[phpBB Debug] PHP Notice: in file /viewtopic.php on line 1002: date(): It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected the timezone 'UTC' for now, but please set date.timezone to select your timezone.
[phpBB Debug] PHP Notice: in file /viewtopic.php on line 1002: getdate(): It is not safe to rely on the system's timezone settings. You are *required* to use the date.timezone setting or the date_default_timezone_set() function. In case you used any of those methods and you are still getting this warning, you most likely misspelled the timezone identifier. We selected the timezone 'UTC' for now, but please set date.timezone to select your timezone.
GET YOUR MONEY BACK! Misconduct and malpractice. Investment industry "best and worst practices". Information to improve public protection. Expert witness services for industry and investors. Forensic investment analysis. • View topic - advisor fraud, professionals, or salespeople masquerading?

advisor fraud, professionals, or salespeople masquerading?

Index of forum topics, talk to us.

Postby Guest » Mon Oct 31, 2005 12:27 pm

The Securities Act allows salespersons to hold themselevs out as advisers. The firms lobbied their MPPs to allow this and the OSC can't do anything about it unless the law is changed.

Write to your MPP about this misrepresentation.
Guest
 

Postby Guest » Mon Oct 31, 2005 10:37 am

MR notice 349 refers to "employees of IDA member firms" which applies to officers, salespersons and non-registered individuals.
________________________________
Wendyanne D'Silva
Director, Registrations
Investment Dealers Association
wdsilva@ida.ca
phone: (416) 865-3032 / fax: (416) 364-9177



(This response from the IDA director of registrations tells me that perhaps my suspicions were correct. That persons who are registered with the securities commissions as "salespersons" are using title inflation and violating this IDA rule to call themselves something they are not registered as.
This is not only illegal, which is one crime unto itself, but it is misleading to the public and portrays a bit of a "name game" by so-called professionals.

Professionals should not be pulling the wool over the eyes of the public on thier qualifications. Doctors are not allowed to get away with title inflation.

To have this ignored, or worse supported by the large, bank owned firms is in my opinion indicative of the level of greed and corruption they are guilty of.

Another link in the chain of the class actions yet to come.)
Guest
 

Postby Guest » Fri Oct 28, 2005 11:14 pm

to explain the above post a bit for newcomers, I submit that most people across canada selling investments for IDa firms are in fact registered with the IDA, OSC etc as "salesperson". Yet they are using title inflation, and calling themselves advisor or whatever title makes more marketing sense. the notice mentioned in the "member regulation notice MR0349" refers to officers and members of firms who call themselves a title that they are not in fact registered or entitled to call themselves. I am sending this a second time to wendy at the IDA to clarify if this applies to salespersons as well, and if not, why not. It will form partial basis for those who follow in these footsteps and reach a similar conclusion to myself. My conclusion is that title inflation is being used to mislead and misinform clients into believing they have a special trust relationship with thier advisor, when in fact they may be dealing with a salesperson in advisors clothing. See Norah Cosgrove verses RBC to watch this exact defense being used to deny the 90year old client the trust relationship by RBC.



To: wdlilva@ida.ca
Wendyanne D'Silva, Director of Registration, Investment Dealers Assocaition of Canada

re: member regulation notice MR0349 second request


I was just writing about MR 0349, notice of registration category verses title used . After reading an article in ADISORS EDGE REPORT, Sept, 2005, titled "NAMES PEOPLE PLAY"

Is there a reason that this notice refers only to officers etc, and not to persons registered as salespersons? Are they under a separate notice suggesting similar requirement to use title based on registration?

thanks very much for your clarification
Guest
 

Postby Guest » Tue Oct 25, 2005 12:28 am

To: wdlilva@ida.ca
Wendyanne D'Silva, Director of Registration, Investment Dealers Assocaition of Canada

re: member regulation notice MR0349


I was just writing about MR 0349, notice of registration category verses title used . After reading an article in ADVISORS EDGE REPORT, Sept, 2005, titled "NAMES PEOPLE PLAY"

Is there a reason that this notice refers only to officers etc, and not to persons registered as salespersons or registered representatives? Are they under a separate notice suggesting similar requirement to use title based on registration?

thanks very much for your clarification
Guest
 

Postby Guest » Tue Oct 25, 2005 12:20 am

I asked the following question at the OSC town hall, and was given the answer below. (which I am not sure answers fully how they are allowed to mislead clients............)

18. Why are investment salespeople who are officially registered as either "registered representatives", or as "salespeople", at the Securities Commission, allowed to represent themselves to the public as "investment advisors", indicating a different level of fiduciary duty to the public, when the Securities Act is clear on which titles are allowed and which are not?
The OSC registers individuals in the categories of salesperson, officer, director or partner. These categories are then further designated as trading or advising. The firm can be registered as either a mutual fund dealer, an investment dealer, or as investment counsel or portfolio manager (ICPM). The latter ICPM category is what we refer to as an adviser (spelled “er”). While advisor (spelled “or”) is widely used in the industry to represent a salesperson or representative, it is not a registration category. The OSC does not register job titles.


Before investing, investors should check the registration of anyone selling securities or offering advice with the OSC. They can do this on the OSC website, or by calling the OSC Contact Centre.

(advocate comment: (or question) If the Securities Act is clear on what is allowed or not allowed as a title, is the OSC answer just another example of them passing the buck? What am I missing?

Update October/05, after finding IDA and MFDA sending out notices to members to add clarification on this topic:

MR0349 - Officer and Business Titles
MEMBER REGULATION notice TORONTO Suite 1600, 121 King Street West, Toronto, Ontario M5H 3T9 Telephone: (416) 364-6133 Fax: (416) 364-0753 CALGARY Suite 2300, 355 Fourth Avenue S.W. Calgary, Alberta T2P 0J1 Telephone: (403) 262-6393 Fax: (403) 265-4603 HALIFAX Suite 1620, TD Centre, 1791 Barrington S
/files/regulation/mr_notice/mr0349_en.pdf


This PDF notice suggests that "employees of IDA member firms may not use an "officer" title (quotes mine) that suggests he or she is registered in a capacity in which he or she is not in fact registered.

(why only applied to "officers" of IDA firms? Is it perhaps due to the fact that nearly "every" salesperson in Canada who works in an IDA firm, is representing themselves by a title (investment advisor) that they are not in fact registered as?

To confirm, find the registration category of your own salesperson in the OSC or the IDA web site. You will find thier business card title is not the same as what they are registered as.

This info comes from a good article by Philip Porado in Sept 2005, ADVISOR's EDGE REPORT, page 6, titled NAMES PEOPLE PLAY.
(Title inflation by todays investment salespeople to (mis) represent themselves and market themselves better to trusting clients)
Well done Philip, good article, great title.
Guest
 

Postby Guest » Mon Oct 24, 2005 6:45 pm

Most advisors are "crooks" but don't blame all of them, they're just doing the job, sales, they were hired to do. The real crooks are the investment bankers who feed them bogus deals like business Trusts. Those institutional salesmen could just as easily market quality deals, really represent investors but don't often because of a system that breads corruption.

(Admin writes:
This post almost makes my argument for me perfectly:
they're just doing the job, sales,


if they only were properly representing themselves as "salespeople", instead of misrepresenting themselves as "trusted advisors", and then putting a sales pitch on clients, then they would be forgivable)
Just be honest about what you do, either for clients, or to clients.
Guest
 

Postby Guest » Mon Oct 24, 2005 5:22 pm

sorry to offend

when referring to evil pigs to user your quote (I won't resort to that) I guess I am referring to the 80% of mutual fund sales that are done using the highest charging method (the DSC) and the hoghest (sic) compensation to the advisor. You should be commended for not DSC'ing your clients.

I think that advisors who represent themselves to clients as professionals to be trusted, and then put them into the highest compensating investment choice.............are nothing but salesmen. Not advisors. Not greedy pigs (your quote again). Just plain unprofessional, and mis-representing to the client.

If you choose to defend them, yet you do not practice the sales abuses that they do that is fine with me. It makes you somewhat more ethical than they, yet you accept the unethical ones into the industry. I cannot accept the bad ones since they make everyone (including yourself perhaps by mistake) look like "evil pigs". (your quote)

I also agree with your comments about the offloading of most costs to you, the advisor, not to mention the offloading of all risks to you, the advisor.

Quote:
Demonizing advisors will not help you in advocating for investors. I choose to advocate for investors by being a good advisor. I would appreciate the tiniest bit of respect for that.


I choose to demonize only those advisors who cannot display a "client first" method of operation. I take no offense from those who can demonstrate putting clients first. I choose to advocate for investors by helping to rid the industry of those who ruin the reputation of everyone with their greed. I respect your position. Will you respect mine? I got a hunch we are not even on opposite sides, just opposite paths.
Guest
 

Postby Advisor » Fri Oct 21, 2005 10:30 am

B.Comm Finance degree, and Certified Financial Planner actually, not that that matters to you and your lot.

I don't DSC my clients. I have some instances where we discuss a low load of 2% to cover my costs for an extensive financial plan or complicated pension workup. I discuss these options with my clients and we agree on them together. I do however have clients that have transferred DSC funds to me that I am trying to help them get out of as quickly as possible.

YOU have a problem in that you think that all advisors are greedy evil pigs. That is an insult and as you can imagine, impossible. I try to do the best job I can with the products I have on my shelf, and with the AVALANCHE of new costs because of the AVALANCHE of new forms and ineffective compliance being heaped on my by an ineffective regulatory body. Who should pay for those costs? Right now, it's me. Not the dealer, not the client, not the fund company. It certainly isn't the dealer (you would think that the dealer, being the member of the Mutual Fund Dealers Association would pay it's own assocation costs, but no, they charge those back to me, and I have to hire more staff to process more forms to put in more files that require more space and cost me more rent and leave me half the time I used to have available to spend helping my clients).

Demonizing advisors will not help you in advocating for investors. I choose to advocate for investors by being a good advisor. I would appreciate the tiniest bit of respect for that.
Advisor
 

Postby Guest » Thu Oct 20, 2005 6:49 pm

what in god's name are you doing calling yourself an advisor if you put clients into the DCS option when advising them mutual funds?

Just because it pays you the highest commission you can get away with, hides the commission from the client on the trade confirmation, fails to disclose the liability to them on the account statement, and earns you a trailer commission on top of the sales commission, DOES NOT make you an advisor.
It makes you a salesperson putting your interests in front of those of your clients. While promising and advertising a duty to care for your clients first.

Apparently you are a tad behind the times. Check the NASD web site on the topic of class b mutual funds to see why they call this activity fraud in some courtrooms.

Will there come a day when professionals in the industry actually act like it instead of claiming the title without delivery?

I am sure you are a very nice person and all, but with a three month Canadian Securities Course as the major requirement to entrance into this industry, please stop pretending all advisors are professionals just because they say they are. Judge them by their actions for clients, not by thier name.
Guest
 

Postby Advisor » Thu Oct 20, 2005 2:36 pm

I love how the fact that moving from DSC to FE costs investors NOTHING, and in some cases reduces their fees, only gets 13 words out of this entire article.

Nice bias!!! Gotta wonder what is in it for a journalist to try to turn something that is only positive for investors into something seedy. You are hurting this industry by doing that, not helping it.

Also didn't mention how in many cases if you don't convert your 10% free each year, you LOSE them, so any advisor who isn't on the ball and doing this with their clients is doing them a great disservice. How about THAT??? I wonder how you could make THAT sound dishonest?

nevermind, you'd find a way.
Advisor
 

Postby Guest » Sun Oct 09, 2005 7:07 pm

PERSONAL FINANCE:
DEFERRED SALES CHARGES
Trick of the trade for fund advisers bears scrutiny

By ROB CARRICK

Tuesday, October 4, 2005 Page B21

Under the guise of helping clients, investment advisers and mutual fund companies have devised a neat little trick for helping themselves.
Pay attention if you bought funds with a deferred sales charge, or DSC, because you may have had this happen in your account. It's common enough to have prompted the regulators at the Mutual Fund Dealers Association of Canada (MFDA) to issue a notice to advisers reminding them about their obligations to clients.

DSC funds are losing popularity, but they still account for a lot of fund sales because they enable you to avoid an upfront sales commission. Instead, you only pay if you redeem your investment in the six or seven years after you buy. What can be done about this potentially expensive limitation on your flexibility to change funds?

The fund industry's solution is to allow 10 per cent of your holdings in a DSC fund to be taken out each year without penalty. In a process that is starting to become automated, the money is then moved into a front-end load version of the same fund, with the upfront sales commission waived so that there is no cost involved.

The MFDA's concern is that these switches are being done without investors understanding the process or consenting, which might on the surface seem like a minor thing. After all, investors are getting out of their restrictive DSC funds and into front-load funds, which can be redeemed cost-free at any time, short-term trading fees aside.

The controversy comes from the fact that DSC conversions allow advisers to make more money in fees off a client's account while doing nothing extra to warrant the pay increase. Fund companies benefit here as well in that they've got a nice incentive for advisers to keep client money in the same funds once the DSC schedule is up, rather than moving to a different fund company.

Where clients provide their consent, those 10-per-cent annual DSC conversions are defensible. What's much harder to justify is a different switching scheme that has the same ultimate result -- more money for advisers.

Here, the switches involve money held in DSC funds for a long enough period that redemption fees no longer apply. At this point, a DSC fund is not different from a front-load fund in that clients have total freedom to move their money. Instead of just letting these DSC fund holdings alone, though, advisers are switching them into front-load versions of the same fund.

Some fund companies offer a lower management expense ratio on front-load funds, so in a few cases clients might gain from having their DSC money switched. But the true beneficiaries here are advisers -- again, they squeeze out a little more income for themselves and their firms.

To understand how this works, you have to know the differences between DSC and front-load funds from the adviser's point of view. Front-load funds bring in an upfront sales commission ranging from zero to 2 per cent, while DSC funds generate a fat commission of up to 5 per cent that advisers share with their firm.

Front-load funds also compensate advisers for client service by paying so-called trailer fees of 0.5 to 1 per cent a year in most cases. Because they offer a big commission at the beginning, DSC funds pay about half the trailers that front-load funds do. Here, you see how an adviser gets the best of both worlds with a DSC conversion. There's the upfront commission of up to 5 per cent and, after the conversion, there's the 1-per-cent trailer fee.

It's important to note that investors don't pay anything extra for these conversions. The MFDA says it's still possible for investors to be hurt through DSC conversions, however. For one thing, it's possible that a switch from a DSC fund to a front-load fund could be considered a sale of an investment, which means taxes would apply in non-registered accounts. Some fund companies have obtained rulings saying these conversions are not taxable events, but the MFDA says there's been no definitive word.

The real issue here isn't potential tax liabilities, though. Rather, it's the idea of an adviser sneaking around behind a client's back, with the collusion of the fund industry.

To prevent this, the MFDA wants advisers to tell clients all about DSC conversions, including any extra remuneration and tax implications, and then get a signature to indicate consent. There's no specific regulation saying this has to be done, but it is considered to be part of an adviser's duty to deal with clients in a fair, honest and clear way.

Ideally, investors who own DSC funds will have a chat with their advisers about conversions into front-load funds. Most investors will sign off on the move without another thought, even though there's an argument that says a pay increase for the adviser should be earned through enhanced service.

As for advisers who don't disclose their DSC conversions, it's hard not to see them as commissioned salespeople working primarily for themselves rather than clients.
Guest
 

Postby admin » Tue Sep 13, 2005 8:24 am

Canadians tired of high fees, lack of transparency in investment industry, survey finds

--------------------------------------------------------------------------------
Sep 8, 2005 - Canada Newswire

--------------------------------------------------------------------------------


Investors seeking low fees, transparent pricing, unbiased advisors


TORONTO, Sept. 8 /CNW/ - Canadian investors believe they are paying too much in fees to those who manage their money, and many find the complex fee structures of the investment industry confusing, according to a new survey by Decima Research.


The survey, commissioned by Stratos Wealth Management (Stratos), a division of MD Management Limited, reveals a troubling picture of frustration and dissatisfaction among Canadian investors when it comes to understanding and receiving value for the fees they pay for investment products and services. Stratos is a new business venture from the MD Financial Group, one of Canada's largest independent financial services organizations.


The survey also reveals that while many feel the investment industry lacks clarity and transparency in disclosing the fees investors pay, many have little or no idea what they pay - leaving a large proportion of investors in the dark when it comes to their personal financial management.


"It's clear that investors are dissatisfied with the fees they pay - and those who aren't should be, given the negative effect high fees have on investment returns," says Sandy Wilson, chief operating officer for CMA Holdings, the parent company of both MD Management and Stratos Wealth Management. "Canadians are looking for clear, competitive and transparent pricing - with no hidden fees."


Here are some key findings of the survey:


Investors tired of high fees, low transparency


- 48% of Canadian investors believe they are paying too much in fees, compared with just 40% who are comfortable with the fees they pay. A further 12% don't know one way or the other. Of those who offered an opinion, therefore, 55% believe they are paying too much.


- A surprising number of investors - 43% - believe that the investment industry lacks clarity and transparency in disclosing the fees investors pay.


Investors in the dark


- It seems that the information provided by investment firms is not doing the job. 44% have only "a vague idea" or "no idea" of the fees they pay on the management, purchase and sale of investments by their fund managers, securities dealers or investment advisors.


- Of those who do know what they are paying, 43% report paying 3% or more of their total investment portfolio in fees. Of that number, an incredible 6% claim they pay more than 10% in fees. This contrasts with data from Investor Economics, which show that, on average, Canadians pay between 2.2% and 2.8% of their portfolios in fees(x).


- Individual financial advisors seem to get a passing grade: 67% agree that their advisor or investment company has taken the time to provide information on fees. Still, almost one-third (31%) disagree, notwithstanding regulatory efforts to improve disclosure of fees.


Stratos Wealth Management is modeled on its highly successful parent company, MD Management Limited, part of the MD Financial Group, which manages more than $19 billion in assets. The company plans to leverage this experience by providing wealth management to all busy professionals seeking more customized, comprehensive and cost-effective services.


Stratos is based on a simple idea: offering quality investment products and ongoing financial advice and service - all for a low fee. The new company offers one other point of differentiation: its unbiased financial advisors are measured and rewarded based on client satisfaction - not sales commissions.


About the survey


This telephone survey was conducted with 376 Canadian investors between the ages of 25 and 64 between August 18 and August 21, 2005. It was conducted by Decima Research Inc., on behalf of Stratos Wealth Management. Results to the survey can be considered accurate to within plus or minus 3.1 percent, 19 times out of 20.


About Stratos Wealth Management (www.stratoswealth.com)


Based in Toronto, Stratos Wealth Management is a division of MD Management Limited, one of Canada's largest and most respected independent investment companies. With more than $19 billion in assets under management, MD Management has been serving members of the Canadian medical profession and their families for more than 35 years.


About MD Financial Group


MD Financial Group(TM), refers to various CMA Holdings Incorporated companies offering financial planning through MD Management Limited, mutual funds by MD Funds Management Inc. and MD Private Trust Company, discretionary investment counselling and portfolio management services through MD Private Investment Management Inc., executor and trustee services through MD Private Trust Company, banking referral services in collaboration and through National Bank and insurance products by MD Life Insurance Company and Lancet Insurance Agency Limited.


(x) For Canadian industry wrap products, "The Fee-Based Report," Investor Economics, Winter 2005, p. 87.
admin
Site Admin
 
Posts: 2797
Joined: Fri May 06, 2005 9:05 am
Location: alberta

Postby admin » Wed Aug 31, 2005 11:10 pm

NEW BOOK: Diana Salomas and Henry Dembicki, Why swim with the sharks? Paperback ISBN: 0973706007 Fine Print Press, April 2005. The authors may not be “financial gurus” but the 213 page book is full of common sense financial wisdom that will keep you firmly on track to early retirement (if that’s your goal), years sooner than you think possible. Lots of ideas on how to deal with financial advisers. Sample - "It'd be like asking someone who sells time-share vacation condos for help planning your holidays. Do you really expect them to tell you about cheaper alternatives, like camping?”
admin
Site Admin
 
Posts: 2797
Joined: Fri May 06, 2005 9:05 am
Location: alberta

advisor title misleading?...innapropriate for salespeople?

Postby admin » Wed Aug 10, 2005 10:34 pm

Read this if you are interested in discussion, debate, or the exploring some legal aspects surrounding the question of whether investment advisors are really salespeople masquerading as something that they are not. I am quite willing to be proven wrong on the topic by healthy debate.

Taking a short tour of some of the rules and regulations surrounding the use and or misuse of the “advisor” title, as it is either used or misused by a large majority of investment salespersons in Canada.

Starting with this OSC web site:
http://www.osc.gov.on.ca/Dealers/Regist ... s.html#857

This site gives us a glimpse into the more than one thousand (yes,1000) registration categories in the investment industry

1 Category number one, “advisor” is found in approximately NONE of the fifty five pages of registrants at the largest investment firm in the country.


2 Category number 1083 (salesperson)is by far and away the most common category of registration found at this same firm.

And yet, most of the registered salespersons at this firm are claiming the title of “advisor” on their business cards, their web advertising, and their promotions, and have done so since shortly after 1987 in an effort to improve or alter the public image and the marketing results of their sales job.

http://www.osc.gov.on.ca/Dealers/Requir ... rities.jsp

For each individual seeking registration in an advising capacity, we require confirmation of education and investment experience to demonstrate that the relevant proficiency requirements of OSC Rule 31-502 have been met; i.e. the requirements of either per s. 3.1 of Rule 31-502. The details should be provided in the proficiency and employment sections of the 33-109F4. The individual should include letters from previous supervisors, or, in the alternative, the contact information for those supervisors, to confirm the investment experience. This information should be provided in paper format to the Registrant Regulation Section of the OSC.

http://www.osc.gov.on.ca/Regulation/Rul ... 02rule.jsp

(From this page we see the proficiency requirements for advisors, in short, they need to be finished the CIM course or partly finished the CFA course etc. to call themselves this title)

PART 3 PROFICIENCY REQUIREMENTS FOR ADVISERS
3.1 Securities Advisers and their Representatives, Partners, Officers, Branch Managers and Compliance Officers
(1) An individual shall not be granted registration as a securities adviser or a representative, partner or officer of a securities adviser unless
(a) the individual has been granted registration previously as a representative, partner or officer or an associate partner or associate officer of a securities adviser, investment counsel or portfolio manager or as a securities adviser, investment counsel or portfolio manager;
(b) the individual has
(i) completed the Canadian Investment Manager Program or the first year of the Canadian Financial Analyst Examination Program, and
(ii) established that the individual performed research involving the financial analysis of investments for at least two years under the supervision of a registered adviser; or
(c) the individual has been granted registration as such by his or her principal regulator, as that term is defined in National Instrument 31-101 Mutual Reliance Review System for Registration, and that registration has not been suspended or terminated.
(2) An individual shall not be designated by a securities adviser as the compliance officer under section 1.3 of Rule 31-505 Conditions of Registration or as a branch manager under section 1.4 of Rule 31-505 Conditions of Registration unless the individual has been granted registration previously as a representative, partner or officer of a securities adviser, investment counsel or portfolio manager.


“After two decades, I have yet to meet a registered salesperson, calling themselves an advisor, who had actually completed the requirements necessary to lay claim to the “advisor” title. Yet it was used extensively, as mentioned above, for marketing reasons.”

“It was (and is today) misused, in my opinion, in order to lead clients into the false sense of security that they were not dealing with self-interested salespeople, but instead were dealing with client-interested professionals. It was used to lend credibility and trust to client relationships that were then often abused and used to pursue the greatest sales commissions for the occasional bad sales rep. In addition, most of the firms advertising and promotion supported this trusted professional stance.”

“However, when push came to shove, as it did when 92 year old Norah Cosgrove of Toronto took RBC to task in small claims court, their statement of defense spoke to the truth and spoke volumes about the misleading aspect of claiming trusted professional status:

RBC stated something to the effect that at no time were they acting in a fiduciary capacity and they felt they owed “no duty of care” to this and presumably all other RBC clients. See Ontario Superior Court, Small Claims action # for the exact wording of their statement of defense.”

“In summary, firms may talk the talk (when talk is easy), but fail to walk the walk. And when called onto the carpet by this disgruntled 92 year old client, to use one public example, they may recant even the talk. I maintain that use of the title, “advisor” on investment salespersons business cards commits each and every one of them to a fiduciary level of responsibility to the client, and to claim anything less is misleading and damaging to the public interest. This fiduciary level of responsibility to the client should and could be used by class action lawyers to obtain redress and compensation for all clients over the past decade or two, who have received a sales pitch by sales people, rather than the professional investment advice, as the firm and the representatives promised instead.”

“For a look to the future, and the potential size of the actions possible towards these firms, see the NASD web site and investor alerts: http://www.nasd.com/web/idcplg?IdcServi ... odeId=1249



In July 2002, NASD charged a broker with securities fraud involving, among other abuses, purchasing large volumes of Class B shares that kept his customers from taking advantage of the lower sales charges available through different classes of shares.
admin
Site Admin
 
Posts: 2797
Joined: Fri May 06, 2005 9:05 am
Location: alberta

Postby admin » Tue Aug 09, 2005 5:36 pm

Trailer mathematics and the impact on behaviour

Generally speaking equity mutual funds sold on a DSC basis earn advisers 0.5% trailer fees while funds sold on a front-end load (FEL) basis cost investors 1% of assets for trailer fees each year. On top of this, FEL investors pay a 0-5% sales commission to the advisor. Investors buying a DSC fund are tied to an early redemption penalty schedule typically from 6 percent down to an NIL. after six or seven years. Let's take a look at the numbers We’ll have to make a few assumptions as fund financial statements do not isolate out these commissions but you’ll get the idea.

For the advisor:
FEL: He earns, say 2% upon sale plus N (0.5%) where N is the number of years the fund is held
DSC: The advisor receives a 1.0% trailer for each year you hold the fund.
Roughly, without considering changes in NAV, his breakeven is 0.02 plus N times 0.005=0.01N or N= 0.02 / 0.005 equals 4 years
After four years he’d be better off had he sold you a DSC fund which in fact is the observed result in the majority of cases.

For the firm:
FEL: The firm didn't pay out any commission at the time of sale; the investor paid for this. The firm is committed to paying 1.0% trailers annually out of the management fee for as long as you hold the fund. The MER has this embedded, so in fact, investors pay the trailer-there’s no free lunch.
DSC: The firm is committed to paying out 0.5% trailers for as long as you hold the fund plus a 5% commission at the time of sale. This upfront commission is embedded in the MER; we’ll assume it's amortized faster than the typical six-year DSC penalty, say five years.
Thus, after five years the firm has received its original 5% (more, if the NAV has increased) and the MER which contains the 0.5% trailer fee is a flow-through cost thereafter. After five years, since the MER does not reduce, the firm is sitting pretty. If you redeem early, the firm’s cunningly designed redemption schedule guarantees they more than recover their initial commission investment.

For the investor:
FEL: The investor pays, say 2%, upon buying the fund and has 1% p.a. extracted from his assets as long as he holds onto the fund. Note that the MER of an FEL. sold fund is, with a few rare exceptions, the same as a DSC sold fund.
DSC: The investor pays 0.5% per annum as long as he holds onto the fund. This is subtracted from assets and of course reduces returns. If the investor sells the FEL. fund in six years or less his cost has been 0.02 plus N times 0.01. If he sells a DSC fund during this period his cost is N times 0.005 plus DSC penalty relative to N. According to some sources, the average hold period is four years. So, the FEL fund has cost him 6% of assets in trailers. The DSC fund has cost him 6% also. If he were to hold on to the DSC fund beyond six years, he'd be better off in terms of trailer payouts long-term IF the MER were in fact reduced at this point.

Here lies the catch. The MER’s of FEL and DSC funds are the same and stay constant. After the DSC penalty period (and even earlier) the MER should in principle come down as the initial 5% commission payment has been fully amortized (recovered). This doesn't happen, so someone's getting hosed -- it isn't the advisor or the firm. Guess who?

One other point. Most fund prospectuses and Annual reports boldly proclaim that the firm pays the trailers, not you giving the false imprssion of free service. Physically, they do cut the cheque but it's you who'se really paying the bill. This is one reason that investor advocates have argued that any redemption penalties after the firm has recovered its initial investment should be rebated to the fund. In practice, all early redemption penalty amounts go to the firm which is maybe why you should consider investing in fund companies rather than their funds.

You might ask why advisers act this way. A large part of the problem lies in the infamous compensation grid. This is a table, usually on one sheet of paper and usually marked “ for internal use only ” that sets out the percentage split the firm will pay the individual adviser. Down the left side are gross commissions and fee production levels in ascending order. Across the top are transaction commission sizes also in ascending order. The details vary from for the firm, but the percentage split for the individual advisor starts very small and rises with increased sales production and the size of the order. While the training courses for advisers promote understanding of their clients needs, establishing a suitable investment strategy and periodic review of accounts to make sure things are on track, the compensation grid virtually assures that unless they push product they will starve. Rookie advisers quickly learn that the way to stand well with the branch manager is to qualify for the list of producers published monthly in the branch, not by helping clients get the best possible return on their investments. Thus the system drives them to sell products rather than solutions. Many advisers feel the pressure to sell a small group of products rather than the best ones available. That also explains why low cost funds and ETF’s aren’t found in most client portfolios. It’s all in the math.
(thanks to Ken k for this article)
admin
Site Admin
 
Posts: 2797
Joined: Fri May 06, 2005 9:05 am
Location: alberta

PreviousNext

Return to Click here to view forums

Who is online

Users browsing this forum: No registered users and 1 guest

cron