/pensions/The_25_billion_annua
This Report attempts to set the record straight for this and other public policy issues where advice plays a role. Throughout the Report, the concerns we have with respect to embedded commission derived advice are supported by fact-based, independent, third-party research available from credible, published sources. The aim is to provide a clear, unbiased view of what real advice means to the financial well-being of Canadians and their confidence in the future. In so doing, it is hoped that this work will enable public policy-makers to better assess the impact the advice market has had on investor's savings.
2. Advisors – What They Do
Advisors are employed in the provision of a variety of financial and investment advisory services including: distributing products like mutual funds , the setting of planning targets; choosing the right vehicles to reach those targets; and hopefully developing cost-effective portfolios matched to client needs.
Each client is unique in terms of his/her own financial situation, life cycle needs, risk/loss tolerance and investment / savings goals. And there is a confusing array of products and services proposed to meet those needs. A majority of Canadians find that they lack the financial knowledge, or the time required, to research all the options available to them and to make the important financial decisions they need to make at critical points in their lifetimes.Those without financial and investment advice may find themselves ill-prepared for some of the most important financial decisions they will encounter in their lifetimes.
So what exactly is meant by “advice” ? Financial advice is advice provided to an individual or family to assist them to grow, manage and protect their wealth. It includes strategic advice, recommendations about suitable investment classes, appropriate products (investments, RRSP and insurance) as well as explanation of the impact of legislation, taxation and other external factors on their financial position.
A professional advisor helps people make the right decisions , decisions that are not blurred by dual loyalties. The range of decisions range from budgeting, debt management, and financial planning to investing for retirement, insurance and estate planning. A professional advisor is well educated in the field (s ) he/she is registered in. . Depending on issue complexity, specialists in such areas a taxation or life insurance may be needed. Professional advisors have a fiduciary duty to clients . Traditional embedded commission advisors paid by mutual fund companies need only provide products that are suitable for investors. Such advisors may have taken no more than a correspondence course and passed a multiple choice exam to be licensed.
Under the new National Instrument 31-103 as of September 28, 2009, mutual fund representatives, formerly called “salespersons”, are now called mutual fund “dealing representatives” and individuals who were an advisor under a portfolio manager are now called an advising representative. See this link for full details: http://www.bcsc.bc.ca/uploadedFiles/sec ... BNI%5D.pdf Many feel that the previous title was more descriptive of their behaviour. To be sure, the title salesperson wasn’t normally on their business cards. No matter what the title, these folks are paid lucrative sales commissions for selling you mutual funds and keeping you invested.
Unless they’re dual-licensed to also sell securities and ETFs, or triply licensed to include insurance recommendations, options or commodities, take with a grain of salt industry declarations that most embedded commission mutual fund “advisors” do much more than distribute mutual funds. Paraphrasing Henry Ford, ,” You can have any product you want as long as it's a mutual fund”. As Henry Ford
3. Wide Range of Valuable Services
Professional advisors provide a wide range of valuable services to their clients, including the planning and maintenance of targets, helping them choose the right vehicles and the right asset mix to achieve those targets.
 A.  Setting and achieving planning targets: There exists a significant body of expert research, supplied by academia, showing the potential benefits of advisor-supplied financial or investment planning.
A survey sponsored by the Financial Planners Standards Council (FPSC) showed that only 40% of Certified Financial Planners did financial plans for “most” of their clients in 2006, down from 53% in 2002 . Overall, 70% of those surveyed said they have used a financial planner and a majority were aware of the services beyond investments that a planner can provide, including tax planning, estate planning and risk management. But, importantly, fewer than 10% claimed to have actually used these other services-including mortgage, insurance or money management advice The survey showed that while 44% said they are working with an advisor, only 18% are (knowingly) working with a Certified Financial Planner (CFP) and 27% of those with an advisor don’t know what credential’s that person has, if any.
B. Choosing the right vehicles and plans: Advisors can , in principle, help individuals choose the right vehicles and plans to optimize outcomes for their unique circumstances. But this ideal can easily be sabotaged by sales commissions, trailer commissions , sales quotas and the relentless force of commission grids. The underlying assumption is that the “vehicle” is likely to be a mutual fund or wrap account with enough embedded compensation to justify the effort. It’s unclear what the average fund salesperson will say about alternative “vehicles” such as paying off all your non-deductible debts, , setting aside emergency funds, investing in GICs , Real Return Bonds, inflation-linked annuities or low fee ETF's .
One weeps for those Canadians who follow undifferentiated advice to save in RRSP’s. Apparently, only tax experts and bureaucrats know that the effort will be of almost no value Too many clients are not told the very important tax and estate issues associated with RRSP's /RRIF’s when withdrawal time comes around. The GIS clawback will hurt people with less than $100,000 in retirement assets hard. A CD Howe Institute Backgrounder No. 65 New Poverty Traps: Means-Testing and Modest-Income Seniors available at www.cdhowe.org/pdf/backgrounder_65.pdf) demonstrated that many RRSP's were dead end trips, satisfying the need for sales commissions rather than the best interests of clients.
Another example: An HRSDC REPORT on RESP’s http://www.hrsdc.gc.ca/eng/publications ... ge08.shtml remarked : "In all, there is a significant risk that participants in group plans end up in a worse financial situation as a result of their participation” Group scholarship plans are characterized by a complex prospectus- the CST prospectus is 124 pages. The referenced report notes that in 2006, some 20% of gross contributions went towards fees.) , complex Terms and Conditions and unexpected consequences. According to the referenced HRSDC report, a shocking 3.2% of group RESP plans were cancelled or terminated in 2006. Additionally, 1.9% of group scholarship plans were closed by the group RESP vendors and subscribers paid the price: “When the group scholarship provider closes a group plan, the subscriber can reclaim the contributions, and these are then returned net of fees and without the investment income. Closing also means the grant and bond are repaid to the government, and these cannot be earned back later if new contributions are made for the same beneficiary.”
We have found that typically, fee/penalty disclosure is hard to understand, risks are not adequately articulated or understood, the true cost of ownership is poorly revealed, embedded sales commissions are masked and constraints inadequately explained. The enrolment fee is not part of the investment base. It therefore is a cost of the investment even if 100 % returned at contract maturity. It does not earn any money and is returned after many years in deflated dollars. This does not occur with self-directed RESPs. See also http://www.canadiancapitalist.com/the-m ... hip-plans/ .So-called advisors may not be acting in their client's best interests by flogging these products.
A 21- page FAIR Canada Report http://faircanada.ca/top-news/fair-cana ... 0-million/ found that Canadians hold $56 billion in money market funds (MMF) earning almost nothing. In the six months to year end 2009, the average Canadian MMF earned just 0.02% after costs, before the impact of inflation and taxes.  The average return for the most recent 30 and 60 day periods was 0%.  Even worse, fully one quarter of all Canadian money market funds (mostly smaller segregated funds) lost money in the three or six months to December 31, 2009, and continue to lose money. Again, we find evidence that advisors aren't paying attention to the needs of clients .
Do advisors improve investor performance?: Over the years, Morningstar has examined investor behavior patterns in a number of ways. An investor's emotional response to the market's gyrations may be one of his/ her biggest costs as an investor. The return lost to poor timing can even trump the cost of expense ratios. The average asset-weighted expense ratio across Morningstar's database of mutual funds is 1.23%. During the last decade, the gap between asset-weighted investor returns and total returns is 1.64%.You can think of this gap as the returns that were sacrificed because investors bought and sold funds at the wrong time. The pattern is clear: Investors tend to buy funds and asset classes following rallies and sell at low points, leaving a lot of money on the table in the process. Some of  their most conclusive findings show that investors have the hardest time using volatile funds well. But Morningstar dug deeper – their data simply doesn't prove or disprove the premise that financial advisors are any more or less fickle than individual investors. To read more,visit http://www.morningstar.com/go/?uidm=TMQ ... l=ETC0AGGT Whose more fickle: Advisors, Institutions, or Individuals? A close look at true investor returns yields some surprises. , Karen Dolan, CFA
According to Do financial advisors improve portfolio performance?, a recentlyreleased study of German investors at Vox by university professors Andreas Hackethal, Michalis Haliassos and Tullio Jappelli. they don't. The reason is the old bugaboo - costs and fees.

Advisors add value but ... "Even if advisors add value to the account, they collect more in fees and commissions than they contribute." Apparently the authors found that richer, older people tend to use advisors more which accounts for a preliminary gross conclusion that "Investors who delegate portfolio management to a financial advisor achieve on average greater returns, lower risk, lower probabilities of losses and of substantial losses, and greater diversification through investments in mutual funds." They note that the financial industry would love to grab that statement for publicity. However, the net truth is completely opposite: "Once we control for different characteristics of investors using financial advisors, we discover that advisors actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own."
Of course, that does not mean that all advisors are bad for your financial health. It does mean choosing carefully, however.
C. Setting the right investment mix: Professional advisors help choose the right asset mix for an individual client’s circumstances, objectives, and risk/loss tolerance. The value of this for individual investors is that, with advice, their portfolios will be weighted according to their specific needs, loss tolerance and time horizons. Investors are often coaxed by widespread media commentary that they can do better on their own through low or no advice embedded products, such as exchange-traded funds . The fund industry claims the reality is that the investment decisions of investors, without advice, are very often driven by short-term biases. They chase past performance. Investors often cycle between being over-cautious and under-cautious, and very often at precisely the wrong times. Of course, some of negative actions are caused by fund companies hyping new mutual funds near market highs such as the e-commerce and internet funds in 2000.
So do advisors really help reduce the buy high, sell low trap or do they contribute to it? In their study, "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," Daniel Bergstresser (Harvard Business School), John Chalmers (University of Oregon), and Peter Tufano (Harvard Business School) analyze a database of U.S. mutual funds from 1996 to 2004. Their objective was to compare the performance of investors who bought funds through broker-dealers to investors who purchased funds directly. They found that investors with broker-sold mutual funds experienced “lower risk-adjusted returns, even before subtracting distribution costs.” They also found that investors purchasing broker-sold funds were directed into funds with “substantially higher fees” and failed to show superior asset allocation. And as for helping investors avoid behavioral biases, “regrettably, the advisers generally demonstrated all the same biases that the rest of us have.” Even without this study, one only had to look at how advisors overemphasized technology funds in the late 1990s and how many advisors are overemphasizing energy, gold, and foreign funds today.
In any event, it's generally accepted that asset mix is a far greater influence on portfolio performance than securities selection. This would suggest that cost would reign supreme. But since MFDA licensed “advisors” can't sell low-cost ETF's or won't sell cheaper funds lacking a trailer commission, they don't recommend ETF's. In fact , cost is the most important driver of returns . According to a new study by Morningstar Inc. , low fees are likely to be the best predictor of a mutual fund's future success. The study shows that using low fees as a guide would give investors better results than even Morningstar's own star-rating system, which looks at past risk- and load-adjusted returns. While the stars system has typically guided investors to better results, it isn't as effective in predicting future returns at times of big market swings. Morningstar found that in aggregate, low-cost funds had better returns than high-cost funds across all asset classes, during various periods from 2005 through March 2010. Fees "have proven to be the strongest predictor out there." says Russel Kinnel, director of fund research and author of the study. "The stars system, as a measure of past risk-adjusted performance, is going to be a little more limited." http://news.morningstar.com/articlenet/ ... ?id=347327 Fees Count!
Based on this and similar research , if advisors are to have a net positive economic impact to justify their costs it will have to involve some intangible benefits. Some of the key intangible benefits that  professional advice could provide includes:

(a) peace of mind
(b) greater control of finances
(c ) the prospect of a more comfortable retirement
(d) avoiding bad investments following a budget  and
(e ) the ability to save tax-effectively .
While a professional advisor may bring piece of mind , incompetent or unscrupulous advisors can ruin your life. Here's some Advisor Red Flags to be on the lookout for:
Lives flamboyant lifestyle
Unwilling to provide written information, including provincial securities registrations and verifiable references
Ignores or evades your questions.
Fails to provide personal rates of return and proper client statements
Asks you to sign blank forms or cheques
Asks you to sign any documents you haven't fully read or don't fully understand
Offers yields -returns that are too good to be true
Suggests offshore investments
Borrows money from you
Asks you to name him as executor of your will
Indications that a signature has been forged. or a form adulterated
Account statements that don't originate from the firm
Insists that an uninsured investment has little or no risk
Offers a guaranteed investment or one with 'no risk'
Advises you to put all of your money in one investment
Recommends investments you don't recognize, and doesn't try to explain them clearly, or says they're too complicated to understand
Argues with you or ignores your instructions
Makes unauthorized trades
Makes claims on performance  guarantees that make no sense.
Is vague about the amount of commission or fees he or she will earn
Uses High pressure sales tactics with an insistence on an immediate decision;
Requires you to keep the deal secret
Unwilling to let you discuss the deal with another advisor or to get a second opinion;
Suggests that you invest on the basis of trust or faith.
On his website http://www.macgold.ca/advisorfault , dispute resolution consultant Robert Goldin lists 156 ways that an advisor can be responsible for your investment losses. These include such items as:
the lack of suitability of your investments.
2. failure to ensure that an investment, originally suitable remained suitable.
3. your financial advisors failure to construct an investment portfolio that mirrors your investment objectives and risk tolerance levels.
4. failure to learn the essential facts about you.
5. inserting incorrect information into your account opening application form that is filled out when you open up an account with your brokerage house (This is known as the Know Your Client Form or the KYC Form). The KYC is the contract between you and your brokerage house.
6. failure to conduct periodical or more ideally, annual reviews of your KYC form.
7. failure to update your KYC Form with new information such as changes in your personal, social, family or business circumstances resulting in possible new investment objectives and risk tolerance levels. These include marriage, divorce, retirement, disability, additional children, supporting elderly parents etc. 
8. over-concentration in single investments or in single industry sectors.
9. lack of diversification of your investments, over a number of different market sectors so as to limit your overall risk.
10. failure to monitor the performance of your portfolio and warn you of any possible dangers such as a potential market turndown, your investments about to tank and doing nothing to stop the slide, or letting you know of any changes both positive and negative in any of your securities i.e. giving you the bad news along with the good.
One of the worst cases involved MFDA registered “advisor” Ian Thow. The case is "one of the most callous and audacious frauds this province has ever seen," said the BCSC when it imposed the $6-million fine in 2007. An entire webpage is dedicated to his story of investor devastation. http://www.investorvoice.ca/Scandals/Th ... _Index.htm
4. Confidence in the Future
 Advisors are supposed to encourage their clients to adopt good savings and investment behaviours early in life and to maintain those practices through their lifetimes. It is interesting and alarming that despite the best intentions and a clear understanding of the risks of not being adequately prepared, too many pre-retired Canadians have yet to take action to protect themselves financially for the future.
Canadians nearing retirement worry about their standard of living, depleting their savings and being unable to pay for health care - but few are doing much about it, a survey released June 14, 2010 for the Canadian Institute of Actuaries suggests. The survey was done to gauge the attitudes and actions of individuals approaching retirement age, or who have recently retired. Actuaries are specialists in risk management and work with pension plans, insurance companies, government regulators and individuals. The survey found that 74 % of those over 45 but not retired were concerned about maintaining a reasonable standard of living for the rest of their lives. Sixty-two per cent worry about having enough money for health care or depleting all their savings. One in five said they would never fully retire, while only 8 % said they are very prepared for retirement. The macro-impact of the advice business seems to have had little success as the survey demonstrates.
The poll was conducted Feb. 4 - 10 for the actuaries by Ipsos Reid. It involved 1,064 Canadian adults over 45 who are not retired and 1,073 who consider themselves retired. The error margin for each of the two sections of the poll is plus or minus three percentage points, 19 times out of 20.
5. Financial Literacy
Governments have noted the importance of improving the financial literacy of Canadians. The Government of Canada has established the Task Force on Financial Literacy to develop a national strategy. Provincial governments in British Columbia, Manitoba, Ontario and Prince Edward Island have begun to target early age learning through financial education initiatives in their school systems. After the last stock market crash, the federal government realized that people needed help with spending, saving, investing and – of course – borrowing.
An important element of financial literacy is to teach people how to avoid outright scams, toxic financial products and commission driven "advisors" .The annual losses are staggering.
People need to be taught to be less trusting and more inquisitive about financial products and services. For example, we have the highest mutual fund fees in the world because Canadians are too trusting and don't realize all the annual commissions built in and the impact these expenses have on returns over the long term. This is taking a very heavy toll on retiree and pensioner nest eggs. There is a danger that the literacy initiative will result in a retardation in regulatory reform. That would be a big mistake. Today's financial products are increasing in complexity so financial consumer protection is paramount. No amount of financial literacy will be able to keep pace with the creativity of the financial services industry .
 6. Advantages of a Regulated Market?
There are potential advantages to dealing with an individual licensed to sell a financial product, and who, in turn, is dealing with a regulated entity. This is the case for most retail buyers of mutual funds and securities in Canada. But consider the following facts:
An advisor licensed to sell mutual funds cannot sell you ETF`s ; as a result these low-cost products aren`t included in mutual fund portfolios
The regulation of these dealer representatives is by two self-regulating Organizations ( the MFDA and IIROC) , not provincial securities commissions
Canada`s regulatory system of 13 provincial regulators is regarded by many observers, including the Federal Government , as fragmented and dysfunctional
These SRO's do not have the power to collect on fines levied on advisors once they leave the industry
If your driver’s licence is pulled, that means right across Canada. Arrest warrants are valid right across Canada as well. And as for the national revenue folks . . .But all a provincial securities commission  can do is tell  scam artists not to try it again within their province of jurisdiction. So if  Alberta scammers set up shop in Moose Jaw , who’s to stop them? The infamous Earl Jones case in Quebec exposed many weaknesses in the system. Investor advocates have been pleading for years for tougher, uniform enforcement .
Regulatory exemptions have not been kind to small investors. For example , the infamous
granting of an exemption on mutual fund DSC early redemption penalty reimbursements so that investors could be sold expensive proprietary funds harmed investors. Recently , the CSA has proposed a Point of Sale disclosure regime that may suit the wishes of the fund industry but certainly puts retail investors in a worse position. Despite recommendations to modify the regulations from the investor advocacy community and Morningstar, a fund rating firm, the proposals seem ready to be unleashed on small investors.
The industry-sponsored and funded Ombudsman for Banking Services and Investments (OBSI) has had to deal with a record number of complaints . Its 2009 Annual Report highlights include .
• Opening of 990 case files, a 48% increase from 2008.
• Over 200% increase in total case files opened over the last three years.
• a 73% increase in investment case files opened over 2008.
• 21% increase in banking case files opened over 2008.
Just 35 % of OBSI's recommendations support complainants. Can there be any question that the advisory community needs to introduce reforms?
Canada continues to lag behind other countries in investor protection During the non-bank ABCP fiasco no regulator came forward to assist distressed retail investors. Were it not for the determined efforts of several investor advocates , these folks would have been left high and dry..
FAIR Canada has released an expert report with options for improving the management of conflicts of interest at the Toronto Stock Exchange (the TSX), in connection with the TSX’s regulation of listed companies. FAIR Canada has expressed concerns since its establishment about the inherent conflict at the TSX between the TSX’s listings business and listing regulation functions, and has pushed for regulators to address this conflict of interest in a way that is consistent with international standards.
Earlier this year the United Kingdom moved to outlaw by 2012 the sales commissions that are embedded in fees for investment products. Australian regulators proposed something similar. Then, late in July, the U.S. Securities and Exchange Commission (SEC) voted to cap such fees for mutual funds at a quarter the 1 per cent fee included in some funds in Canada. Meanwhile , Canada's Quebec and Alberta provincial regulators attempt to patch a broken regulatory system and block attempts to establish a national regulator.
There are many more examples demonstrating Canada's weak regulation of securities markets and low level of investor protection.
7. Broad Local Access
The financial advice industry comprises approximately 289,000 Canadians, working locally and contributing to their communities in all regions of Canada . Of these individuals, advisors make up a large workforce, including the 114,116 IIROC, MFDA and AMF registrants licensed to sell securities and mutual funds, the 131,900 insurance representatives licensed to sell life and health insurance products, and the more than 17,000 financial planners holding the CFP designation.
Geographic coverage is excellent but the fees are also world class. The 2007 “Tufano” report Mutual Fund Fees Around the World concluded that Canada’s mutual fund fees were among the highest in the world suggesting that Canadians should be receiving truly superior performance for the outsized fees. Or, it could suggest an uninformed investor base paying an excessive price. Approximately 85 % of funds are purchased through an “advisory” (sales) channel .
Source: http://papers.ssrn.com/sol3/papers.cfm? ... _id=901023 ]
Client complaints are not geographically uniform. In its 2009 Annual Report OBSI disclosed that Ontario accounted for 57.8 of complaints with 38.8 % of the population . Quebec on the other hand accounting for just 12.5 % of complaints with 23.4 % of the population.
According to a August 12th article by the Toronto Star's James Daw , Industry defends mutual fund trailer fees ,  a lot of money is at stake. He quotes Carlos Cardone, senior consultant with research house Investor Economics who says about $2 billion was deducted from Canadians’ mutual fund assets in 2009 to pay advisers what are called trailer commissions. That compares with about $9.5 billion in the U.S., with ten times the population. The Canadian figure excludes what banks embed in their funds to pay sales and advisory staff. Bank funds hold roughly 30 % of total mutual fund assets in Canada. And things aren't getting better. As of July 1, Ottawa and Queen’s Park want to collect revenues at a rate of 13 % on fund fees paid by Ontario investors. That’s up from just 5 %, when the fees were subject only to GST, and there was no provincial tax bite.
Mutual fund annual fees—which include management fees, administrative costs, trailer commissions and taxes—can really make a dent in your overall return. You may be surprised by how much. Say two people invest $10,000 in two different stock funds, which both gain an average of 8 % per year over 10 years. Fund A charges 0.5 % in annual fees, and Fund B charges 1.5 %. A decade later, Fund A will deliver a return of roughly $20,530 while Fund B will return $18,560. To compare fund returns yourself, taking into account expenses, the Ontario Securities Commission's Investor Education Fund offers a mutual fund calculator on its website, http://www.getsmarteraboutmoney.ca/tool ... fault.aspx .
8. Canadian Choose Advice
Advice, because it is relationship-based, tends to provide outcomes that are of more durable value than services that are purely transactions-based. Embedded commission based advisors however do have serious embedded conflicts of interest .
Do advisors help clients find funds that are lower cost (excluding distribution costs)? After analyzing several trillion dollars worth of transactions, the answer appears to be no. A U.S. study released in November, 2006  by the Zero Alpha Group (ZAG) and Fund Democracy [ The Costs of Using a Broker to Select Mutual Funds ] could not find evidence that advisers find low cost solutions. Their study showed investors who buy index funds through brokers pay half a percentage point more in management fees than do independent investors who go through no-load channels - for essentially the same fund.  The use of a broker to advise mutual fund investment decisions thus causes investors to pay twice – once to the broker for his bad advice and then again in the form higher ongoing annual fund expenses.
Error! Filename not specified.In "Investor Timing and Fund Distribution Channels," Mercer Bullard (University of Mississippi), Geoff Friesen (University of Nebraska-Lincoln) and Travis Sapp (Iowa State University) also compared the performance of U.S. mutual-fund investors by distribution channel. They found that brokers did not prevent clients from buying high and selling low — i.e. from exhibiting poor investment timing. Comparing asset-weighted and unweighted returns, investors in funds with front/rear loads and/or annual fee (sold by brokers) were found to have purchased and sold their funds more than investors of no-load index funds. Investors in load/annual fee funds consequently underperformed a buy-and-hold approach whereas investors in no-load index funds closely approximated the buy-and-hold approach. The study’s conclusion leaves little doubt about the authors’ opinion of the utility of financial advisers. “We find that investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer timing performance than investors who purchase pure no-load funds,” they say.
In "Conflicts of Interest and Competition in the Mutual Fund Industry," Ajay Khorana (Georgia Institute of Technology) and Henri Servaes (London Business School) examine how conflicts of interest in the U.S. mutual-fund industry affect competition and investor behaviour (their database covered the period 1979-1998). Overall, their paper “highlights a number of conflicts between fund families and investors,” say the authors. For example, they found “no evidence that investors derive any benefit” from annual fees for marketing and distribution (12b-1 fees in the U.S). Furthermore, “fund families generally want to maximize assets under management … and the resulting management fees,” an objective at odds with investors’ “desire for high risk-adjusted performance at low cost.”
Here's how to set the bar for a professional advisor:
1. Find out how mutual fund portfolios did vs. benchmarks for the  last 5, 10 years
2. Ask if he/she provides personal rates of return and prepares an Investment Policy Statement
3. Make these advisors show you the analytics behind their portfolio designs
4. Ask for the MER and TER for the funds they want to sell you and the impact after 10, 15, 20 years
5. Make them demonstrate how they measure and manage portfolio risk
Advisor- refugees are growing in numbers and so are ETF`s. Today, ETFs are available on all types of indexes and sectors, together with bonds, currencies, commodities and commodity futures. Sensing the trend, BMO has recently entered the field. With interest rates low and muted forecasts for future returns, fees count as never before. Online DIY investing allows you to take charge of your investments. It`s worth spending the time to seize control over your money .A fair number of online investors retain an account with a mutual fund dealer to maintain access to some advice. On-line investing is a different experience, so take it slow and maybe try a practice account. If you need help along the way you can obtain it from a professional fee-only advisor, an accountant or a second opinion service such as www.secondopinions.ca By looking after your own portfolio you'll save on commissions and fees, manage your taxes better and develop a better understanding of the world of finance as you build your nest egg.
9. Conclusions
In this Report we have examined the financial and investment advice business in Canada, examined what professional advisors should do for their clients, highlighted a number of issues and identified some of the principal values that investors should expect to derive from the relationships they have with their financial professionals.
Professionals can help individuals in setting and maintaining planning targets, and assisting in their choices of the right vehicles and the right portfolio for reaching their goals. In the crash of 2008 we discovered that diversification may fail us when we need it the most. If your “advisor” looks at investment risk only through the mutual fund prism, he or she may not be able to help you truly hedge your portfolio with sophisticated hedging strategies and alternative investments outside the mutual fund “vehicle.”

Advisors can contribute to the financial literacy of Canadians but the sheer number of issues and complaints suggest that all is not well in advice land. Advisors operate within a deficient regulatory framework and controversial distribution system that has proven incapable of protecting the Canadian retail investor.
Thankfully, taking control of your investments has never been easier, thanks to the proliferation of information on the Internet, the growing assortment of free research tools made available by discount brokers and independents and some excellent choices for low-cost ETF’s , even some that are actively- managed. The Horizons AlphaPro Funds are actively- managed Exchange Traded Funds ("ETFs"), which are similar to traditional mutual funds, but are listed on the TSX exchange. As a result, active ETFs combine active management with the traditional structural advantages of ETFs: lower fees, intra-day liquidity, and superior tax efficiency.
You can open US $ accounts, RRSP`s, RESP`s, RRIF`s, TFSA`s and the like. Accounts can also be set up to permit option transactions and margin buying. Instead of working with the same stock broker, you will do most of your trading online, or if you decide to call in your order, with the first available broker (order taker). Commissions typically run about $9.95 per online trade but can vary widely. You can invest in stocks, bonds, GIC`s, options, mutual funds and ETF`s. Advisor-refugees often migrate to ETF`s when moving away from mutual funds. The case for ETFs:
1. Lower MER`s and expenses since most replicate an underlying index
2. Index ETFs have often beaten active managers over the long term
3. Can be traded throughout the day (mutual funds must be redeemed at the end of the trading day)
4. Are more transparent because they disclose all holdings daily
5. Low portfolio turnover helps make for greater tax efficiency
You can stick with actively- managed mutual funds without paying for advice you don`t want. RBC Direct Investing offers a wide selection of its funds in the low- cost D Series. TD offers its lower cost eFunds and of course there`s always the low- cost fund providers. Discount firms offer research that is on par with those offered at the traditional brokerage firms. .
If you do need advice , consider a fee-only advisor to avoid conflicts-of-interest . Financial advisors can be important contributors to your financial success – if they are experienced, competent and have your best interests at heart. Unfortunately, most investors have no means to assess the service and advice they receive from their advisors. Check out this rating system at http://www.weighhouse.com/resources/rate_advisor.aspx
Given growing competitive forces, the possibility on a national voluntary pension plan and increasing investor awareness of client-advisor issues , the advice community will need to demonstrate it adds value, not by words, but by results.

Kenmar Associates

[admin]

EXTRACT from SIPA submission to the Tak Force on Financial literacy:

We feel it is appropriate that Government launch a program for financial literacy
that includes disclosure of the ugly truth. It is essential that the problem be
properly identified before a valid solution can be formulated. Financial literacy is
only a small part of the solution. Certainly investors should be made aware of:
· how the investment industry operates
· how it is regulated
· the qualifications of dealer’s representatives and their limitations
· the fact that there are exemptions from the rules
· the fact that unregulated products are being sold
· the fact that the regulators generally will not get your money back
· the fact that those who claim to provide investor protection did nothing to
prevent the limitation period from being reduced to two years
· the fact that the law does not require that so-called advisers are not required
to put clients’ interests first
· the fact that the law does not hold the industry to a fiduciary standard
· the fact that the industry will hold that the investor is responsible for
mitigating loss even though the loss may be due to industry wrongdoing

[admin]

"The Keith Ambachtsheer study on mutual funds suggests Canadians are losing $25 billion per year due to excessive fees. Other studies suggest Canadians invested entirely in mutual funds will end up with approximately 50% of what a good pension fund manager could achieve."

"Do Canadians know that the industry that is responsible for looking after their life savings is not being held to a fiduciary standard?"

"Do they know that so called investment advisors (who until recently were registered as salespersons and not registered as being qualified to give advice) are not legally required to put their clients’ interests first?"

SMALL INVESTOR PROTECTION ASSOCIATION
A Voice for Small Investors Financial Literacy - Pg 1of 6
April 29, 2010

Task Force on Financial Literacy 255 Albert Street 11th Floor, Ottawa ON K1A 0G5

Re: Financial Literacy Dear Sir;

A quote from the Honourable Minister James Flaherty:
“All Canadians are working toward a personal goal, be it retiring, buying a home or attending college or university. As these goals have financial implications, Canadians would benefit by becoming better consumers, investors and savers.”

The Small Investor Protection Association (SIPA) was founded a decade ago because we are concerned about the lack of investor protection and the fact that many Canadians are losing their savings due to investment fraud and wrongdoing with little hope of recovery from such a
life-altering event.

Our comments are therefore directed to this paramount issue of small investor losing their savings due to fraud and wrongdoing. However, we do recognize the importance of raising fiduciary literacy so that all Canadians will understand that they must manage their money properly. They must know the impact of debt service and the effect of compounding. They must know about risk management and that in addition to market risk, there is product risk and advisor risk.

For decades there has been talk about investor education. The Ontario Securities Commission (OSC) established the Investor Education Fund and they along with other organizations provide excellent materials for investor education. However, until Canadians are told the truth about the need for financial literacy, the probability of change is minimal.

SIPA has tried to raise investor awareness for more than a decade, but with limited resources we reach a limited number of people. We believe that awareness of the facts is the first level of financial literacy. Government should work with and provide support to Non Governmental Agencies engaged in raising financial literacy.

The lack of financial literacy contributes to Canadians losing their savings due to investment fraud and wrongdoing at the rate of $25 billion per year. This issue must be exposed by Government to encourage Canadians to seek financial literacy.

Ours is a trusting society.

How many Canadians will prepare specifications and call for three bids before asking a plumber to do a job? Usually they will trust the plumber to do the job at a reasonable price because they do not have the knowledge to determine a fair price.
How many Ontarians will ask for a second opinion before following their doctor’s advice? Usually they have faith in their doctor and trust them to prescribe proper treatment. They do not see the need to become medical experts when they can rely upon our medical care system to provide them with excellent service. They place their trust in the medical profession.

The financial services industry is also important to Canadians. They are led to believe that they can trust the financial industry. The media advertising suggests that early retirement is possible by placing trust in the industry. Slogans like “Freedom 55” encourage this belief.

Products with names like “Income Trusts” or “Principal Protected Notes” sound secure, although many Canadians have lost their savings when they were concentrated in these products. Canadians are told that the financial services industry is well regulated, and that investors are protected. In 2004 the Senate Committee held that belief, as do most Canadians, however their hearings revealed a much different story.

The recent financial market meltdown has exposed many frauds that have operated for decades. The Earl Jones caper in Montreal is an example of frauds that can operate long term in a trusting society. In retrospect it is evident that Jones worked with the banks and investors simply placed their trust in him. The banks did not react to red flag warnings that were apparent. They simply trusted him and facilitated his fraud. Everyone trusted Earl Jones. Would financial literacy have helped them to override this trust?

Today, most Canadians continue to believe their savings are safe when they are invested with the financial services industry. They are not made aware of the facts. They do not know how many Canadians are losing a major portion of their savings when they are retired or near retirement. How much is lost due to unregulated fraud? How much is lost due to systemic wrongdoing in the regulated investment industry? What products are being sold that are unregulated? What products are being sold by the regulated industry that are the result of exemption orders? Why don’t regulators make this information available?

The Keith Ambachtsheer study on mutual funds suggests Canadians are losing $25 billion per year due to excessive fees. Other studies suggest Canadians invested entirely in mutual funds will end up with approximately 50% of what a good pension fund manager could achieve. This fact alone raises concerns about the trend towards defined benefits pension plans which download the responsibility for investment performance onto the pensioners themselves.

Do Canadians know that the industry that is responsible for looking after their life savings is not being held to a fiduciary standard?
Do they know that so called investment advisors (who until recently were registered as salespersons and not registered as being qualified to give advice) are not legally required to put their clients’ interests first?

Do they know that the Statute of Limitations has been reduced to two years? Do they know that if they do not start civil action within two years they may be statute barred from seeking justice through civil litigation?
Is this how government and regulators protect small investors?

In 1999, Robert Golden published a book entitled “INVESTOR BEWARE”. He outlined the many systemic practices that can cost investors their savings. He tried to warn investors with his book. Many others have also written books in an attempt to teach the public. However the industry uses the media to create a perception that the public can trust the industry and all is well. Regulators and Government support this perception and Canadians are continuing to lose their savings. The truth is still not disclosed.

There are two schools of thought on investing.

One is that held by most Canadians. You can place your trust in the investment industry. The industry is well regulated. If all else fails and you are unable to get restitution for wrongdoing from the industry or regulators, you can seek justice in court.
The other held by most investor advocates is that the industry is deceiving investors by creating toxic products and selling them to unsuspecting investors; the regulators are captured by industry; investors rights to seek justice through the courts has been eroded with reduced limitation periods, and it is indeed an INVESTOR BEWARE investment environment.

We feel it is appropriate that Government launch a program for financial literacy that includes disclosure of the ugly truth. It is essential that the problem be properly identified before a valid solution can be formulated. Financial literacy is only a small part of the solution. Certainly investors should be made aware of:
• how the investment industry operates • how it is regulated • the qualifications of dealer’s representatives and their limitations • the fact that there are exemptions from the rules • the fact that unregulated products are being sold • unregulated persons are defrauding large numbers of investors • the fact that the regulators generally will not get your money back
• the fact that those who claim to provide investor protection did nothing to prevent the limitation period from being reduced to two years
• the fact that the law does not require that so-called advisers are not required to put clients’ interests first
• the fact that the law does not hold the industry to a fiduciary standard • the fact that the industry will hold that the investor is responsible for
mitigating loss even though the loss may be due to industry wrongdoing

If you have your car towed to the garage because it won’t start, replacing a dead battery may seem like the solution but that may not be the real cause. It may be that the alternator is not functioning or some other fault. The car must be analyzed to determine the cause of the fault.
When you go to the doctor he must properly diagnose the problem before he can start a successful treatment or prescribe effective medication.

It is not enough to propose financial literacy or investor education as a solution before diagnosing the problem. Canadians must be involved. Town Hall events are effective means of hearing from Canadians. Why hold individuals responsible when institutions fail to provide good governance or deal fairly with the problem. The Goldman Sachs hearings are revealing an attitude of insatiable greed and a cavalier attitude towards investors’ savings. Firms that deal with Canadians financial futures must have a fiduciary responsibility and be held accountable. Legislation is required to establish this responsibility and accountability, as well as to provide appropriate penalties for failure to comply and mandatory restitution for victims of white collar crime.

In our society most people are busy with careers, family and social responsibilities. They do not have the time to become an expert plumber, an expert mechanic, or gain sufficient medical knowledge that they can evaluate their doctor’s diagnosis. They also do not have access to the resources that would be needed by these specialists. They simply trust and depend upon those in whom they place their trust.
The services of the plumber and the mechanic are unlikely to be critical to survival but the doctor’s services may well be.
So too, the services of a financial adviser may well be critical to their survival.

When people lose all of their savings due to fraud or wrongdoing the impact is devastating. The realization that life’s dreams are shattered and there is insufficient time to start over or recover can drive individuals into depression, create stresses that impact health and family, and can result in suicide.

As a minimum it leads to a life far different from that which was earned by someone who worked a lifetime to save for a comfortable retirement. It can mean no more winter holidays, giving up cars, taking on menial jobs to eke out an existence, and struggling to save homes and meet mortgage payments. It also means the family legacy has been lost to future generations.

Beyond the direct impact of financial loss, victims lose their faith in others, the capacity to trust and the essentials of hope and love. Their lives are effectively destroyed. Does Government know how many vicitms there are? What is Government doing to assist these victims?
In order to prescribe an approach for financial literacy or investor education the public must first be made aware of why it is so important for them. Government must reveal the ugly truth so that the public can realize the necessity to gain financial literacy including investment awareness.

With the trend from defined benefit pension plans to defined contributions it is becoming critically important for the public to become aware. In future many more will lose their savings and also their pensions. They will be left destitute and at the mercy of our welfare system, unless appropriate changes are made.

At present the tendency is to accept the investment industry as it is and download the responsibility onto the individual. The regulators say the individual must become better educated in investment, do his own due diligence before investing, and when something goes wrong he must take action to mitigate the damage. Does this mean he can no longer place his trust in the investment industry, that the industry has no fiduciary duty, that the regulators are incapable of regulating, that the police are not able to protect the public, and that the courts are there for a game that lawyers play and not to provide justice for citizens? Is this really the society that we wish upon ourselves and future generations?

The alternative would be to revise our legislation to introduce a fiduciary standard for the investment industry so all of those who sell investment products would have a fiduciary responsibility to their clients. That they would need to place their clients’ interests first. Legislation should make it a criminal offence to sell investment products without a license, or without appropriate insurance to protect client’s investments.

Regulators should be revamped to have civilian oversight, and regulators should be enabled to investigate and order restitution to be paid from funds provided by the industry for that purpose. (The proposed new national regulator may approach this solution).
Special police units and courts to deal specifically with white collar crime should be established that are not under the control of the industry. The impact on victims of white collar crime must be recognized and resources developed to deal with them. In many cases the impact can be far greater than the impact on vicitms of violent crime.

Government needs to introduce legislation to ensure that the investment industry and its regulation are transformed to recognize values inherent in our society so that in future we may be able to place our trust in the investment industry confident that they will provide good governance and place clients’ interests first rather than allowing unbridled greed to lead to the development of complex products unsuitable for most small investors but nevertheless sold to trusting investors who end up losing their savings.

Government action is needed if Canada is to be perceived in future as a “just society” rather than the wild west of investing and a land where we live by the law of the jungle.

Let’s call a spade a spade and deal with the issue. There are two options:
1. Reveal the truth and warn all Canadians that it is INVESTOR BEWARE.
2. Reveal the truth and take action to introduce legislation that places responsibility where it should be rather than place it on the shoulders of individual Canadians.

To take no action will result in even more Canadians losing their savings due to investment fraud and wrongdoing.

Financial literacy may be a part of the solution but what is needed is a total solution that will be effective to prevent the devastation currently caused by the failure of Government and regulators to protect the investments and savings of individuals.
We believe the investment industry should have a fiduciary responsibility and that victims of investment fraud and wrongdoing should be exempted from current reduced limitation periods due to the fact that the devastating impact of losing life savings makes it impossible for most Canadians to react rationally and determine a course of action within two years.

I consent to the disclosure of our submission in its entirety including my name
Stan I. Buell, P.Eng. Founder & President Small Investor Protection Association
SIPA – P.O.Box 325, Markham, ON, CANADA, L3P 3J8 – tel: 905-471-2911 – website: http://www.sipa.ca – e-mail: sipa@sipa.ca

[admin]

this is a good image I found, and web site designed to involve humans in their own community affairs, locally or nationally. (the link wont work here but the site you can go to is
http://www.huffingtonpost.com/news/third-world-america/

I applaud the concept and I urge all to get involved. If we stand back and continue to play the trust game, placing our faith in leaders and financial regulators, we will continue to be the prey in a predatory environment. Your choice.

best
larry

Sept 2, 2010, early beginnings of an Industry of Accountability...........an entirely new growth of persons and organizations, expanding into communities, governments, nations who stand guard against economic, social or environmental terrorism, economic social or environmental predation from within, without or wherever. An industry that takes crooked, lying, or self dealing accountants, lawyers, politicians, bankers, mining companies, any corporation, and investigates them, reports on them, "outs" them in public and holds them accountable to pay back society for the damage they do.

join in, it is free to get involved. You never know, it might be the next world growth industry.