Tricks of the Trade. Sales tricks, investment abuses.

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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Sun Apr 22, 2012 3:35 pm

49 Globe Mutual Special_046.jpg

“Pink Slime” investment sales techniques?
Nine broker tricks that taint and prevent your investments from working properly for you.

Any one of these tricks has the potential to cut your retirement in half, over the long term, while placing the other half into the hands of the trusted financial industry.

Two former clients of mine paid me a visit recently, showing me their mother's account and asking me for my thoughts about how it was managed. Here is what I said to myself as I flipped through the pages:

ONE, The misrepresentation of commission salespersons as “advisors”, which is a LICENSE VIOLATION since “advisor” is a legal license category at each securities Commission. (see “salesperson or advisor” topic at )

456 records at the Alberta Securities Commission (ASC), could not find an “advisor” license within this firm.
I found salesperson, dealing representative, mutual fund seller etc., everything but the title they refer to their sales agents as. (there may be a legal exemption involved in here which is damaging the public interest)

TWO, The investments were in an “ADVISOR ACCOUNT”.......which added 2% to the cost of the investments. And the insult was that this was done by a commission salesperson misrepresenting the public into thinking they were an investment “advisor”.

THREE, 100% of the investments were placed into a mutual fund portfolio where the real investment management happens, where investments get picked and chosen. This results in another 2% fee for this to manage the actual mutual funds.

FOUR, is that 100% of the mutuals were the "house brand" rather than independent products. House brand funds are shown to make the firm up to 26 times more money for them, than if they sold you an independent product. (source OSC Fair Dealing Model study)
 Most sales appear to be going in this direction for exactly that reason. (see IFIC data below)
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FIVE, Surprise, the mutual funds held other mutual funds with over 50% of it’s money in once case. This means many fees for phoney "advice" while simply turning the money over to someone else to manage...... adding yet another 2% fee.........

Beyond the above five violations of this elderly person’s account are another half dozen tricks you should be on the lookout for. People who refer to themselves as “advisor’s”, are using the following tricks to make themselves and their company richer, while damaging the interests of their customers.

SIX, AT SOME FIRMS SALES COMMISSIONS are added when buying independent funds. 80% of mutual funds sold in my time were sold using the highest commission choice possible.........despite cheaper alternatives (DSC , deferred sales charge is the sign to knowing you are being "sold" and not "advised")

SEVEN, Then there are those who DO BOTH (double dipping of fees on TOP of commissions) , (and we call those people in the business “vice president’s”:) It goes like this, first sell the customer the name brand fund, get the 5% up front DSC sales commission and THEN a year down the road, convince the customer to move into a fee based account, or into the firms’s house brand account, and add annual fees on top of the first commission based purchase.

EIGHT, Misleading customers into a false sense of security......with fake titles like Vice President, Wealth Management Specialist etc. The thing to be aware of is that the person calling themselves your advisor is doing this while lobbying to remove any customer duties of care owed to you. (the “client interest first” requirement has been removed recently, without notifying the public)

NINE, Then there are the banks who have sloppy product to get rid of, and if they cannot sell them, they are stuck with them. They apply for legal permission to dump them into the accounts of the banks mutual funds, and thus turn the bank's inventory problem into the bank customer’s problem.......never even bothering to tell them......... or simply sell them off to the public, telling unsuspecting clients what great investments they are. Never having to inform them that these investments could not even pass our laws.......$35 billion went that way with ABCP.

Join me on facebook please. LARRY ELFORD. And join the Facebook group Together we might change the abuse of financial customers by financial professionals. If you have an investment statement that you would like an opinion on, we are happy to take a confidential look. If you have been abused by these tricks, see topic titled GET YOUR MONEY BACK, at this same forum.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Mon Apr 02, 2012 6:57 pm

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Financial Advisers Flunk Undercover Sting
Sager: A new study finds advisers often put client interests second to their own.

By now, you may have realized that you aren't always the most rational manager of your money. Chasing returns. Buying into bubbles. Selling into troughs. Keeping too much in cash or company stock. Heck, even if you keep a textbook, well-diversified portfolio of low-fee index funds, you've still probably felt tempted over the last month or so to buy Apple at $600. (You may turn out to be right in retrospect; that won't make it rational.)

To keep yourself in check, perhaps you've turned to a financial adviser. The majority of retail investors have. If so, a new study posted this month by the National Bureau of Economic Research has some bad news for you: Financial advisers not only fail to curb investors' worst habits, they actually tend to reinforce them -- especially when those habits generate fees for the advisers.

The study, by Harvard economist Sendhil Mullainathan, Markus Noeth of the University of Hamburg and Antoinette Schoar of the MIT Sloan School of Management, looks at the behavior of typical investment advisers available to the general public through their banks, independent brokerages or investment advisory firms (focusing on the market for those with less than $500,000 to invest). These advisers are typically paid on the fees and commissions they generate by selling stocks, mutual funds, insurance products and the like.

To see what kind of advice was doled out by these advisers in real-life situations, the study's authors hired and trained actors to make nearly 300 visits to Boston-area financial advisers over a five-month period in 2008. The actors were assigned to one of four fictional investment portfolios: 1) a returns-chasing portfolio, filled with holdings in sectors that had over-performed in recent years; 2) a portfolio heavily invested in company stock; 3) a diversified, low-fee stock/bond portfolio, and 4) an all-cash portfolio.

So, when the actors came into these offices, what happened? Basically, the advisers advised the dummy clients to do a whole lot of things that were in the advisers' interests, while making some adjustments based on just how much they thought the clients could be persuaded to do.

Most strikingly, the advisers nudged people in low-cost index funds toward high-fee actively managed funds -- blatantly making their clients worse off. Presented with the index-fund portfolio, the advisers recommended a change in strategy more than 85% of the time. Meanwhile, advisers largely encouraged returns-chasers to keep chasing returns. And they tried to nudge cash-only and company-stock investors toward active management, too, though they seemed to take things a bit slower with these clients (apparently inferring that they had a lower tolerance for risk).

While the researchers expected that they might find "catering" behavior -- that is, advisers telling clients to stay on their current course to avoid alienating them -- they largely found that the advisers were willing to recommend big changes fairly quickly (after giving the clients' original strategies a polite reception in their initial reaction).

So, should investors ditch financial advisers entirely? "I wouldn't say that people shouldn't use financial advisers," says Ms. Schoar of MIT. Many people, without an adviser, are too timid to enter the market at all, which isn't good for their financial health. The best advice in the experiment, she said, was given to those who came in without a strategy (that is, those with the cash-only portfolio). While the advice given to these clients wasn't perfect, it was relatively conservative and well-matched to a client's income, age, marital situation and perceived risk tolerance.

The most important thing, she said, was simply to understand how your financial adviser is getting paid. Some charge based on how much capital they're managing, and thus their incentives line up much better with their clients. Some even charge by the hour, which eliminates most conflicts of interest -- though it does leave the client with the vast majority of the work.

In the end, the quality of advice you get from a financial adviser is likely to be tied directly to your financial literacy -- and your willingness to hear advice that doesn't conform to your preconceptions. Individuals who are bad at making financial decisions might also be bad at picking advisers," says Ms. Schoar.

That certainly seems to be the case. A 2008 RAND study of investors' understanding of the roles of investment advisers and stock brokers found that investors have little understanding of how much responsibility either type of service provider has to them (advisers generally have a much greater duty to look out for their clients' interests) or of what types of fees they are paying. Nonetheless, the majority of investors were happy with their financial-service providers.

Just how bad is the gap between the quality of service and people's contentment? Well, despite the abysmal advice offered by the advisers surveyed in the Harvard-MIT study, the actors were willing to go back to 70% of the advisers they visited. This time with their own money. ... ab_article
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Thu Mar 08, 2012 9:30 pm ... %3Dgeneric

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Investment analyst Dan Hallett and a broker friend debate the pros and cons of deferred sales charges
By Dan Hallett | March 2012
Despite taking the occasional shot at the investment industry, I have a few financial advisor friends remaining. One longtime friend is a very sharp investment advisor at the brokerage arm of a big bank. His firm's compliance department won't let us use his real name, so let's call him Ulysses.
Ulysses and I often discuss industry hot-button issues over lunch. We most recently debated the 25-year-old deferred sales charge. Ulysses says the industry should kill the DSC; I'm not a huge DSC proponent but decided to take the pro side. Our discussion:

Ulysses: Back-end loads are something we should say goodbye to for a number of reasons. Just as it usually pays to do the most uncomfortable thing when investing, we must learn to do the same in our own practices. DSCs have long been a notoriously poorly explained approach to advisor compensation and, because of that, advisors recognize that DSCs are — in effect — concealed fees.

Dan: When I started in the industry, I was trained to explain that the client doesn't pay me a cent but that the fund company pays me on his or her behalf. But the DSC mechanism is not inherently evil. The sneakiness disappears with simple disclosures that any compliance officer can embrace.

Ulysses: Yet, so few do explain this. Back-end-load funds have hurt our industry's reputation. Many clients have told me they've dumped their advisors because of lack of communication or poor returns and then expressed shock at the prospect of the mutual fund company clawing back 4% of what they originally invested if transferred to our firm in cash. The trickle of discontent becomes a torrent.

Dan: This has nothing to do with the DSC; rather, it has to do with the failure to document advice properly. We both know that clients don't retain what you tell them for very long. Advice — and details such as DSCs — must be documented in plain English. I agree with regulating disclosure about how DSCs work but not with regulating how investors pay their advisors.

Ulysses: When I started in this business in 1996, I used back-end loads for many clients. It was the way of things then. Fees and trailers were irrelevant, and a back-end load would give you the commission you needed to get paid.
I remember having conversations with other advisors about the nature of our business being one of giving advice and getting commissions at the same time. They replied: "That's just the way the advice world works." But I also remember debating that although we espouse patience and putting clients first, we got paid more for activity. What if the right thing to do was nothing? DSCs don't reward advisors for that.
And, looking back, back-end loads were much more work — for example, explaining mechanics, allowable switches and inevitably rationalizing clawbacks.

Dan: I'm no DSC cheerleader. But everything you have said has to do with the advisor's professional conduct, not with inherent DSC flaws. Sure, the DSC is easier for ethically challenged advisors to exploit. But there are conflicts with every form of advi-sor remuneration.
I started as an advisor in 1994. Although my training wasn't ideal, I was encouraged to read prospectuses and then review the highlights with clients.
So, I sold DSC mutual funds but walked every client through the mechanics, rationale, fees and commissions.
When I woke them up, they seemingly understood it. And although many didn't retain it all, they went home with documented advice and a marked-up prospectus. I didn't make much money back then.

Ulysses: Dan, I recognize that removing the DSC model is difficult for our industry, and that it will be tougher for newer advi-sors to make ends meet without the 5% up-front DSC commissions. Perhaps new advisors' compensation has to be altered to allow them to build a business.
The bank for which I work had put rookies on a special fee grid eight years ago because it was the right thing to do. The bank supported brokers who walked the walk.

Dan: It's much tougher than it used to be. But that's a case for a more professional mentorship model rather than for legislating behaviour.

Ulysses: More education, another course. But will that change behaviour?

Dan: No. But bringing young advisors along more gradually through better mentorship is a better model and can address the industry's succession challenge. But you don't create good advi-sors by tossing rookies into the deep end and holding their heads to see if they can swim.

Ulysses: OK, but you've said before that back-end loads encourage clients to stay invested. I don't buy it. The DSC is not a barrier to investors dumping their investments in a panic when full switching among funds in fund families is allowed.

Dan: In theory, you're right; any investor who had bought a DSC fund a few months ago need not wait six years to make big asset-mix shifts.
But my research has revealed two interesting long-term tendencies. The dollar-weighted average holding period for mutual funds reporting to the Investment Funds Institute of Canada has long been six to seven years, which is about the length of the standard DSC schedule. As for capitulation — selling early — mutual fund investors tend to trade less — not more — during down markets. But it will be interesting to see if reduced DSC use will shorten holding periods the way it had lengthened them through the 1990s.

Ulysses: Embedded compensation will be banned in Australia and Britain, according to my peers on LinkedIn. It's time to remove them from Canada. Use the extreme test: either apply the DSC to all fund sales or charge trailer fees only. Which would clients choose?

Dan: Both are embedded commissions, but clients would choose trailer fees. Still, fee-based advisors also have big potential conflicts: they would prefer clients keep money invested rather than spend it on non-investment items. Even fee-for-service planners are incented to maximize the effective fees charged per hour of actual work on client files.
But one other positive of DSCs is that they help smaller investors afford financial advice — generous DSC commissions can pay advisors for giving investment advice to smaller accounts.

Ulysses: I'm familiar with that argument. But please note that my employer and its bank-owned competitors offer high-quality advice on a no-load basis. Clients with smaller portfolios are well served by Canada's major banks on financial planning issues.

Dan: That's one of the problems with eliminating DSCs: it effectively gives banks a monopoly on small clients, who, I'd argue, get better advice elsewhere. Plus, if your beef is with conflicted advice, you're suggesting that the only choice most investors should have is to walk into the most captive sales channel in the country.
Don't squeeze out independents. Legislate disclosure, let people choose how to pay advi-sors and let market forces decide. It's already happening: DSC sales are half of what they were in the late 1990s.

Ulysses: The trend is, my friend, look at low-load funds … they're like salt-reduced bacon. You know it's a bad thing when you can get a "reduced" version. Low-load funds are just "DSC Light." The implementation of "a little less of a bad thing" only highlights the need to remove the DSC structure once and for all. IE

Dan Hallett, CFA, CFP, is director, asset management, for Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for advisors, affluent families and institutions.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Tue Feb 21, 2012 11:31 am


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RBC Mutual Funds Trailer Fee Commissions pay up to 1.15%

Page 180

@ ... ctus_2.pdf

Trailing commissions

We pay dealers an ongoing annual service fee, known as a “trailing commission,” as long as you hold your investment, based on the total
value of Series A, Advisor Series, Series T or Series D units their clients hold in the funds according to the following table.

Annual trailing commission
Annual trailing for Advisor Series units Annual trailing Annual trailing
commission for Initial sales Deferred sales Low-load sales commission for commission for
RBC Funds Series A units charge option charge option charge option Series T units Series D units
Money Market Funds Up to 0.25% Up to 0.25% Up to 0.10% Up to 0.25% – Up to 0.10%
Fixed-Income Funds Up to 0.80% Up to 0.80% Up to 0.25% Up to 0.80% – Up to 0.15%
Managed Payout Solutions Up to 1.00% Up to 1.00% Up to 0.50% Up to 1.00% – Up to 0.25%
Balanced Funds and Portfolio Solutions Up to 1.00% Up to 1.00% Up to 0.50% Up to 1.00% Up to 1.00% Up to 0.25%
Equity Funds Up to 1.15% Up to 1.15% Up to 0.50% Up to 1.15% Up to 1.15% Up to 0.25%

We do not pay trailing commissions on Series F, Series I or Series O units.

These service fees paid to your dealer depend on the fund and the sales charge option you choose. If your dealer initiates a switch of your
units from the deferred sales charge option to the initial sales charge option after the deferred sales charge schedule matures, it will result in
an increase in the annual trailing commissions payable to your dealer. This will not result in any additional cost to you. Your dealer is required
to observe the rules of any self-regulatory organization to which it belongs when initiating such switches, including any requirement to obtain
your consent prior to initiating such switches. We may change the terms of the service fee paid to your dealer without informing you. Dealers
typically pay a portion of the service fee they receive to their investment professionals for the services they provide to their clients.

CIBC Mutual Funds Trailer Fee Commissions pay up to 1.25%

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@ ... 011-en.pdf
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Sat Feb 18, 2012 11:04 am

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MERQ is Too Extreme to be Believable
Regular readers of this blog are very familiar with the arguments that seemingly small costs can cause big damage to your portfolio over an investing lifetime. To make this more clear, I’ve proposed the MERQ (Management Expense Ratio per Quarter century) as a better measure than a single-year MER.

One thing I’ve discovered about the MERQ in casual discussions is that many people simply don’t believe it. For example, the Investors Group Beutel Goodman Canadian Balanced Fund Series A has an MER of 2.89% which translates into an MERQ of 51.4%! This means that after 25 years, more than half of your portfolio would be consumed by fees.

In contrast, a balanced portfolio of index ETFs from iShares (XIU and XBB) has an MER of 0.235% for an MERQ of 5.7%. So, a portfolio that would have come in at a million dollars without fees would end up with $486,000 with the Investors Group fund and $943,000 with the iShares ETFs.

This difference is so large that people are skeptical that it is real. This makes me even more interested in popularizing MERQ. We need to be discussing real impacts on portfolios and not hiding them with seemingly tiny MER percentages like 1%, 2%, or 3%.
Posted by Michael James at 12:01 AM
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Sat Feb 11, 2012 10:23 am

(you will notice that this report dates to 1998, and yet nothing has been done to address the systemic churning of customer accounts to benefit sales firms)





A Review by Glorianne Stromberg

Prepared for Office of Consumer Affairs, Industry Canada

October 1998 ... 1&lang=eng ... Canada.pdf


21.1. Switching and Churning

Industry participants tell me that there is substantial switching and churning of accounts going on.185
Two situations in particular appear to be giving rise to this. Both situations relate to mutual fund
securities that have been sold on a deferred sales commission basis.

The first situation relates to the permitted ten per cent per annum redemption of mutual fund securities
that may be redeemed free of any deferred sales commission or redemption fee.

I understand that some sales representatives are advising their clients (or using powers of attorney that
they have obtained from their clients) to redeem these “free shares” and to reinvest the proceeds either:

(i) in the same fund on a zero front-end sales commission basis; or

(ii) in another fund on a deferred sales charge basis.

Investing the redemption proceeds on a zero front-end sales commission basis results in the doubling
of the ongoing trailing commission that the intermediary receives.

Investing the redemption proceeds on a deferred sales commission basis results in:

(i) a new deferred sales commission period starting with respect to the mutual fund securities that
are acquired with the redemption proceeds; and

(ii) the intermediary receiving an immediate lump sum sales commission that is paid by the fund’s
manager plus an ongoing trailing commission.

When these transactions occur in a registered plan account such as a retirement savings plan or a
retirement income fund, there are no income tax consequences to the client. However, if the
transactions occur in a non-registered plan account, the transactions are a “disposition” for income tax
purposes and give rise to a realized gain or loss that the client must take into account for tax purposes.

I have been told that in some cases clients are not even aware that the transactions have occurred. If
this is so, it creates additional problems for clients whose securities are held in a non-registered plan

The second situation relates to the expiration of the period during which redemptions of mutual fund
securities would give rise to a deferred sales commission. Industry participants tell me that as in the
first situation, some sales representatives are advising their clients (or using powers of attorney that
they have obtained from their clients) to redeem these mutual fund securities and to reinvest the
proceeds either in the same fund on a zero front-end sales commission basis or in another fund on a

185 The discussion in Section 21 of this Review is confined to situations dealing with mutual funds.
Industry participants have spoken with me about the switching and churning which they say goes
on in the case of certain market-linked universal life policies. I have not, in the time constraints
applicable to this Review, been able to follow-up on this to gain a better understanding of what is
involved or the magnitude of any problems that exist.

Page 124

deferred sales commission basis. The consequences of this action are the same as those described
above in respect of the first situation.

Another consequence of the switching and churning transactions is the added record-keeping and
administrative work that mutual fund management organizations perform for distributors to keep track
of deferred sales commission transactions and the payment of ongoing trailing commissions. This work
adds costs and is another contributing factor to the increasing costs of investing that are borne by

Although individuals associated with the “manufacturers”, the “distributors” and their respective service
providers know what is going on, they remain silent. This silence and these situations are examples of
how the competitive pressure on “manufacturers” to increase sales and access to distribution, and the
competitive pressure on “distributors” to retain top performers have an impact on what happens to

It is situations like these that undermine the confidence and trust that consumer/investors are
encouraged to place in the integrity of the investment fund industry. Here the work of the relatively few
undermines the work of the many in an industry that strives hard to merit the confidence and trust of

21.2. Recommendations to Address Switching and Churning

There is no simple way to distinguish bona fide changes in investments from those that are not. There
is also no simple way to prevent the abuse of trust that results when switching and churning occurs. I
have set out some suggestions below that might help address the problems by keeping them from
occurring in the first place.

Systemic Changes - Education and Regulatory Structure

The recommendations made earlier in this Review relating to enhancing the knowledge and awareness
of consumer/investors and industry participants should help.186 In the case of consumer/investors
increased knowledge and awareness should result in a more aware, questioning client. In the case of
industry participants the enhanced knowledge and awareness of their fiduciary obligations and the
consequences of breaching them should help to reduce the incidences of abuse of trust.

A regulatory system and structure that was aligned with advisory-based relationships as opposed to
transaction-based relationships should also help.187

Systemic Changes – Compensation

Commission-based compensation is at the root of the problems relating to switching and churning. It is
also often at the root of most of the problems relating to suitability issues. This is so because as long as
there is a product-based differential in the compensation that a sales representative or adviser will earn,
the question will always arise as to whether the product that has been chosen is the best one for the
client or the best one for the intermediary. Differences in sales commissions and the opportunity to

186 See Sections 14 and 15 of this Review.

187 See Sections 12, 13, 14, 15 and 16 of this Review.

Page 125

generate new commission payments have long been responsible for many investment changes that are

The recommendations made earlier in this Review relating to the need to align the compensation
structure so that it is more appropriate for an advisory-based relationship than for a transaction-based
relationship should serve to remove or reduce any incentive or advantage to switching and churning.
In this respect, some firms have adopted the practice of not charging commissions on switches.
Instead, a low flat administrative fee is payable. The internal compensation plans of these firms are also
designed to discourage switches.

Switch Disclosure Document

Industry participants have suggested that the best method to deal with switching and churning is to
require that a switch disclosure document be completed. They note that this type of document is used in
the life insurance industry when policyholders surrender one policy and acquire another.189
The mandatory use of a switch disclosure document should help to focus the attention of
consumer/investors on the proposed changes in their investments. This document should clearly set

(i) the change in investments that is being made;

(ii) the reason for the change;

(iii) the costs of the change;190

(iv) the income tax consequences of the change with an estimate of the amount of income tax that
will be payable; and

(v) any other information that is needed in order to illustrate the impact that the proposed changes
will have on the consumer/investor.

The switch disclosure document should be required to be signed by the client in question, the sales
representative and by the appropriate supervising officer(s) of the intermediary with whom the sales

188 Industry participants have told me about attending “road shows” to launch new investment funds
and sales meetings where the people attending are urged to review their client records to identify how
much “free room” there is to switch investments without incurring sales charges. The opportunity to
earn extra commission and to be eligible for additional cooperative marketing and educational
conference support is used as a motivating force to persuade sales representatives to redirect client

189 I have been told that one of the reasons contributing to the effectiveness of the insurance
industry’s switch disclosure document to reduce unsuitable transactions is that it is a “chore” to prepare
the document and when the client sees the impact of the changes, the client often decides not to
proceed with the transaction.

190 These costs would include sales commissions or charges that are:

(i) payable directly or indirectly by the consumer/investors;

(ii) payable either immediately or at a later time; and

(iii) payable either on a lump sum basis or a continuing trailing basis.

The costs would also include any transaction or account fees and any other fees and charges that are
payable directly or indirectly by the consumer/investor in respect of the transactions. The required
information would relate to both the redemption and the reinvestment of the redemption proceeds.

Page 126

representative is associated before the transactions are processed. Powers of attorney granted to sales
representatives or to the intermediary should not be permitted to be used to eliminate the requirement
for the client’s signature. The client should receive a fully executed copy of the switch disclosure

In determining the situations where a switch disclosure document is required to be used, some thought
needs to be given to ensuring that the requirements include transactions that may be designed to avoid
the requirements. An example of where this might happen is if there is a delay between the redemption
and the reinvestment of the redemption proceeds. There are other practices that may need to be
addressed such as “pre-signed” approvals by supervising personnel.

The proposals for requirements for a switch disclosure document are designed
to discourage inappropriate advice being given to consumer/investors.
They are not designed to discourage bona fide investment changes.

The switch disclosure document should be a key compliance tool to assist all intermediaries to exercise
oversight and supervision over the persons associated with the firms. To this end, there is no reason
why intermediaries could not begin using such a document immediately. The use of the document need
not await the promulgation of regulatory or self-regulatory requirements. However, ideally, the minimum
requirements for the switch disclosure document would be mandated as a condition of registration
and/or membership in a self-regulatory organization.

In the interim, consumer/investors should ask for a switch disclosure document that sets out the above
information before agreeing to a switch of the nature described above.

Enhanced Supervision and Oversight Procedures

Enhanced supervision and oversight procedures would assist in identifying and dealing with switching
and churning. The switch disclosure document referred to above is one tool. There are other review
mechanisms that could be used. What is needed is an impetus to motivate intermediaries to use these

While the best impetus may be the demands of consumer/investors, the reality is that most
consumer/investors are not aware that they may be receiving inappropriate advice. Therefore the
motivation needs to come from the regulators and the self-regulators. They should take a pro-active
role in setting standards and in monitoring compliance with the standards.

They need to recognize that high standards that are implemented on a voluntary basis can place
intermediaries at a competitive disadvantage and result in sales representatives leaving to join less
principled firms. The role therefore of the regulators and self-regulators is to ensure that all players in
the industry are required to have, and to meet on an ongoing basis, the same high standards.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Thu Jan 26, 2012 11:34 am

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Dan SolinAuthor of the Smartest series of books

Brokers and advisors like to describe their activities in terms indicating the benefits they bestow upon their clients. "Wealth manager" is one of my favorites, because it conveys the impression that using them is likely to increase your wealth. Using the wrong adviser can have the opposite effect. They can "manage" to transfer your wealth into their pockets.

I also find the titles bestowed on brokers interesting. They refer to themselves as "financial consultants" and "Vice-President." Mutual funds play the same game. "Absolute return fund" implies a fund that always has positive returns. According to an article in The Wall Street Journal, while most (but not all) of these funds posted positive returns in the 2008-2009 time frame, "many were lackluster in comparison with the index returns and just two funds outpaced the S&P 500's gains."

The clever name game is part of a larger strategy geared to get your business. It includes massive advertising (often using celebrities to enhance credibility), the availability of "trading programs" and niche marketing, like hosting seminars for women investors.

While these pitches for your business are fairly subtle, the gloves come off when brokers or advisers are competing for your business. It gets really ugly when one of the contenders is recommending an index based portfolio, which is what I believe should be the strategy followed by all investors. Here are some of the dirty tricks some brokers and advisers use to dissuade investors from index based investing:

Hiding Expenses

Since expenses are deducted from returns, it makes sense to be aware of the expenses of the funds in your portfolio. A study by Morningstar found the management fee charged by mutual funds (called "expense ratios") are "strong predictors" of performance.

It is important to understand wrap fees, transaction costs, adviser fees, brokerage commissions and account management fees when computing the real cost of your investments. Transaction costs are easy to hide. Ask for the "turnover ratio" of the funds you are considering. A high turnover means higher trading costs. Index funds typically have lower turnover ratios than actively managed funds.

To get an overall understanding of expenses, ask for the "weighted expense ratio" of the recommended investments.

Higher Taxes

The returns of actively managed funds are typically reported pre-tax, which can be very misleading. One study (discussed here) looked at the 10 year pre-tax and after-tax returns of index funds and actively managed funds. It found that, on an after-tax basis, index funds outperformed 86% of active mutual funds.

Ask for the after-tax returns of the recommend funds.

Misleading tilt

There is significant research supporting the value of tilting the stock portion of a portfolio towards small and value stocks. Tilting towards these riskier asset classes can increase expected returns, albeit with increased risk. However, there are periods of time when large and growth stocks outperform small and value. For example, in 2011, large cap stocks outperformed small cap stocks.

By tilting the stock portion of a portfolio towards the asset class that outperformed in the past year or two, advisers can make it appear they have the ability to increase returns in the future. Don't be fooled. If your adviser is recommending a tilt towards any asset class, ask to see long term data supporting this recommendation.

Using long term and lower quality bonds

By using long term (maturity dates more than 5 years) bonds, and bonds with ratings below investment grade, brokers and advisers can make it appear they are generating higher returns. Many investors don't understand these returns come with higher risk. Historically, according to research done by Dimensional Fund Advisors, long term bonds are more volatile than shorter term bonds, but have not provided consistently greater returns. The same research indicated that bonds lower in credit quality have earned higher returns, but there is a greater risk of default.

You would be better advised to limit your bond holdings to maturities of five years or less and to insist that all of these holdings be rated investment grade or higher. You can increase your expected return (and your risk) by allocating a greater portion of your portfolio to stocks, assuming that would be suitable for you.

Using short term returns

Short term data can be extremely misleading. Some brokers and advisers cherry pick funds for inclusion in a recommended portfolio that have impressive three year returns. The implied message is that these funds are likely to outperform in the future. You can find a discussion of the benefit of longer term data here.

You should insist on seeing at least a 10-year history of returns and preferably longer.

There's an old Chinese Proverb that says: "If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time."

You now know some of the rules of the game.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published December 27, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog. ... 20607.html
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Sun Jan 15, 2012 8:06 pm

Finding how many years a third of your investment will be lost to fees........from Jon Chevreau, ... es-matter/

The Rule of 40 is a way mutual fund investors can estimate the number of years it takes for a Management Expense Ratio (MER) to consume a third of the initial investment. You divide the number 40 by your fund’s MER and that tells you how many years it will take for a third of the investment to be lost by fees. So for the 2.1% average of Canadian funds in 1998 (not much different today), divide 40 by 2.1 to get 19 years. A fund with a 3% MER would take just 13 years. The video describes the much longer time it would take for modern low-MER ETFs to lose a third.

In the foreword, Hamilton likened paying a 2% MER for 20 years to paying a 33% front-end load. It wouldn’t matter if investment managers could beat the markets by 2 or 3% a year but research shows most do not do that well. “They can’t beat the market because they are the market.”
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Thu Dec 29, 2011 1:22 am

Screen shot 2011-12-29 at 1.22.16 AM.png
Wonderful discussion on investment risk by blogger Mike Macdonald:

This is a MUST READ for retail investors. Here's an extract: Advisor Risk: The number one risk to your investment success and often your retirement success is “advisor risk”.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Sun Dec 18, 2011 5:49 am

DECEMBER 12, 2011
How to Pay Your Financial Adviser
With pricing plans proliferating, it's more important than ever to know the advantages—and disadvantages—of each one

Here's the good news: You have more options than ever for paying your financial adviser. The bad news? It's even tougher to figure out if you're getting the best deal for your money.

More in Wealth Adviser

What's Next? The Outlook for Markets in 2012
So, How Does Money Make You Feel?
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Read the complete report .
For a long time, advisers mostly offered their clients only one way of settling a bill—investors would hand over a percentage of their assets under management every year.

Now some in the industry are rewriting the rules. With the economy in the tank, and more people than ever looking for guidance, advisory firms have cooked up new options for investors. Some offer flat fees or hourly rates, or weigh all of a client's holdings instead of just the size of the portfolio.

With these new options, though, come new questions. What are the advantages, disadvantages and conflicts of interest in all of these new plans? What responsibilities do advisers have to their clients?

"There's no perfect form of compensation; each has its pluses and minuses," says Lukas Dean, assistant professor and program director for financial planning in the Cotsakos College of Business at William Paterson University in Wayne, N.J.

Here's a look at some of the most popular pricing models—and some that are just starting to emerge—and what they mean for investors and advisers.

PRO: The adviser has big incentives to boost client assets and build lasting relationships

CON: Lots of potential conflicts of interest

This is the original compensation plan for advisers, and it's still the most common, bringing in 85% of advisory-firm revenue last year, according to a survey by FA Insight of Tacoma, Wash.

John Kuczala
The setup is simple. Every year, clients hand over a percentage of the assets they entrust to the firm, typically 0.50% to 2%. A client with a portfolio of $500,000, for example, might pay 1% of that, or $5,000, per year. Many times, advisers lower the percentage charged as clients' assets grow.

The advantages are easy to see. Advisers have a strong incentive to boost client returns, because their fees increase as the assets grow—and fall if the assets decline.

"Clients know we're doing our best to add value to their account," says David Scott, chairman and chief investment officer at Sunrise Advisors in Leawood, Kan. "When things are really bad, we want to protect you because it protects us. When the getting is good, we want to participate because that helps us as much as it helps you."

Recurring asset-based fees help build a lasting bond between clients and advisers, says Michael Finke, a personal-financial-planning professor at Texas Tech University. "It's a long-term proposition where you derive your compensation from your client on a regular basis," he says. "There is some incentive to provide a greater breadth of financial services when you have a long-term relationship."

Clients, meanwhile, may relax with the adviser and feel that they can call or email with questions, something they might be hesitant to do if they were paying hourly, Mr. Finke adds.

One disadvantage with this setup is the asset bar. Many asset-based advisers require account minimums of at least $500,000 to $1 million, shutting many investors out. However, some will accept less, particularly for children of existing clients.

But perhaps the most serious caveat is that asset-based fees introduce many conflicts of interest. Advisers may be tempted to take undue risks to grow their clients' accounts and thereby boost their own fees. They might also be tempted to discourage moves that benefit the client but take assets out of the account. For instance, an adviser might be tempted to advise a client not to buy life insurance because that would mean less money to manage.

There's also the question of whether or not advisers are really earning their money. An investor who takes up little of an adviser's time may pay as much as one who spends hours in the adviser's office. What's more, a client's assets may grow or shrink for reasons unrelated to any guidance the adviser gives. "If the general market does well, then your assets under management will continue to grow even if you haven't been given good advice at all," says Alex Edmans, an assistant professor of finance at the Wharton School of the University of Pennsylvania.

PRO: In some cases, it can be an efficient way to do all your business in one place

CON: Adds even more potential conflicts of interest

Fee-only advisers don't take commissions on products they sell, so they won't be swayed to recommend a product because it will pay them more. But many advisers combine some type of fee with commissions.

This model has come under criticism and the scrutiny of regulators. Critics say it generally adds more costs and conflicts of interest—often without the client realizing it.

In this setup, clients typically pay a set fee for a financial plan or a percentage of assets under management—and then a commission when advisers purchase an investment for them. Advisers using this plan are known as hybrid or dually registered professionals, since they act as brokers as well as advisers.

Some advisers argue the setup can be efficient. Investors would be paying a fee to buy the products anyway, they say, and this way the advisers can provide comprehensive services under one roof. They say it works particularly well when investors buy products that don't count as assets under management.

For instance, Timothy Lee, lead financial planning manager at Monument Wealth Management in Alexandria, Va., charges a flat fee for financial planning, then a percentage of assets for asset management, but occasionally sells products, such as municipal bonds, on a commission basis. If he puts $100,000 in a municipal-bond ladder for a client, he'll get a commission, but not an annual fee on the investment—since it doesn't count as an actively managed asset.

Still, it might be cheaper for investors to buy some products themselves through sources like online brokerages if they can select those products on their own. And the fee-based arrangement also introduces several potential problems. The biggest: When advisers act as brokers, they have an incentive to sell the product that pays the best commission. There's also the temptation to urge a client to sell one product and buy another so the broker can earn another fee.

While acting as a registered investment adviser, the adviser is a fiduciary, required to act in the client's best interest. But the adviser isn't a fiduciary when working as a broker. In that capacity, advisers only have to select an investment that's suitable for their client. That means they don't have to consider things that fiduciaries would, such as: Are the fees for this product reasonable? And does it help to diversify the client's portfolio?

Advisers juggle the two roles by giving only general planning advice as fiduciaries. For example, the adviser may tell clients they need to get a certain amount from an income stream or have more bond exposure. Then, when it gets down to implementing a strategy, they move into the broker role.

Whether investors understand that is another matter. "Is the client in a position to really grasp how the adviser is talking to him, in what type of framework?" asks Alois Pirker, an analyst at Aite Group LLC. "Probably, the answer is no."

In addition, commissions aren't always obvious. Brokers aren't required to disclose the amount of their commission at the point of sale, though it is included in a confirmation later sent to the client.

Investors can get honest advice from advisers working on commissions, but "commissions leave more room for the unscrupulous adviser to take advantage," Mr. Dean says.

PRO: Gets people professional help if they don't have a lot of money or don't need ongoing advice

CON: May not be the best way for investors with limited means to spend their money

A payment plan that works well for investors with limited assets, or limited needs, is the flat-fee setup. Advisers offer packages of financial services, like setting up a college-savings plan, for a relatively modest one-time or monthly fee.

Ways to Pay


Who might prefer it

Investors with a high net worth who can get lower fees as their assets grow, or investors who want a lot of guidance from advisers


Who might prefer it

Investors looking for help on specific financial matters, or young couples who need an introduction to budgeting and other money matters


Who might prefer it

Investors who can't meet the standards of asset-based plans, such as people with high income but low savings, or lots of illiquid assets


Who might prefer it

Investors who have limited cash and need advice on specific financial issues, such as setting up a college-savings plan

For instance, Jude Boudreaux, an adviser with Upperline Financial, a fee-only financial-planning firm in New Orleans, offers an introductory financial-planning service for $1,000 a year or $100 a month. Clients get four meetings of an hour to an hour and a half in which they discuss their net worth, budget and changes that are needed. They meet again later to discuss their progress and any new issues that have arisen. The investors aren't charged extra for telephone calls or emails.

This might be an attractive option for investors who don't need ongoing advice, as well as young clients who haven't accumulated a lot of assets. But investors should consider what they're getting for the price.

Susan John, chairwoman of the National Association of Personal Financial Advisors, says clients should be sure they're clear at the onset about what's included. They're not paying for comprehensive financial planning. And while they may be entitled to seek advice via telephone or email, they should understand that if such queries become excessive, the adviser may want to add more charges.

Another basic question is whether the money could be better spent elsewhere. For many clients using this service, the $1,000 or so fee may well be their largest discretionary expense for the year. The money might be better spent on immediate concerns, such as paying off high-interest debt. On the other hand, the guidance an adviser gives could help rein in a client's spending or otherwise boost their net worth over time.

PRO: Makes it easier to qualify for professional help

CON: Investors need to do the math to make sure the setup works

Another payment structure that's just starting to emerge works a lot like asset-based pricing. But instead of paying a chunk of assets every year, investors pay a portion of their net worth or income, or a combination of the two. That opens the door to people who don't have a lot of investable assets but might have a high income or assets that aren't liquid, like a home or a 401(k) plan. (The calculation generally excludes closely held businesses.)

Upperline Financial's Mr. Boudreaux, for one, charges clients who want comprehensive financial planning an annual fee of 1% of their adjusted gross income and 0.50% of their net worth, excluding any closely held businesses. The percentage of net worth is reduced to 0.25% or 0.10% as net worth increases.

Even though investors' entire net worth is taken into account, they may pay less than they would under an asset-based fee because the percentages are typically lower. Consider an investor with an income of $100,000, $1 million in a 401(k) or other account, a $400,000 home and $100,000 in other assets. Under a plan that charged 1% of their investable assets—in this case, the 401(k)—they'd hand over $10,000 annually. Under Mr. Boudreaux's model, the investor would pay $8,500.

The setup also helps people who wouldn't ordinarily qualify for asset-only payment plans. Mr. Boudreaux uses the example of a young doctor with $200,000 in income but loads of student-loan debt and no portfolio to speak of. An asset-based adviser wouldn't be able to get any fee at all from that kind of client. But Mr. Boudreaux would be able to charge a percentage of income, and collect $2,000.

In theory, these models remove the conflicts in asset-based pricing. Because an adviser is charging a percentage of entire net worth, there's no incentive to advise clients against moves that make sense but deplete assets under management.

Still, these plans aren't for everyone. Sometimes the math just doesn't work out, and people with lots of illiquid assets but low income and savings find they can't afford to pay an adviser thousands of dollars a year.

For investors in that spot, "my annual fee can be a tough pill to swallow," says Mr. Boudreaux.

PRO: A fairly transparent structure that helps build a relationship between adviser and client

CON: The meter is running, and there's an incentive for advisers to keep it running

Hourly fees are exactly what they sound like: Clients pay their advisers a set fee for every hour they work. The setup is easy to understand and ensures that investors pay only for the advice they need. "To me, it's the perfect way," says Mr. Finke of Texas Tech. "Essentially, you're paying directly for the services you're receiving."

What's more, he says, it's a good way for investment advisers to take on middle-market clients, given that "asset-based fees are just not adequate given the average investable assets of most American households."

But it can be hard to get this deal. Hourly fees are still quite rare among advisers, though asset-based advisers occasionally offer them to children of clients.

Some experts warn that advisers may try to keep the meter running, or start it by raising opportunities that aren't appropriate. "It can give an incentive to put a lot of hours in without doing any producing," says Mr. Edmans of Wharton, who notes that hourly pricing is being reconsidered as a model for lawyers for that exact reason.

Mr. Edmans prefers asset-based fees because they're at least somewhat sensitive to performance. Ideally, he thinks compensation should be even more closely tied to performance. If an adviser recommends a mutual fund, for example, and the investor earns 10% above a reasonable benchmark, the adviser would get a portion of the 10%.

"One of the reasons this isn't adopted is that the current model is quite cushy," Mr. Edmans says.

Ms. Maxey is a special writer for Dow Jones Newswires in New York. She can be reached at ... #printMode
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Thu Sep 22, 2011 10:47 am

Screen shot 2011-09-22 at 11.46.50 AM.png
Yale University's chief investment officer (and reputedly one of the world's best investment authorities) tells of the dangers of "disclosure" when it is crafted by investment sellers and those they employ.
============================= ... don-t-work
Mutual Fund Disclosures Don't Work
September 21, 2011

By Elizabeth MacBride

Last month, in a provocative op-ed in The New York Times, David Swensen, Yale University’s chief investment officer, lashed out at mutual funds. He said, in short, that mutual funds invest poorly and have fees that investors don’t understand, and that some of the brokers and advisors who sell mutual funds use “pointless buying and selling to increase and justify their all-too-rich compensation.”

The Investment Company Institute, which represents mutual funds in Washington, D.C., struck back, suggesting Mr. Swensen had been led astray by his “hubris.” The ICI says the mutual fund industry already offers information and disclosures to investors.

“Funds have reported their fees for decades and have published prominently displayed fee tables with a wealth of cost information since 1988,” the ICI said.

For decades, the mutual fund business and its regulators have hidden behind this idea: that disclosures absolve them of responsibility toward investors. That’s why, over the years, the prospectuses you get in the mail seem to grow thicker and thicker, and the print seems to get smaller and smaller.

A growing body of academic research suggests what most of us have suspected instinctively all along, that “disclosure” as it is practiced today in the financial services industry offers not only little value to investors — but may even offer companies a license to do worse by their clients. (See “The Dirt on Coming Clean”).

To be valuable, disclosures should be paired with real, meaningful, easy to access explanations, as Mr. Swensen has suggested. In addition, investors should seek out companies, brokers and advisors who seek to reduce their conflicts of interest, rather than people who believe that conflicts of interest are OK if they are disclosed.

“A conflicted expert can give good advice. But unbiased advice is highly undervalued,” says Daylian Cain, assistant professor of organizational behavior at the Yale School of Management

Why It Matters Now
The question of disclosures is critical now, as the SEC works on reforms of the financial industry following the crisis of 2008. For decades, government regulation of the financial services industry – not just mutual funds, but broker-dealers like the big Wall Street firms, credit card companies and insurance firms – has rested on the idea of disclosure.

But just consider how the industry has interpreted the idea of disclosure. Take a look, for instance, at the prospectus, selected more or less at random, for American Funds’ New Perspective Fund, described on the company’s website as investing in the stocks of blue chip companies in the United States and abroad. American Funds is one of the nation’s biggest mutual fund families.

This prospectus contains two key disclosures. One is on page 37 of the 46-page document. It explains that classes of shares that carry 12b-1 fees—which are charged as a percentage of assets on an ongoing basis to pay for the marketing and distribution of the fund—may be more expensive to own over time than shares that carry an initial sales charge. (You can watch SEC Chairman Mary L. Shapiro discuss the history and the future of 12b-1 fees here:

There’s another on page 38, alerting investors that American Funds offers a financial incentive to dealers that sell the most shares in the New Perspective Fund:

American Funds Distributors, at its expense, currently provides additional compensation to investment dealers. These payments may be made, at the discretion of American Funds Distributors, to the top 100 dealers (or their affiliates) that have sold shares of the American Funds. The level of payments made to a qualifying firm in any given year will vary and in no case would exceed the sum of (a) .10% of the previous year ’s American Funds sales by that dealer and (b) .02% of American Funds assets attributable to that dealer. For calendar year 2009, aggregate payments made by American Funds Distributors to dealers were less than .02% of the average assets of the American Funds.

Maura Griffin, a spokeswoman for American Funds, says the company doesn’t know what investors do with the information.

What The Research Says
You might expect that an investor reading these disclosures would think twice about buying a class of shares carrying 12b-1 fees, and be wary of an advisor or broker who recommended their purchase. You might further expect an investor to wonder whether the compensation coming from American Funds might sway an advisor or broker to recommend one of its funds over another fund that does not pay such compensation.

You might expect that. But it’s probably not what happens.

Human behavior prevents investors from giving proper weight to such disclosures, says Professor Cain. He points to the behavioral principle called “anchoring” to explain why disclosures fail to have the expected or sufficient impact on investor decisions.

In one classic study of anchoring, Amos Tversky and Daniel Kahneman, who later won a Nobel Prize for his work in behavorial economics, asked participants to guess the percentage of African countries that were members of the United Nations. One group of participants was asked whether the percentage was “more or less than 10%,” and then asked to guess the actual percentage. A second group was asked whether the total percentage was “more or less than 65%,” then likewise asked to guess the total percentage. The study found that the group presented with the higher initial benchmark guessed higher actual totals.

Basically, once a person has decided to believe in something, that belief colors the thinking that follows. Professor Cain says he suspects that financial advice would prove sticky in much the same way: Once an investor has decided to trust an advisor or a mutual fund company, a disclosure of conflict of interest is unlikely to sufficiently shake that trust. In a subsequent study, Cain found that even participants who were warned that their advisor would intentionally manipulate them failed to attach proper weight to that disclosure.

“Even in the face of disclosure that should have been incredibly alarming, the advice turned out to be very sticky,” Cain says. “Disclosure tends to help us discount advice in the right direction. But we don’t discount conflicted information as much as we should.”

Even Worse

There’s a more pernicious flipside to disclosures. While investors don’t properly weight conflicts of interest, disclosures may spur individuals in the financial services business —probably subconsciously—to counteract their disclosure by giving advice that is actually more biased.

Robert Prentice, associate chairman at the University of Texas McCombs School of Business, describes the phenomenon in terms of moral equilibrium: When people believe themselves to be good, they are more likely to take license to behave poorly. He says a study conducted by Sonya Sachdeva, a psychology researcher at Northwestern University, exemplifies the phenomenon. Researchers asked one group of participants to describe their own positive personality traits. The second group of participants described their negative traits. Members of each group were then given the opportunity to make a theoretical donation to charity. The group that had enumerated their positive traits donated less money.

Says Mr. Prentice: “If I’m a broker, I tell myself, ‘I didn’t hide my conflict of interest, I explained it to my customer, who can protect themselves.’ In that setting, I’ve licensed myself to give more biased advice than I otherwise would have.”

Earlier this year, Professor Cain’s paper, “The Dirt on Coming Clean” indicated—at least in the context of the study—that advisors tend to make recommendations in line with their incentives, and that the their advice became more biased when their conflict of interest was disclosed.

“Disclosure, in effect, may cause the investor to cover his ears,” says Professor Cain. “What does the advisor do in response? He yells [the advice] louder.”

The bottom line for investors? Beware of companies, both mutual fund companies and the firms of people who sell them to you, that rely solely on disclosure to discharge their moral obligations.

And the bottom line for regulators? It might be time to find a better way to regulate the mutual fund business, because disclosures alone just don’t cut it.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Tue Aug 30, 2011 6:24 pm

Be cautious of Advisors who abuse Deferred Sales Charges (DSC)
Written by Jim Yih in Advice, Investing 4 Comments - ... arges-dsc/

In a recently read an article on on the problems of the Deferred Sales Charges (DSC). There may have been a time and a place early in the birth of the mutual fund industry where DSC structures made some sense but in today’s world, everyone would be much better off without the old back end load. If you are not sure what a DSC or back end load is, read this article on mutual fund fees.

A tale of bad, selfish advice
A young couple, Janet and Reg, recently asked me for a second opinion on some advice from their financial advisor. We’ll call him Mr. Advisor.

Janet and Reg started working with Mr. Advisor 6 years ago. Since the beginning of this relationship, he has moved companies twice and now is embarking on his third move in 6 years. He started with World Financial Group and then moved to another mutual fund dealer and now is moving to an insurance based license.

Janet and Reg have 3 investment accounts:

A RRSP with Franklin Templeton worth $25,000
A non-RRSP leverage portfolio worth $55,000 (originally $50,000) invested in AGF mutual funds
A non-RRSP mutual fund at Franklin Templeton worth $25,000
Mr. Advisor wants them to cash everything out of mutual funds an move it into a Guaranteed Minimum Withdrawal Benefit (GMWB) Segregated Fund with Sun Life using their SunWise Funds. There are so many things about this recommendation that bugs me that I feel compelled to write about it so that anyone getting this type of advice runs away from their advisor as fast as possible.

Why should they pay back end loads when he is recommending them to get out?

Firstly, to get out of these funds, the young couple has to pay over $2500 in back end penalties which the advisor has recommended they pay. What is the benefit to Janet and Reg for paying this fee? For Janet and Reg, there is little to no upside. They get investments with higher fees (1.14% MER for Money market up to a whopping 4.13% MER), they get guarantees that are going to be irrelevant to them in the long term and their chances of performing better are not higher but arguably lower. And when they buy the new investment they will be locked into a new 6 year DSC schedule.

So what’s in it for the advisor? Lot’s! How about a $4200 commission cheque for selling the new Sun Life investments. And let’s not forget about the $4000 he already made from the sale of the Templeton and AGF mutual funds. And let’s not forget about the $2000 in trailer fees he already made over the past 6 years. So who’s helping who here?

And there’s more . . .
So when I asked Janet and Reg about why the advisor is changing firms, Mr Advisor told them it was because the fees and costs of the mutual fund industry was too high. Having been a licensed mutual fund advisor in the past, let me translate . . .Mr. Advisor is now recommending segregated funds because he is giving up his mutual funds license because he can’t make enough money to justify the costs of being an advisor who sells mutual funds. That sounds like a really successful advisor!

Everything about this story sucks and my advice to the young couple was very simple – get a new advisor. There are lots of advisors who can afford to deal with mutual funds and don’t sell funds on a DSC or back end load basis. This story is an extreme example of the conflict of interest that occurs in the financial industry – are advisors recommending products because it’s best for the client or because it’s best for their personal interest? The good news, is not all advisors are this extreme in recommending products based primarily on their own selfish reasons. Unfortunately, this story also proves these advisors still exist. Remember, not all advisors are created equal. For that reason, my hope is that all of Mr. Advisor’s existing clients read this article before they sign on the dotted line to help him earn more commissions for really bad selfish recommendations.

My bigger hope is any investors who recognize that this situation (triggering back end loads to trigger new upfront commissions without re-imbursement) may have happened to them take a stand and let their advisors know this is wrong and not ethical. For new investors, make sure you know what fees are being charged, especially Deferred Sales Charges (DSC) and back end loads.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Sat Aug 27, 2011 12:01 pm

A useful rule of thumb – the rule of “40” :Malcolm Hamilton, an actuary and pension consultant with William M. Mercer Ltd., in the Introduction to Jonathan Chevreau's The Wealthy Boomer, provides this handy "rule of 40": Take 40. Divide by your mutual fund's management expense ratio (MER, annual) and presto, you've got the number of years it takes management expenses to consume one-third of your investment.

To clarify further, lets look at three examples:

If you were unfortunate enough to buy the "house" fund of Assante, Artisan or Optima, paying as much as between 3% and 4% at times, then you would have a) been financially raped by your "advisor, and b) lose nearly one third of your investment to fees in around ten years.

If you deal with a regular investment "advisor" he or she will have placed you into normal mutual funds with fees averaging 2.5%, (plus commissions plus) and thus you will lose one third in 16 years. Plus all the other combined losses as your "advisor" needs to get you to switch funds every few years so he or she can earn a new commission from you.

If you find yourself fortunate enough to avoid commission sellers and rapists, you will be able to get various forms of professional management as well as investment diversification for as little as 1%, if you still want it "handled" for you. In which case you will have increased the time it takes for fees to eat one third of your money to 40 years.

Last, but not least, if you can become an informed do-it-yourself investor, you will be as highly trained as your average investment salesman in about 90 days, and you can invest for a ZERO annual management fee. Good luck to you with your money.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Mon Aug 08, 2011 8:38 am

Friday, July 29, 2011

Why Canadian Fund Investors are Confused

Mike Macdonald

Canadian fund owners have every reason to be confused.....and it is likely to be getting worse not better! The average investor often makes the assumption that they just don’t have the time to sort things out, when in fact the industry is ensuring the investor does NOT sort things out. The basic information required by investors is either completely lacking or is provided in a format that cannot or will not be understood by investors.

ü Ask why we pay higher fees on Mutual Funds than other countries and you get a resigned shrug of the shoulders. Ask the fund companies and they will assure you 1% and 3% are the same fee really! (Canada ranks last in fund fees on virtually every international study)

ü Ask why salespeople who sell funds are called “advisors” and not “salespeople” and you get a shrug. (Industry lobbyists pushed for changes to use other terms in regulatory requirements and the salespeople call themselves "advisors" which means nothing)

ü Ask why so many Canadian investors purchase funds on a deferred sales charge basis and you get a funny look, like “what is that?” from the investor who has bought the punitive DSC option of a fund. (check your statement for initials such as DSC, or BEL beside your fund name; some countries just regulate there can be no DSC fees, which solves the problem)

ü Ask how much an investor is paying each month, quarter, or year to have their funds managed and the investor shrugs. Even the GST/HST fees are hidden for some reason? (government complicity allows fund firms to hide HST fees so investors cannot calculate their MER fees)

ü Ask how a fund can lose money and yet still issue tax slips for dividends, capital gains, and interest supposedly received by the investor, and you get a shrug.

ü Ask what the annual rate of return on an investor’s portfolio is and you get a shrug. (funds advertise their performance when it suits them but will not tell you your funds’ performance....can you guess why?)

ü Ask how you’re fund has performed against the relative benchmark for the last month, quarter, year etc, and you will get a shrug. (SPIVA reports consistently show funds perform very poorly against passive index strategies)

ü Ask how a balanced fund can be called “balanced” when it rarely is a 50%/50% split between equity and fixed income and almost always holds more equity holdings. Many investors actually believe balanced means “equally balanced”! (International rules define the amount of allowable asset mix in a fund that is balanced) you can see the list of reasons to be confused can be quite high for a typical Canadian trying to invest their RRSP and/or TFSA into something paying more than 0.10% annual interest. Most Canadian investors wrongly blame themselves. Their thought process is that “they must be too busy to understand all the information they get”, or perhaps “they just do not have the interest or aptitude for investing”. In fact, the real reason investors do not comprehend answers to the above concerns is because the information is being withheld by the manufacturers and sales people. That’s right; information is not unknown to the fund firms and sales people. It is simply withheld from the paying client! Apparently we are too “simple” to understand the information or explanations.

In fact the fund industry has a policy of ensuring the language in fund information documents does not exceed the comprehension level of a child in grade six! No, I could not make that up folks! This is official policy! (National Instrument 81-101; Section 4.1 (3) (f) requires the document not to exceed a grade 6 reading level on ...).

So, why do I say it is getting worse? While foreign securities regulators continue to advance the requirements for transparency, Canadian regulators continue to lose ground with newer and dumber approaches to fund disclosures! The next blog will discuss the new “risk” disclosure approach recommended for Canadian funds. It is misguided, misleading, and another fund industry sham supported by what appears to be a totally out of touch and disinterested regulatory body! Here is a clue to how bad this new risk disclosure is.....the same fund manager managing two identical versions of the same fund can have the identical funds ranked at two different risk levels depending on who is sponsoring the fund. Apparently, risk is just a state of mind!

Sois mike

Mike Macdonald, B.A. (Econ), FMA
Macdonald FP
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Fri Jul 22, 2011 9:14 am

Although this article is about the USA, investors must realize that Canada is still years behind in investor protection practices. Buyer beware.

A recent Barron's article discussed the estimated $3.5 billion paid by mutual funds to brokers, insurance companies and other advisers to 401(k) plans. These payments are euphemistically called "revenue-sharing." In reality, they are legal bribes paid to plan advisers, who extract them as the cost of letting these funds gain admission to the investment options in the 401(k) plan.

PIMCO's Total Return Fund pays $145 million a year. The Growth Fund of America pays $75 million and the Dodge and Cox Fund pays about $20 million a year.

The securities industry considers these payments a "win-win," claiming they reduce overall plan expenses. I believe they are a "win-win," but not for plan participants. The mutual funds win because they are paying a small price to gain access to a huge pool of assets. More assets mean more fees for them. The advisers win because they pocket a big hunk of change for doing nothing -- unless you consider selling out plan participants doing something.

For hapless plan participants, this system is a disgrace, which should be illegal. It would be if our dysfunctional Congress really had the best interest of its constituents in mind. I guess it depends on how you define "constituents." Their real interest is in pleasing the securities industry which adds to their reelection coffers. No other reason could justify sanctioning this practice.

On merit alone, no actively managed fund should make the investment cut for any 401(k) plan. The majority of them underperform their benchmark index. Over the long term (which is the right way to measure performance since 401(k) investments are primarily for longer time periods), less than 5% of actively managed funds will equal their benchmark index. There is no way to predict which ones will be the next "winners."

The data is overwhelming that plan participants would be far better off with a small number of pre-allocated, globally diversified portfolios of stock and bond index funds at different risk levels. The primary reason most plans are populated with actively managed funds (and under populated with index funds) is that actively managed funds pay-off and index funds don't.

Because of this shady practice, advisers who accept these payments refuse to give investment advice to plan participants. They are worried about liability caused by their clear conflict of interest. I can understand their concern.

Since Congress is impotent, and most employers don't understand there is a better option, plan participants need to engage in self-help. Tell your plan administrator to dump your present plan. Replace it with an adviser who agrees in writing to be a "3(38) ERISA fiduciary." It's illegal for these advisers to accept "revenue sharing" payments or to have any conflicts of interest with the participants in the plans they advise. All plan participants deserve to receive completely unbiased investment advice and to have investment options that can be defended based on historical data (and not influenced by the size of the pay-off).

Your retirement with dignity -- and perhaps your being able to retire at all -- may depend on your taking charge of your 401(k) plan and wresting control of it from those feeding at the trough. ... 99821.html
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