© 2014 Copyright Peter Whitehouse PeterWhitehouse@Bell.net
October 7th 2014
The question is being asked in the financial world, "Does Disclosure Work ?"
How about first examining the Issue and Detrimental Effect of Non-Disclosures
EXECUTIVE SUMMARY
Ms Susan Wolburgh Jenah, who is the President and CEO of IIROC, will be delivering a keynote address at a panel discussion hosted by The Capital Markets Institute and Canadian Foundation for Advancement of Investor Rights (FAIR Canada) on October 28th 2014. The title of the address is "Does Disclosure Work". Does the disclosure received by retail investors help them to make optimal investment decisions?
Topics for discussion include --
● Does the disclosure received by investors assist in making optimal choices? If not, what are the barriers?
● Do investors receive information that is helpful to their decisions?
● Do investors pay attention to the disclosure they receive?
● Do investors understand the disclosure they receive?
● How do investors interpret the disclosure they receive?
● Does the traditional disclosure model ensure adequate investor protection?
● What behavioural effects impede or enhance investor decisions?
● Academic research has identified some contradictory and unintended consequences of certain aspects of required
disclosure such as conflict of interest disclosure. What is the best way to correct these failures?
● What regulatory (or other) response could address the issues raised?
There are two major overriding issues that are missing from the discussion subjects that should be at the top of the list and they are -
● The panel should be reminded that all disclosure obligations should recognize that it is the investor who should
rightfully be in control of the their investments, not the Investment Dealer or the Dealers Financial Advisor
Representatives. As you will see from the details brought forward in this treatise, the lack of proper full
Regulatory disclosure obligations in the past have subordinated the investors best interests and placed the
investor at the mercy of the Dealers and Advisors self-interests.
● The issue of permissive non-disclosures by Investment Dealers and their Financial Advisors to investors.
Before we talk about, "Does Disclosure Work", a simple objective review of the damage that has been done to
the interests of investors by non-disclosures that are permitted to continue should be first on the order sheet.
There should be an accounting of the perils investors face without properly defined and enforced disclosure
obligations that Dealers and Advisors should be subjected to.
This treatise deals with two subjects where Investment Dealers and their Investment Advisor employees have been able to enhance their own financial interests at the expense of uninformed and unsuspecting investors.
The first subject (see later Issue No. ONE) relates to the detrimental effect of non-disclosures by the Investment Dealer when the investor opens up an account.
The second subject (see later Issue No. TWO) deals with the non-delivery by Advisors of Prospectuses and the non-disclosures of information that should be in the hands of the investor before purchasing, in order for the investor "to make optimal investment decisions"
These subject details are not anecdotal offerings. These are hard facts on which the Regulatory Authorities and the SROs need to immediately implement appropriate rules to make such non-disclosures illegal. A list of the recommended Regulatory changes which will place control of the investor Portfolio accounts in the hands of the investor, instead of the Investment Dealer, will follow after first recognizing the rights of investors.
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The time is now to redefine the Regulatory Disclosure Obligations of Investment Dealers
and Financial Advisors to Investors.
The present practice whereby an Investment Dealer and their Investment Advisor employees can conduct a business relationship without making full mandatory disclosures to investors, violates the Financial Consumer Agency of Canada (FCAC) proclamations which reads -
 Financial Consumer Agency of Canada
Your rights as an investor
The Financial Consumer Agency of Canada (FCAC) makes it quite clear that investors do have rights that should be enforced, but there is a permissiveness that somehow evades the attention of the SROs Regulatory enforcement.
Here is what the Financial Consumer Agency of Canada has to say -
You have a right to timely and accurate information
● The information your advisor gives you about an investment should be accurate and contain all the details you
need to know. (This is called Disclosure. Anything short of full disclosure is called Non-Disclosure.)
● You must receive documentation such as a prospectus within the allowable time frame.
( Re: The OSC Securities Act (Ontario) 71. (1) Obligation to deliver a Prospectus - It was brought to the SROs
attention that not just once, but several times Prospectuses were not delivered to an investor relative to certain
investments that were made. The SRO response was that they were quite satisfied with their audit of the
Investment Dealers procedures and processes for sending out Prospectuses. The fact is, the Investment Dealer
violated the OSC Regulations by not delivering the Prospectuses. It is up to the Dealer to prove that the
Prospectuses were delivered because it is not possible to expect the investor to come up with evidence
that the Prospectuses were not delivered. More on this subject later in Issue No. TWO.)
You have a right to receive your advisor’s best recommendations based on your stated investment goals.
● Your advisor’s recommendations should lead you toward meeting your goals, within the level of risk that
you have discussed.
(This is where the SRO should recognize that it is unsuitable and inappropriate for an Advisor to be making
EQUITY investments for long term capital appreciation when the investor is already in the RRIF payout
distribution phase.
You have a right to know if your advisor has a conflict of interest.
● If your advisor has an interest, such as a sales commission or ownership of an investment that could affect
his or her advice to you, you have a right to know of any possible conflict.
(When this question of un-disclosed rates of commission and DSC Early Redemption Fee commissions, etc. was
reported by one investor to the SROs, the issue was totally ignored and the investors' complaint was rejected
because the investor could not prove to the SRO that the subject information was not verbally communicated to
the investor ? ? ? ?)
● If a conflict of interest is disclosed, you can decide whether you want to accept the advice or look for independent
advice.
(This poses a rather unrealistic expectation that the Financial Advisors are going to disclose a conflict of interest if the
disclosure is likely to result in the reduction in the Advisors income. It is also unlikely that the Advisors are going to disclose
that they have a conflict when not disclosing that there will be detrimental consequences for the investor following the
Financial Advisors' investment recommendations, if it means losing a sale)
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The conclusion from all the facts brought forward in this treatise is that the investors best interests will be properly served when the Regulatory Authorities implement the following changes in the Regulations -
1. Upon opening an account, it must be disclosed to the investor in writing by the Investment Dealer, as to whether
the assigned Advisor is an employee representing the Dealer or is operating as an independent Advisor business
entity. The answer to this point determines who has the responsibility to supervise the Advisor.
2. Upon opening an account, the Investment Dealer must disclose in writing, to the client-investor, the schedule of
compensation and commission rates and any other charges for the services rendered by the Financial Advisor
and the Dealer. It is then the responsibility of the client to negotiate any variation of the cost schedule.
3. Upon opening an account, the Investment Dealer must provide the investor with an instruction reference manual
with details on how best to self-educate and guide the relationship with the Investment Advisor in the investment
process. Presently, uninformed and inexperienced early investors do not know what questions to ask of the
Advisor and therefore they have no option but to place their total trust in the Advisor. With this situation, it is
unreasonable to expect the investor to apply the caveat emptor principles when the investor is at the mercy of
the better informed Advisor. While independent investor educational materials may be available, unless there is
a preemptive initiative by the Dealer to provide this information to the investor, the investor remains vulnerable to
misguidance.
Here is a link to an example of the information that should be provided to the client-investor by the Dealer
at the opening an account -
http://www.fcac-acfc.gc.ca/Eng/resource ... t-4-9.aspx
4. That Trailer Fee commissions paid by mutual fund companies to Financial Advisors are not transferable from the
selling Advisor to any other person or company.
5. If the relationship between the Advisor and the investor is terminated by either party for any reason, the investor
thereafter then receives all the Trailer Fees paid by the mutual fund company while ever the investor retains the
mutual fund investments.
6. The sale of mutual fund investments on a Deferred Sales Charge (DSC) basis must be terminated. This is
because it provides the permissive, self-interested selling incentive for the Advisor to make an egregious 5% or
6% sales commission, while at the same time it burdens the investor with unpredictable liabilities in the event
that the investor chooses to sell the mutual fund investments for any reason before the DSC period expiry date.
(The uneducated explanation given by the SROs to the complaining investor is that the investor could always
purchase alternative mutual funds from the same mutual fund company without paying DSC Early Redemption
Fee Commission penalties. This is a totally invalid rationalization when the mutual fund company does
not have appropriate alternative investments to fit the investors changing needs.)
7. Regulatory Authorities must rule that any form of claims by the Financial Advisors and their Investment Dealer
employers that disclosures made verbally to the investor are completely invalid as disclosures must be made
in a printed form or in writing. Also, that such disclosures must be confirmed as being received by the investor.
8. When a Financial Advisor is leaving the employment of an Investment Dealer for any reason, the Investment
Dealer must advise this change of account Advisor status to the investor in writing. In this communication,
the Dealer must provide the names and phone numbers of other Investment Advisors who could be made
available for interview by the investor. If there are no other Advisors available, the Dealer must so state.
Please Note - There appears to be no independent investor advocate participating on the panel. Therefore, as the format appears that of a discussion and not a debate, it would seem appropriate that the above recommendation views of an investor should be added in the form of resolutions as part of the discussions.
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This treatise explains the permissiveness and the outcomes from the lack of enforcement of disclosures and how they affect the relationship of the investor with the Investment Dealer and its Financial Advisor.
When an investor signs a New Client Application to open an Account with an Investment Dealer, they are unaware that they are starting a relationship that is based on an illusion. When the investor engages the services of a Financial Advisor to build a Portfolio of investments for their RRSPs, RRIFs or other savings plans, the investor starts out believing that they are getting 100% of the Advisors dedicated interest in serving the investors own wellbeing.
However, where is the list of specific Regulatory Laws defining the obligations for Investment Dealers and their Financial Advisor Representatives to the investors, that require them to make full disclosure, in writing and/or print, of investment influencing information, prior to making investments.
It is therefore not long before this obvious absence of specific obligations of full disclosure to the investor in writing facilitates an opportunity for a permissiveness that quietly subordinates the investor's best interests to those of the Financial Advisor. The detrimental effects of the non-obligation for written full disclosures of all the conditions to be considered when an investor decision is required, will be enumerated in the balance of this treatise.
All the sales promotion by the financial services industry that is aimed at trying to convince investors that their retirement financial security is, first and foremost, on the minds of the Investment Dealer and their Financial Advisors hardly stands the test when there is no obligation for full disclosure to the investor. We really should call this
non-obligation for written full disclosures by the Financial Advisor as an opportunity for deception, not an illusion.
If there are Regulatory Laws defining the obligation of Financial Advisors to make written disclosures of information that can influence the investor decision process, the Dealers and their Financial Advisors need to be so advised as to where to find these Laws, Rules and Regulations. This responsibility should not fall on the shoulders of the investor.
This matter is not open for debate by the organizations supporting the financial services industry. It is the investors who need to be protected from financial abuse by placing obligations on the Investment Dealers and their Representatives to fully disclose the information that is not now obligatory to be disclosed by the Regulatory Authorities Rules, Regulations and Guidelines.
What are the Regulatory Disclosure Obligations of the Investment Dealer and its Financial Advisor to the Investor ?
At this late date, why is this question being asked, "Does the disclosure received by retail investors help them make optimal investment decisions? " The first response is, "the disclosures by whom". The assumption must be that, on account of complaints being filed with the Self-regulated Organizations (SROs), questions are being raised as to whether or not investors are being sufficiently protected by whatever disclosures are being made to them by their Investment Dealers and Financial Advisors.
This is a question that can only rightly be asked of the investors. It is the investors' money and interests that are at stake. The Financial Services Organizations (FSOs) may have suggestions as to how certain disclosures can assist the investor reach more optimal investment decisions, but it is the investors who should have the last say as to what constitutes proper disclosure, not the FSOs. It is a dream world to believe that Investment Advisors are going to come forward with disclosures that are contrary to their own interests. That is why there must be a Regulatory obligation for Financial Advisors to make specific disclosures that are in the best interests of investors.
There is a precursor to opening up another adversarial debate between investor advocates and FSOs as to whether or not disclosures by Investment Dealers and Financial Advisors help retail investors make optimal investment decisions. That precursor is the pressing need for Financial Regulatory Authorities to first examine the mountain of complaints from investors of where non-disclosures have been a major contributor to a investors losses.
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Any changes should start with disallowing any form of claims by the Financial Advisors (FAs) and their Investment Dealer (ID) employers that disclosures made verbally to the investor are just as valid as disclosures made in the printed form or in writing.
It is hardly the course to be now asking the FSOs for their views as to whether or not disclosures help retail investors make more optimal investment decisions. It has been the non-disclosures and claims of verbal disclosures, by Financial Advisors (FA) and their Investment Dealer (ID) employers, that have caused so much heartache and angst for inexperienced and unsuspecting small investors. The possibilities that disclosures can either be ignored by, or give a false sense of security to the investor, can be dealt with by placing an obligation on the FA and ID to fully inform investors of the consequences of their agreeing to any and all recommendations, either originating from the FA and the ID, as well as any decisions initiated by the investor. In any case, confirmation of the implications and consequences with disclosures must be in writing.
The response to this "Does Disclosure Work ?" question being asked is, "Where are the present Regulatory definitions of obligations of Investment Dealers and their Financial Advisor employees to make full disclosures to their client-investors". If it is considered that there are sufficient Regulatory obligations for full disclosure that are now a matter of law, why is the question being asked, "Does Disclosure Work ? ". The focus should then be on whether or not the SROs are doing their job enforcing the regulations for full disclosure for investors after the SROs receive complaints.
There are two critical stages in this relationship when non-disclosures detrimentally affect the interests of the investor. The first time (see later Subject Number ONE) is when the investor opens and account with an Investment Dealer. The second time (see later Subject Number TWO) exposes the consequential issues when the investor accepts a Financial Advisors recommendation to make investments, without the benefit of the "Advisor" first DISCLOSING and reviewing the critical contents of an investment Prospectus with the investor. This is especially impacting when it involves information contained in mutual fund Prospectuses.
This treatise questions the adequacy of the present Laws influencing and governing the conduct of the relationship of Investment Dealers and their Financial Advisor Representatives to the investor. Here, the Dealers and Financial Advisors are able to open up a relationship with an investor which is based on trust, but they are also able to conduct their business without the obligation to fully disclose critical investing information that should be obligatory to an ongoing trusting relationship.
The issue also raised in this treatise questions the discretionary freedom for Self Regulated Organizations (SROs) to choose whether or not to enforce the existing Laws, Rules, Regulations and Guidelines when complaints are filed against Financial Advisors and their employer Investment Dealers. This SRO "discretionary freedom" comment needs to be examined for its impact on cases with less than major criminal wrongdoing by Financial Advisors and their Dealer employers. As an example, there is one case where the SRO makes it clear with a statement to the complainant, that the SRO cannot pursue every complaint; they have to pick and choose the cases that make the best use of their resources. And this is what they call investor protection.
After a powerless wronged investor complaint has been sandbagged by the Investment Dealer and then negligently cast off without a thorough appraisal by the SROs, it is totally unjust that the investor then has to resort to the only recourse available, which is going to court against the deep pockets of a powerful financial institution.
When many small unsophisticated investors are already in the retirement phase and have lost some of their investment capital through misguidance due to non-disclosures by the Investment Dealer and its Financial "Advisor" Representative, they do not necessarily have the resources to finance a court case in order to get a complaint independently adjudicated, with the possibility of restitution under civil laws. This is what the SROs are supposed to be doing. However, in less than major cases of fraud, etc. against a Financial Advisor, somehow or other the SROs have no problem making repeated rejections of an investors' complaint with a variety of non-factual rationalizations.
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The published Regulatory Disclosure Rules, Regulations and Guidelines governing the conduct of Investment Dealers and their Financial Advisor Representatives, in their relationship with investors, are meaningless when there are glaring loophole opportunities for the financial abuse of investors with the Investment Dealer coalescing with the Financial Advisor. There must be loopholes in the Regulations, or enforcement of the Regulations, when Investment Dealers and their Financial Advisor Representatives can out-of-hand reject legitimate investor complaints without the obligation to disclose any evidence to support the rejection. It cannot get much worse when there is also questionable veracity in a Dealers comments rejecting of the investors original complaint. When the investor looks for answers to specific questions about the permitted conduct of the Dealers Financial Advisor, the Dealer responds by simply stating that the Dealer "observes" all the Regulations and yet avoids disclosing any specific Regulations which permit the Financial Advisor conduct, which is the subject of the investors complaint.
Comments - When there is any impacting information relative to the establishment of an account with an Investment Dealer as well as the true relationship between the investor and the Financial Advisor not being divulged, this is misrepresentation by omission and is unlawful.
What could be more of a conflict of interest than the Financial Advisor recommending investments and hiding from the investor that the recommendations produce the maximum sales commissions for the Advisor while at the same time the non-disclosure produces detrimental consequences for the investor. The same conflict of interest applies to making false statements about the performance of recommended investments. Where is the Investment Dealers supervision when the Dealer does not intervene on behalf of the investor ? The reason is quite obvious, the Dealer also has a conflict of interest if it means losing a sale. The questionable veracity included in the documented rejection responses from a Dealer substantiates this fact.
Where is the SRO enforcement of existing Laws, Rules and Regulations ? Who is going to enforce the rights of the investor when SROs do not seem to be able to understand and recognize the obvious obligations that the Investment Dealer and its Representative Financial Advisors have to the investor. ?
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Issue No. ONE - Lack of Investment Dealer Obligations for Disclosure when an Investor Opens an Account
Here is the first Section showing the opportunities for investors to be subjected to the injustices of the present Regulatory lack of defining disclosure obligations or the lack of enforcement thereof.
The deception in the relationship of the Investment Dealer and its Financial Advisor Representative to the investor actually starts at the very moment the investor opens an account with the Investment Dealer. There is much ambiguity and looseness in the unwritten and undisclosed terms and conditions of the relationship between the investor and the Investment Dealer and its Financial Advisor Representative.
The start of the relationship between the Financial Advisor and the investor carries an ambiguous misrepresentation for a multitude of reasons -
1. At the beginning of the relationship of the Financial Advisor with the client-investor and the opening of an
account with the Investment Dealer, it is the obligation of the Dealer to declare whether the Financial Advisor is
acting as an employee representing the Dealer or if the Financial Advisor is operating as an independent private
practice using the Dealer to process investment orders. Without this declaration, the relationship is
ambiguous and deceptive, as will be shown in later comments.
2. When the investor engages the services of a Financial "Advisor", the investor is lead to believe (by the Dealer
and its promotional advertising) that the Dealer and the "Advisor" are sitting on the same side of the table as the
investor and the "Advisor" will be loyally guiding the investors' best interests. This is not possible when,
without the investors knowledge, there is a conflict of interest with the very existence of a written or
unwritten agreement between the Dealer and the Financial "Advisor" which grants permission for the
Financial Advisor that, as of day one, the investors account is to be an exclusive "asset property" owned
by the "Advisor".
3. While it is promoted that the Dealer Financial Advisor Representative is there to advise the client-investor on
how best to invest to suit the investor needs, the "Advisor" is in a position of conflict with an incentive to
make investment recommendations which, in the short or long run, will better enhance the "Advisors"
own "asset property", regardless of the consequence for the investor. THIS VIEW IS NOT A MATTER OF
AN OPINION. That is the case when the "Advisor" recommends that the investor purchase mutual funds
without disclosing in writing to the investor that they have trailer fee commissions for the Advisor.
There is an additional conflict of interest when the Advisor convinces the investor to purchase on a DSC basis
with the claim by the Advisor that this DSC purchase will save the investor paying an upfront sales commission.
This is an egregious illusion perpetuated by the "Financial Advisor" that cannot go unchallenged.
With this recommendation, the "Advisor" is able to maximize the sales commission at 5% or 6%, whereas a
negotiated sales commission which is published in the Prospectus, but not disclosed to the investor by the
"Advisor", could be as low as 1% or 2%. In fact, some "Advisors" are prepared to process mutual fund sales for
no commission as they can expect to receive Trailer Fee commissions while ever they can convince the investor
to retain the mutual fund investments. These are facts, there are no compensatory benefits for the investor.
This consequential permissible conflict damage can take place because the Advisor presently has
NO REGULATORY OBLIGATION TO DISCLOSE this information to the investor. The SROs see no wrong
in this situation !
4. To the investor, the "Advisor" is NOT operating as a separate business practice entity or partner of the Dealer.
To the investor, the "Advisor" is an Investment Dealer Representative employee providing advice in order to
make a sale. This is much the same way that a window or roofing sales professional employee gives advice
that should be in the best interests of the purchaser. In the event of any non-disclosure that is a detrimental to
the outcome of a clients purchase, the window or roofing sales professionals can be held liable under consumer
protection laws.
Continued / 8
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4. Continued . . . . . . .
Why should it be any different for Financial Advisors when there are non-disclosures that have a detrimental
effect on the best interests of the investor ? It is inexcusable that the "Advisor" can claim that vital
investment influencing information was given verbally to the investor when there should be an
obligation to DISCLOSE such information to writing. Again, the SROs see no wrong in this situation !
The SROs take a neutral stand on claims by the Financial Advisor that critical investment influencing was given
verbally to the investor. The SROs explanation (excuse) is that as they were not a party to a meeting between
the investor and the Financial Advisor, the SRO cannot find in favour for one side or the other. This then means
that without written disclosure of vital investment influencing information, the SROs do in fact find in favour of the
claimed verbal communication from the Financial Advisor, because the contradictory position of the investor is
disregarded. The SROs are willing to accept that unwritten verbal communications claims by the
Financial Advisor to the investor are OK and that the Advisor is not obligated to disclose critical
information confirmation in writing.
5. In the investors mind, the investor does not purchase investments directly from the "Advisor" but is actually doing
business directly with and purchasing from the Investment Dealer. The Dealer confirms, by way of Purchase
Confirmation Acknowledgments, that the client-investor is purchasing investments through the Dealer but the
Dealer does not disclose to the client-investor that, by prior arrangement, they are only acting as an order
processor, as the clients account is regarded by the Dealer as the exclusive property of the "Advisor".
This constitutes a gross misrepresentation and misrepresentation by omission is against the Law.
6. Financial Advisors are sales people selling advice on the most appropriate and suitable investments for
investors. The Advisors earn the loyalty of their clients for repeat sales and referrals by the degree of success of
the clients investment Portfolio. This Advisor "retention goodwill" is by agreement with the Investment Dealer and
unknown to the investor, to be an Advisors own "asset". Deceptively, this "asset" can be greatly enhanced in
value by loading down client-investors Portfolios with mutual funds which have trailer fee commissions.
Therein lies a conflict of interest.
At this point, the "Advisor" is no longer sitting on the same side of the table as the client-investor looking to give
advice to increase the clients goodwill. The "Advisor" is now sitting on the other side of the table looking after
his/her own self-interests. Undisclosed to the investor, this so-called "retention goodwill" now has an additional
valuable unearned "fixed asset" in the form of guaranteed trailer fee commission payouts to the Advisor.
7. The conditions associated with the perceived Financial Advisor ownership of the client-investor account that are
undisclosed by the Investment Dealer to the investor provide several unjustifiable and untenable financial
incentives and benefits for the Financial Advisor, at the expense of the investor.
a) When a Financial Advisor is leaving the employment of one Investment Dealer and moving to a new Dealer,
the Financial Advisor has the freedom to solicit their client-investors to convince them to move their accounts
to the new employer of the Advisor. The same applies if the Financial Advisor is opening his/her own
Financial Advisory business practice. The client-investor can refuse to move its account to the new Dealer and
in the process the Financial Advisor loses any of the "goodwill asset" that has been accumulated.
Consequently, the Advisor forfeits any right to further financial compensation by not being able to sell
the accumulated "goodwill asset".
This consequence substantiates that the client-investor account is not in fact the personal property of
the Financial "Advisor". There is a contradiction with this fact when the Investment Dealer permits the
clients account to be sold by the first "Advisor" to a second "Advisor" with the same Investment Dealer. This
issue becomes even more onerous when, in an effort to attract a Financial Advisor, it is the Dealer selling
a list of investor accounts to a newcomer Advisor with unproven investment experience and knowledge.
Continued / 9
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7. a) Continued . . . . . . .
The newcomer Advisor gets the benefit of purchasing a continuing stream of mutual fund trailer commissions
without any knowledge and not contributing anything to the original investment strategy and without
any regard for the consequences for the investors interests.
b) When a Financial Advisor is leaving the employment of an Investment Dealer, but is not necessarily leaving
the financial services business, the Financial Advisor now has the freedom to sell client-investor accounts
at any time to another employee Financial Advisor of the same Investment Dealer without any obligation for
prior disclosure or prior consultation with the client-investor. Likewise, the Investment Dealer also has
no obligation to disclose to the client-investor that the client-investor account will be transferred to another
Advisor employed by the same Dealer. Therefore, with the Advisor having this knowledge that the value of
the list of clients goodwill "assets" can be greatly enhanced from day one by promoting mutual funds paying
TRANSFERABLE guaranteed trailer fee commissions, not only does the Advisor immediately receive sales
commissions, the Advisor also has the incentive to cash-in at any time by selling off accounts of loyal
client-investors, with total disregard for their best interests.
The results can be especially painful for the investor when the Advisor greedily maximizes sales commissions
by selling on a DSC basis at the same time as not disclosing in writing the Early Redemption Fee penalty
consequences that could impair the investors ability to recoup from capital losing investments, without further
disproportionate investment unloading expenses. (Where are the disclosure obligations ?)
8. There is further evidence of ambiguity that is used by the Dealer in its explanations and willingness to allow a
Financial Advisor the entitlement to make a further profit from the sale of client-investor accounts to another
Advisor.
In the case of an Advisor purchasing Client-investor accounts from another Advisor or the Investment
Dealer, the mutual funds Trailer Fee commissions continue to flow to the purchasing Advisor. However, there is
no declaration from the Dealer as to what happens to the Trailer Fee commissions when the Dealer
resigns a client-investor account ! Likewise, what happens to the Trailer Fee commissions when the
investor closes an account with the Dealer but retains the investments ? Who inherits the Trailer Fee
commissions ? Again, this is a question where are the Regulatory disclosures from the Dealer ?
Financial Advisors have Access to Extensive Tutoring Programs on how to Build "Assets" for themselves. Where is there moral and ethical tutoring included on the necessities of providing Disclosures to investors?
The deception goes further - Canadian Financial Advisors have access to extensive tutoring programs. However, where are the Investment Dealer sponsored training materials for tutoring investors on how to become a successful investor, as well as ensuring that the investor receives full disclosures from "Advisors" before making investments ?
The Canadian "Financial Advisors" training programs tutor them on how to become successful entrepreneurs in building their "assets" (viz client-investor accounts) just as though the Advisor actually owns the client accounts. The first order of business that is learned from the tutoring is for the Advisor to build "assets" by making more sales to their investors and increase the range of clients through concentrating on how to retain investor loyalty.
This effort to retain client loyalty is a natural for any sales position, so no special credit goes to the Advisor learning how to retain client loyalty. Maximizing investment performance and minimizing investment costs for the investor is a sure way for Financial Advisors to retain client accounts and accumulate referrals.
These principles should subordinate the Advisors self-interest to those of the investor, but that is not the prerequisite message in the Advisor tutoring. This statement cannot be denied after reviewing the contents of the Advisor training materials. Take a few minutes to review the below links related to available Financial Advisor tutoring.
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Considering the tutoring that is available for Financial Advisors, it becomes obvious that investors do not start out as equals with the Financial Advisors.
The investor starts out with just the money and no knowledge. The Financial Advisor starts out with the tutoring knowledge of how to sell knowledge to earn the investors' money. The theme that is central to the Advisor tutoring is for the Advisor to concentrate on building the Advisors own "goodwill assets", in the form of the largest number of client-investors with the largest amount of invested capital. The objective being that this "goodwill asset" can later be sold, for any other reason to any other Financial Advisor for a further profit.
Without well defined full disclosure obligations required of Financial Advisors, the thousands of newcomer investors are going to be subjected to the same financial abuse that many more thousands of investors have suffered over the past 30-years. These obligations must include the disclosure that in addition to the Financial Advisor earning commissions from the sale of securities to the investor, the Financial Advisor can, at a time of their choosing, also sell the client-investors accounts to any other Advisor, only with the approval of the investor.
What is missing from the tutoring materials are the lists of disclosure obligations that the Advisor has to the investor. The problem is that there are no comparable training programs that the Investment Dealers should be obligated to make available to equally educate unsuspecting investors on the disclosure obligations of the Advisors to the investors.
Here are the links showing the extensive tutoring available that promote the interests of the Financial Advisors -
https://www.google.ca/?gfe_rd=ctrl&ei=4 ... s+building
More -
https://www.google.ca/?gfe_rd=ctrl&ei=4 ... f+business
More -
http://www.theglobeandmail.com/report-o ... /?page=all
More -
http://www.google.ca/url?sa=t&rct=j&q=& ... 9129,d.aWw
More
http://www.paretosystems.com/q4-financi ... r-webinar/
What do the SROs have to say about the Advisor selling the Client-Investor Accounts to another Advisor
When it was brought to the SROs attention that a client-investor account was sold to another unknown Financial Advisor with the same Dealer, without any prior discussion with the client-investor, the SRO response was that they see no wrong and that it is a standard financial industry practice for a "Book of Business" (client accounts) to be sold by one Financial Advisor to another Financial Advisor. Just because this has become a financial industry standard practice does not make it right, fair and acceptable for the investor. This is especially unconscionable when it incorporates substantial permissive incentives for the Financial Advisors to recommend investments
that have undisclosed benefits for the Advisor while at the same time include detrimental consequences for the investor. This is called "conflict of interest". These issues would be eliminated if written full disclosures were required and trailer fee commissions could not be bequeathed (transferred) by the originating Advisor to any other person or company.
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This is not a question of optics or opinion. The fact is there is no Regulatory obligation on the part of the Investment Dealer to make a prior DISCLOSURE to the client-investor that a Financial Advisor is SELLING the clients account to another unknown Investment Advisor.
It is to be expected that investors are willing to pay for Financial Advisor services, either by sales commissions or fixed fees, when purchasing investments. What most investors are unaware of is that the more successful Financial Advisors are financially motivated and incentivized and rewarded by directing their efforts to maximizing the dollar values of every client-investor Portfolio, as well as from investments from the investors' relatives and friends.
The total number of client-investor accounts, coupled with the sum total dollar value of invested capital, adds greater value to the Financial Advisors own acquired "goodwill assets". As previously noted, under the present permissiveness, these "goodwill assets" can have an additional profit value for the Financial Advisor when the Advisor chooses to sell the client-investor accounts to another Advisor.
Therefore, in addition to making disclosed and undisclosed maximized sales commissions, the Financial Advisor also has this great undisclosed incentive to make investment recommendations to the investor which will increase the future value of the Financial Advisors acquired own "goodwill assets". In the interests of investors, this permissiveness has to change.
By any definition, Financial Advisors are commissioned sales people who can only sell their knowledge when the client-investor makes a purchase of an investment (unless the Advisor is working on a retainer)
A client-investor has a loyalty to a Financial Advisor because the investor needs the "Advisors" knowledge. The Advisor needs client-investors because they have the money. By comparison, Advisors have no loyalty to the
client-investor after the Advisor has maximized the investors accounts. The Advisor may make all kinds of investment recommendations but unless the client-investor makes a purchase there is no commission remuneration for the "Advisor". This is no different to the previously quoted commission paid window or roofing sales person. Unless the Advisor works on a retainer, this payment by commission therefore defines that the Advisor is operating as a commission sales person for the Investment Dealer. Who is it that bestows the right for the Advisor to operate the client-investor account as though it is a "goodwill asset" property owned by the Advisor ?
The Regulatory Authorities need to reject all of the arguments invented by the Financial Services Organizations (FSOs) that Financial Advisors are operating as individual professional business practices and that they build client-investor accounts "goodwill", just like dentists, doctors and lawyers and accounting firms. By any measure, this comparison is a bogus definition that fails the test. Client or patient "goodwill" for lawyers, doctors and dentists practices is not built and measured on past sales commissions or guaranteed future revenues. Client "goodwill" for these professions is built on the possibilities of future service needs of their clients. Lawyer, doctors and dentists get paid after providing advice, regardless of whether or not the client or patient uses the advice. That is not the case with Financial Advisors who only get paid by commission after a sale is made.
This is why the Regulatory authorities must terminate the practice of Financial Advisors and/or Investment Dealers selling client-investor accounts to other Financial Advisors without commensurate compensation to the client-investor. After all, it is in fact that it is the size of the clients' assets in their investment accounts, which can consist of guaranteed revenues from Trailer Fee commissions, etc. that unfairly and greatly influences the selling price of the "goodwill asset".
There has to be a defined Regulation that, upon an investor opening an account, the Investment Dealer must disclose to the client-investor details covering the following -
1. That the Financial Advisor is an employee Representative of the Dealer or is operating as an individual business
practice using the Dealer to process investment orders.
2. That the Financial Advisor can resign from a client-investors' account at any time of the Advisors own choosing.
Under any condition, the Dealer must in writing, advise the client-investor prior to, or at the time of the Advisors
departure that, the Advisor will be resigning, or has resigned from the client-investors account.
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3. That, in the event the investors Financial Advisor wishes to resign from the client-investors account, the
Investment Dealer will provide the names and telephone numbers of available alternative Financial Advisors for
the client-investor to interview. In this way, it is the client-investor who makes the decision on who
controls the outcome of the change, not the Investment Dealer or the Financial Advisor.
It is unconscionable that the Investment Dealer or Investment Advisor should have any say whatsoever
in controlling who should become the replacement Advisor for the client-investor.
4. In connection with the present transferability of mutual fund Trailer Fee commissions from one Advisor to
another Advisor, the following recommendation will solve the problem of related non-disclosures.
The ability to transfer mutual fund Trailer Fee commissions from the Financial Advisor who sold the
original investments to another Financial Advisor should be eliminated. This is because it incentivizes
and distorts the judgment of the original Advisor into making investment recommendations to the investor that
can later increase the selling price of the Advisors own "goodwill assets" (ie. client-investor accounts).
This influence is in conflict with the best interests of the investor. Furthermore, the second Advisor who
purchases the client-investor accounts from the first Advisor has had no participation in the original sale,
therefore there is no reason for the second Advisor to continue receiving the Trailer Fee commissions.
The principle should be that the second Advisor should only receive remuneration based on the new advice that
results in new investment sales thereafter.
The Solution to Investment Dealer and Financial Advisor NON-DISCLOSURES relative to Trailer Fees
Up to now the Financial Advisor has had the upper hand because it is claimed that the Trailer Fee commissions are required as incentives for Advisors to compensate them for continuing to provide investment advice to investors. The Trailer Fee commissions paid by the mutual fund company to the Advisor are also a bonus incentive for the Advisor to convince the investor to continue to retain those mutual funds.
With a non-transferability Regulation for Trailer Fee commissions from one Advisor to another Advisor, the investor would regain the upper hand. If the Advisor continued to be retained by the investor because the Advisor was doing a good job, the Advisor would continue to receive the Trailer Fee commissions. That in itself would be an enough incentive for the Advisor to genuinely be there giving the advice in the investors best interests. Conversely, if the Advisor was not doing a satisfactory advice job in the interests of the investor, the investor could break the relationship with the Advisor and the Advisor would no longer receive the Trailer Fee commissions.
With the above described Regulation in place, this would then mean that these Trailer Fee payments would rightly be redirected to the investor. After all, it is the investors money that is generating the payment of the Trailer Fee commissions.
At the same time the change would not interfere with the investors loyalty to the specific mutual funds.
The only work required by the mutual fund company would be to change the destination address for the Trailer Fee payments from the Investment Dealer to the investors address.
THIS IS THE WAY IT SHOULD BE BECAUSE IT IS THE INVESTORS MONEY THAT IS AT STAKE.
The SROs need to influence the change
Presently, the SROs see no injustice in the freedom for the Financial Advisor to accumulate a list of clients with the incentive for the Financial Advisor to make investments on behalf of the investor which will greater enhance the Advisors "goodwill asset". What is the SROs position on making the above recommended changes ?
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Issue No. TWO - No Obligation by the Financial Advisor to Deliver a Prospectuses before making Investments
The present OSC Securities Act (Ontario) 71. (1) Obligation to deliver a Prospectus, states that it is an Investment Dealer who must deliver a Prospectus before or immediately after an investment has been transacted. This Law requires to be amended because its instructions provide opportunities for the investor to be victimized at the same time as the Dealer and the Financial Advisor are bestowed an escape clause. Because the Act says it is solely the Investment Dealer who is charged with the responsibility to deliver the Prospectus before or after a purchase transaction, the Financial Advisor can and does make investment recommendations and process sales without the investor ever seeing or knowing any consequential detrimental information that is contained in a Prospectus.
When a complaint is lodged with the Dealer, relative to dissatisfaction with an investment, all the Dealer has to do is to refer to some obscure escape clause disclaimer in the Dealers documentation which says that the investor should read a Prospectus before investing. However, the present OSC Act allows the Dealer to deliver the Prospectus either before or after a transaction. Here is a serious conflict. How can a Dealer lay claim that an investor has an obligation to read a Prospectus before investing when the present law permits the Prospectus to be delivered to the investor after a transaction ? If it is the Dealers demand that the Prospectus be read by the investor before investing, IT IS THEN THE DEALERS RESPONSIBILITY TO MAKE SURE THAT THEIR ADVISOR SO DELIVERS THE PROSPECTUS BEFORE THE DEALER ACCEPTS AN INVESTORS PURCHASE.
What is missing is a Regulatory disclosure obligation for the Financial Advisor to provide a Prospectus and discuss the contents with the investor before the Dealer is permitted to process an order. The Advisor would be required to get a DISCLOSURE confirmation signed by the investor agreeing that they have received a Prospectus and that the details of the impact of the investment have been explained. This procedure involves no more work for the Advisors than they are now supposed to be obligated to perform. The only difference is that it is the Advisor who has the obligation to deliver a Prospectus and explain the details therein that relate to the investors best interests.
Here are the reasons to amend the present Law to include definitive obligations on the Dealer and their Financial Advisor Representative to deliver Prospectuses.
1. a) As the Financial Advisor is dealing with the client-investor and, as the Prospectus contains investment
influencing information, it should be the Financial "Advisors" obligation to deliver the Prospectus to the
investor and receive a signature from the investor confirming the receipt, before the investments are made.
b) The Financial Advisor should be obligated to highlight and explain the critical investment information in the
Prospectus and receive the investors confirming signature. (This eliminates the "Advisors" possible escape
that all the critical investment information was given verbally the investor)
2. There is a serious issue with the freedom of the SRO having the discretion to interpret the present OSC Law.
The present OSC Law says that the Dealer must deliver the Prospectus. However when it is pointed out to the
SRO that there is hard physical evidence that the Investment Dealer could not have possibly delivered many
Prospectuses, the SROs response is that they have done an audit of the Dealers processes and procedures
and the SRO are quite satisfied with what they audited. There is nothing in the OSC Law that gives the SRO
permission to just do an audit and give a free pass to the Investment Dealers obligation to deliver a Prospectus.
This is a very serious ethical question when the non-delivery of the Prospectuses denies the investor knowledge
of critical cost of investment elements, when investing in equity mutual fund investments. At the same time,
it permits the Financial "Advisor" the opportunity to convince the unsuspecting investor to agree to allow the
Financial "Advisor" to deceptively make higher rates of commission than if the investor was fully informed.
This non-disclosure in itself has to be illegal but the SRO fails to do anything about it.
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When the investor does not have the benefit of reading a mutual fund Prospectus it means that -
a) The investor is unaware that Financial Advisors commissions are negotiable.
b) The investor is denied the details of the Early Redemption Fee penalties schedule when purchasing on a
DSC basis. The investor is unaware that these financial penalties are also in place for 7-years.
c) The investor is denied the knowledge that any and all dividends must be reinvested and they are also subject
to Early Redemption Fee penalties.
d) The investor is unaware that they can redeem a percentage of the investment each year without DSC Fee
penalties. (This means that the longer the investor retains the mutual fund investments, the more Trailer Fee
commissions for the Advisor)
e) The investor is unaware that investments can be redeemed without penalty providing the redeemed funds are
reinvested in alternative mutual funds with the same company. (There are serious implications with this
limitation)
f) This one is absolutely obnoxious. The investor is unaware that the mutual fund only pays out dividends once
annually to holders of mutual fund units as of December 15th. Therefore, even when switching investments
within the same fund company in November, the investor looses the annual dividend. Also, when investments
are purchased on a DSC basis say in June, and after the 7-year DSC period, the investments must be held
until December or the dividends are lost !
When the repercussions and consequences of the omission of the above Prospectus information affecting the investor have been brought to SROs attention, they took a neutral position which effectively favoured the Financial "Advisor". The "Advisor" claimed that all the information was given verbally to the investor but the "Advisor" had no evidence to support the claim.
This Financial "Advisors" claims were denied by the investor. The SRO statement in response to the investors claim was that as the SRO was not present at the meeting between the investor and the Advisor, they were unable to take sides. However the SRO did, by their supposed neutrality, take sides. It should be the obligation on the part of the Financial Advisor to show written proof that the investor was so informed.
The time has arrived to redefine the disclosure obligations of the Investment Dealers and their Financial Advisor for the best interests of the investor.
There has been enough time and effort spent by Regulators over the past 30-years posting Request For Comment papers from the general public retail investors and the financial services industry on how to better provide an honest and fairness environment to preserve and grow the savings wealth of individual Canadians. Today, there are thousands of pages of Rules, Regulations and Guidelines which, by now, should be all that is needed to properly control the Canadian investor environment. But now the question is raised "Does Disclosure Work ?" - "Does the disclosure received by retail investors help them make optimal investment decisions? "
And the beat goes on. The investors complain that there are still too many permissive open opportunities for Financial "Advisors" to subordinate the investors best interests to those of the "Advisor". Conversely, the financial industry argues that they are quite capable of monitoring and policing the conduct of their own Financial Advisor Representatives.
Truth in reasoning is inconsistent with the way the financial services industry treats genuine investor complaints. Who are they kidding. This is precisely why the starting relationship between the investor and the Financial Advisor needs to clearly and truly be redefined before the investor puts any money on the table. It is just not good enough to provide instructions on how to file a complaint to have it rejected first by a Bank-owned Dealer, then the Bank Ombudsman and the SRO, It is only after this experience that the investor then learns what questions should have been asked of the Advisor, after the damage is done.
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With projected demographics showing that more people will be working and living longer, they will have need to find professional guidance on how to preserve their accumulation of wealth earned through their working years.
Unless the Investment Dealer and Financial Advisor's disclosure obligations to the investors are not more clearly defined than they are today, there will be a greater number of investors lined up at the front door of OBSI and IIROC. The investors will be continuing the crusade with sad tales of losing some of their starting capital investment, by being mislead by the Financial Advisors self-serving misguidance and concealing of information with detrimental consequences.
Regardless of how trusting the investor may be in the relationship with the Financial Advisor, it is the Financial Advisor who has an absolute obligation to disclose any and all information that influences the investment decision making process, before the investments are made. What have been your experiences ?
If you have any opinions on the recommended Regulatory disclosure obligations of Dealers and their Financial Advisors, or wish to relate your own experiences when dealing with the lack of full disclosures by your Investment Dealer or their Financial Advisor, kindly address them to PeterWhitehouse@Bell.ca