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Postby admin » Tue Sep 04, 2007 8:39 am

This article is courtesy of

Advisor-sold investment loans pose conflict of interest
August 31, 2007 | Bryan Borzykowski

Offering an investment loan to help finance a client's mutual fund purchases might seem like a good idea, but one Ottawa-based lawyer questions the practice.

Harold Geller, an expert in financial advisor liability, says offering a client an investment loan can be a conflict of interest, pointing out that the more money advisors put into products, the more they make on trailer fees.

"The industry recognizes that these loans are advisor sold," he says. "Companies offering investment loans through advisors report a strong rise in these things being sold. That's a clear indication that the clients aren't questioning this; it's the advisors recommending it."

The main problem Geller has isn't that advisors are making more money; it's that clients don't know about the extra commission. "The advisor doesn't explain how this is going to increase his compensation, and then they're offside."

To solve conflict-of-interest issues, Geller says, it's imperative that the advisor tell the client he's getting a kickback when an investment loan is used to purchase additional funds. If the client is informed and agrees to the loan, then "it's not a problem as long as the advisor puts the client's interest first at all times."

"The advisor has a duty to say, 'I'm going to be making more money off you taking more risk,'" he says.

But many advisors don't disclose their fee structure or mention that more risk equals more money for them. Geller says the problem stems from advisors who don't know how to service their clients properly, rather than from malicious acts.

"The vast majority of people who are failing in this regard is because of the continuing problem in their education and failing to recognize the conflict and their duties with respect to the conflict," he says.

Mario Causarano, president and COO of AGF Trust Company, says using an investment loan has to make sense for the client, and if that's the goal then it's not a conflict of interest.

"From an advisor perspective, they have to do what's best for their client in terms of managing and helping them create wealth."

He says it's true that advisors get compensated depending on how much money goes into a product, but that's not the issue. "The real issue is that advisors have their clients' best interest in mind and if they are taking a long-term approach to their client base," he explains.

However, Geller is familiar with many cases where advisors don't take a long-term outlook with their clients' investment loans. The lawyer cites one case where a woman in her 70s sold her farm, and the advisor put all the proceeds into a leveraged product. When the investment lost money, margin was called, eventually draining the woman's entire investment.

"As a result, she was in her 70s and driving a school bus," says Geller, who acknowledges that this is an extreme case. "She's in her 70s, and it's ridiculous to think that she has a ten-year time horizon or longer."

Causarano says investment loans are generally of the 20-year variety. "These are long-term. It's not meant to be a short-term win. The advisor really needs to take a long-term perspective to managing a client's return," he says.

But even with a long-term view, many middle-class people can't afford to get into a loan situation like this. Geller says buying leveraged products is for "sophisticated, well-moneyed individuals who can withstand significant downturns in the economy."

He goes on to say that a well-earning, 40-something Chrysler employee might be able to invest long-term, but other considerations need to be taken into account, such as the risk of job layoffs or a failing economy, before moving ahead with an investment loan. "They might have the time horizon, but without due consideration, it really isn't suitable for that person."

While avoiding huge risks for the average person might seem like a no-brainer, Geller says a lot of advisors don't know enough about the potential downsides to investment loans. He adds that he's been to many information sessions related to these products but has never heard a company discuss the associated risks.

"Not once have I seen the downside risk illustrated in any of the sales material. They may explain it in small print, but even lawyers have problem reading the legalese. What about the average consumer?"

Causarano says that AGF helps their advisors understand what situations call for an investment loan, but education is a never-ending process. "There's always work to be done to get them to understand, not only the benefits but the appropriateness of the solutions in the right circumstances," he says.

"They've all got KYC rules, and those kinds of rules help them make sure they're making the right decisions."

Geller's not so sure that education coming from the mutual fund company is giving advisors the full scope of the risks. He says the companies promote the positive aspects of the products without fully disclosing the risks and suitability requirements.

He adds that companies fail to compare their products with ones from other firms, so advisors can't tell if their option is better or worse than someone else's. "That puts the responsibility on the back of the advisor to do expansive due diligence, or to have failed in their duties."

Whatever the reason advisors have for not understanding investment loans properly, it all comes back to the client and those extra trailer fees. If you take advantage of your client for personal gain, you can probably kiss your practice goodbye. "They're not going to be in business for long if they don't have their clients' best interest in mind," says Causarano.

Filed by Bryan Borzykowski,,

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Postby admin » Tue Sep 04, 2007 8:33 am

S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
If you ever want to see Personal Finance columnists from the various media outlets
froth at the mouth, bring up the topic of mutual fund fees. They will climb on top of
their pulpits and shout about the evils of the MER to any and all that would listen. While
I poke fun at them, they do have an extremely valid point. Fund fees in Canada are
high. In fact, according to a recent study released by Peter Tufano, Ajay Khorana, and
Henri Servaes, Canada’s mutual fund fees are the highest in the world.
Source: Mutual Fund Fees Around the World by Ajay Khorana, Henri Servaes & Peter Tufano, May 1/07
S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
IFIC and various industry groups have pointed out a number of perceived inaccuracies
in the study, namely the various reporting standards across jurisdictions may result in
the fees in other countries actually being higher than reported. Nevertheless, we do pay
the highest mutual fund fees in the world and that doesn’t appear to be changing any
time soon.
Fees, like it or not, are part of investing process. There are two main contributors to
fund fees in Canada:
i.) Management Fees – This is usually the biggest portion of the fund cost and
will range in the 1.75% to 2.0% range for Canadian Equity Funds. It typically
will be higher for more complicated mandates and lower for fixed income type
products. This fee pays for such things as investment management,
marketing and administrative costs. Also included in the management fees
are the trailing commissions that are paid to advisors, which will range from
0.50% to 1.0% depending on whether the fund was sold on a front end or
back end basis.
ii.) Operating Expenses – These costs actually refer to the costs of operating
the funds, and will typically include such things as brokerage fees, audit fees
and unit holder communications. Depending on the company and the size of
the fund, these additional costs can range anywhere from 0.15% up to
0.50% or more.
In addition, some funds are moving towards adding yet another fee into the mix – a
performance fee. With a performance fee, the fund manager will take a portion of any
upside gains, with the balance being passed on to investors. We like performance fees
as it tends to give the manager incentive to deliver strong performance for investors.
S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
However, in our view, if the manager wants to bring in a performance fee, then they
should reduce the other fixed costs of the fund as a break for investors. For the most
part, investors don’t even realize that they are paying these fees, performance or
otherwise, as they are deducted from the fund directly.
It is rather unfortunate that most investors are oblivious to fund fees. Very few realize
the impact that they have on investment returns.
S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
$24,000 while the 2% MER would have returned $22,000 with the 3% MER coming
home with just under $20,000. In other words, for every 1% you pay in fees, over a 10
year period, you lose about a quarter of your original investment. Over time, that can
really add up.
Another factor to consider when assessing fees on funds relates to the type of fund. For
example, fixed income funds with their relatively conservative approach tend to be
more impacted by fees than a more volatile equity fund. If we look at the range of
returns for Canadian Fixed Income Funds, the best performing fund over a 3 year
period returned 7.3% as of April 30, while the worst performing fund returned 2.0%,
which is 5.3% differential. When looking at Canadian Equity funds during the same
period, the best performing fund posted an impressive 28.9% 3-year return while the
worst performing fund returned 3.1% for a differential of 25.8. Looking at these gaps, it
becomes clear that the impact of fees will have a more significant impact on the fixed
income funds where the return differential is already so narrow.
Even though fees are a necessary evil, advisors can take steps to help control or at
least mitigate the fee on behalf of their clients. For starters, you can pay particular
attention to the embedded costs of any fund you use and balance this with the quality
of the investment products. Fees, as shown above, are something that needs to be
monitored; however, cost should not be your sole factor in choosing a fund. If using
active managers, one should pay attention to the manager’s investment style and
process, sell discipline, and historic track record, in addition to the level of fees.
When we analyze a fund using our quantitative model, we don’t even consider fees - at
least not directly. Our main reason for this is that our analysis is conducted using a
return stream that is net of all fees. Therefore, while we don’t directly account for the
impact, it is indirectly addressed through the higher the level of fees a manager must
S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
contend with. The higher the level of fees, the higher the hurdle the manager must
pass in order to pass along returns to the investors. That said, if we are looking at two
investment products of similar risk reward profiles, then we tend to favour the lower fee
product for the lower return hurdle going forward.
The second way to help minimize the fees your clients may pay is to switch to a feebased
platform for all or a portion of your practice. In a recent conversation with
Certified Financial Planner and author of the book To Fee or Not to Fee, Marc
Lamontagne, said that a fee-based approach is a great tool in servicing clients for a
number of reasons. Under the traditional commission based system, a good portion of
the advisors compensation comes from the embedded trailer fees. However, the
problem is that those trailer fees are set by the company and result in a higher cost to
the client. By employing a fee-based approach, the client will pay directly for the
service, which effectively allows the advisor to un-bundle the compensation from the
product cost. This serves two purposes. First, it allows advisors to consider other
products that they wouldn’t necessarily use with a commission based system such as
the lower cost index funds available from providers such as Altamira. It also allows
advisors to consider F-Class funds and funds from some of the more boutique
operations such as PH&N and McLean Budden, who don’t pay trailer fees to advisors.
The second advantage of employing the fee-based approach is that it allows for greater
flexibility in pricing. The advisor is now fully in control of what they charge for the
advice they provide their clients. For cost sensitive clients, the advisor can now
compete with some of the lower cost alternatives that clients can now access. In the
end, clients can receive better built portfolios at an all in cost that is less than what it
would cost using a traditional mutual fund portfolio, with the compensation embedded
in the management fees.
S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
There is no doubt that the fees that investors pay for mutual funds in Canada are the
highest in the world. Some companies have been quietly cutting fees, but to what
extent leads us to believe that their actions leave a bit to be desired. Others have taken
more public steps, such as capping MER’s or implementing a fixed administrative fee,
rather than the variable operating expenses. While this will help to provide some cost
certainty going forward, there is, in our opinion, still some room for further cuts to be
Final Thoughts
As an advisor, you can take steps to help to mitigate the impact of fees your clients pay
by paying attention to the fees in the underlying funds you use. However, a caveat is
that fees should not be the only factor you use in selecting funds. Attention still must
be paid to the manager, their style approach and risk reward profile. A good rule of
thumb is that when considering two products of similar risk reward profile, lean towards
the one with the lowest cost structure.
Another approach is to utilize a fee-based platform. By unbundling your compensation,
you can offer your clients a broader range of investment products that are not
profitable to you under the traditional commission model. This will also allow you
greater control in setting your compensation as your clients will pay a fee solely for
your services.
For more information on reducing costs or implementing a fee-based approach to your
practice, do not hesitate to contact me directly.
S p e c i a l R e p o r t
Paterson & Associates
Prepared by: Dave Paterson, CFA, Paterson & Associates
Phone: 416.706.5087 Web: Email:
Mutual Fund Fees – Are we Paying Too Much?
F o r F i n a n c i a l a d v i s o r u s e o n l y
J u n e 4 , 2 0 0 7
• This Report is for Financial Advisor Use only.
• This analysis is intended to be for informational purposes only. The information
provided in this report is not intended to constitute legal, accounting, financial
or tax advice. Many factors unknown to us may affect the applicability of any
statement or comment found in this report to your particular circumstances.
• Any performance data given represents past performance and should not be
considered indicative of future results. Principal value and investment return
of stocks, bonds and mutual funds will fluctuate, and an investor's
shares/units when redeemed will likely be worth more or less than the original
investment. Stocks, bonds and mutual funds are not CDIC-insured, may lose
value, and are not guaranteed by a bank or other financial institution.
Portfolio statistics change over time.
• This analysis is based on information believed to be reliable. Every effort is made
to ensure it’s accuracy, however, we cannot be held responsible for any errors
or omissions in the underlying data.
• The opinions, estimates and any projections contained in this report are subject
to change without notice.
Last edited by admin on Tue Sep 04, 2007 9:10 pm, edited 1 time in total.
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Postby admin » Sun Aug 26, 2007 7:28 pm


August 26, 2007
Everybody's Business
Avoid the Craziness and No One Gets Hurt

FOLLOWING are a few highly preliminary observations about the recent turmoil in the financial markets:


Hedge funds are largely a fraud. A hedge fund is supposed to hedge against market movements by unhedged instruments. In a very simple example, they are supposed to go short when the market is falling and thereby make money to hedge against losses in long positions.

I am sure that some were doing that recently, but from what I’ve seen, many were just highly leveraged bets on long positions. When the market turned sharply against them, they not only lost, but also sometimes had to sell under the compulsion of margin calls and thus hastily and for a loss.

These are not what I could call hedge funds. This is just gambling. Now we see that, at least for many funds, it’s not about investing prowess or sharp insights. It is, as my idol, Warren E. Buffett has said so many times, about “fees, fees, fees.” The model hedge fund is not a means to outperform the market. It is a means to outcharge the investor.


In 2005 and 2006, there was considerable discussion about whether hedge funds needed to be regulated. It was finally decided by the powers that be at the Securities and Exchange Commission that because their investors were often very rich people who were presumably sophisticated investors, the hedge funds needed only the slightest nod toward regulation versus, say, mutual funds.

For anyone at all familiar with rich people, the idea that to be rich is to be sophisticated is almost laughable. Rich people become rich generally in ways that have zero to do with sophistication in investing. I have seen this in spades this week with all of the shrieking from my rich pals about their investment losses. Maybe we need to rethink the notion that the rich do not need regulatory protection.

But more to the point, some of the largest investors in hedge funds are pension and welfare funds for unions and for other groups of employees. These people might well have been stunned if they knew the incredibly risky games that their “2 and 20” managers — charging 2 percent of total asset value and 20 percent of profits — were playing with their money. It is hard to believe a police officer in Los Angeles would really want his pension money tied up in the last slice of subprime, especially with leverage.

If hedge funds are to continue as an entity of some scale, it is high time they are required to display transparency, full disclosure and the kind of fiduciary duty that more sophisticated players in finance always need to show their investors. In other words, we have just seen that we need serious regulation of hedge funds.


Today’s news media will “catastrophize” anything they can. The subprime mess was always much smaller than the media let on. (See my column of two weeks ago.) In a nation of our size, in a world economy on fire with prosperity and liquidity, the losses were not large, but the media endlessly tried to scare us.

When fear can easily outrun fact, some basic education is required from our national stewards of finance. The performance by Ben S. Bernanke, the Federal Reserve chairman, was letter perfect. His injections of liquidity and his resolve to invite banks to the discount window to preserve liquidity were just what the doctor ordered.

Henry M. Paulson Jr., the Treasury secretary, was a slightly different story. He should have been putting things in perspective, assuring us that the government would maintain orderly markets, and that the real problem was fear itself. He did dramatically improve his performance last week, but my feeling is that he still does not realize that he is the financial steward for all Americans, and not just the powers of Wall Street.


If something seems too good to be true in the world of money, it usually is. The junk bonds that Drexel Burnham Lambert once ginned up were supposed to be loans to less-qualified borrowers that would pay higher rates of interest, but not be subject to default rates that offset those gains. They weren’t (except that once the markets had beaten them to a pulp, Leon Black, of Drexel and then Apollo, made a fortune buying them for a song).

Internet stocks were supposed to offer universal wealth despite paying no dividends and having no earnings. They were supposed to defy the conventional rules. They didn’t. Subprime was supposed to be, in effect, a Milken junk bond, with a low-rated borrower and high interest but defaults low enough to allow a profit to the bond holders. In fact, immense profits were made by the issuers, but when the real default rate appeared, the free lunch vanished.


After all, they are always changing, so their previous prices must have been a mistake. But they tend toward being right. (Martin Luther King Jr. said, “The arc of the moral universe is long, but it bends towards justice.” Something similar is true of the stock markets.) But in the short run, some drastic overvaluations and undervaluations can occur.

Something like this is happening now with financial stocks, which are at levels that would seem to forecast a second Great Depression. If that does not happen, in 10 years some smart people who bought financial stocks in the late summer of 2007 might be happy they did. It would take staggering mistakes of monetary policy to justify the prices of those stocks now. Unless Mr. Bernanke is replaced by Chuckles the Clown, it won’t happen. More to come.

Ben Stein is a lawyer, writer, actor and economist. E-mail:
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Postby admin » Wed Aug 08, 2007 6:02 pm

Research for the film BREACH OF TRUST ( )

is suggesting that there is an easily verifiable half dozen or so ways that the trusted financial services industry uses fraudulent means to trick clients into such investments (or investment fee structures) so that the clients will have approximately HALF as much money at retirement, and the advisor and his firm will have the other half:

Method of Fraud....................Example.................Cost to Public

Mutual fund fees .............Top fees in world......$25 bil each year

Bad Income trust schemes........Selling junk to seniors.....$24 bil

Underwriters acting as..............Eaton’s etc., .....$10Bil/year
bad dual agents

Selling the “house brand” fund.......Proprietary funds............$1 bil

Abuse of fee based accounts.........double dipping.....$1 bil per year
Putting buy and hold
clients in fee accounts

Market timing ................firms manipulating funds.....$300 mil

Deferred Sales Charge abuse.......selling clients the high cost choice..............$1 bil per year

Totals $ 62.3 billion

An even less pretty looking list, but more comprehensive one done at request of CTV's W5 investigators is now (April 15, 2008) posted at end of this flogg topic.
Last edited by admin on Wed Apr 16, 2008 1:49 pm, edited 1 time in total.
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Postby admin » Wed Aug 01, 2007 4:56 pm

IFIC estimates that net assets of the Canadian mutual fund industry at the end of June 2007 will be in the range of $704 to $709 billion. If the average MER is 2.40 % what are the annual fees collected by the industry? HINT: they’re more than $10, 000, 000, 000.

ASLDirect worth a look

Which mutfunds have reasonable fees and which do not? A handy site for finding out is [For a fixed monthly fee of $29.95 (which is tax deductible), investors have the ability to invest in over 1000 different mutual funds totally free of all traditional embedded sales commissions and fees]. The fund list under "Tools" on the LHS lists the MERs of most major Canadian fundcos - before and after the trailer commission rebates ASL Direct specializes in. (Trailer commissions are the annual payments salespersons receive for keeping clients invested in mutfunds; they typically account for 0.50%-1.00% of most MERs.) The ASL site helps identify which mutfunds are most responsible for the conclusion of an international research study by Peter Tufano et al that Canada's MERs are higher than those of 18 other countries. ... _id=901023
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house brand funds your interest?

Postby admin » Mon Jul 16, 2007 2:12 pm

Edward Jones to pay $75 million

By Aaron Siegel
July 16, 2007

Edward D. Jones & Co. has agreed to pay $75 million to settle charges with the SEC regarding inadequate disclosure.
The St. Louis-based brokerage was accused of not adequately disclosing its financial incentives to sell mutual funds from its Preferred Families of mutual funds.

The Securities and Exchange Commission also said that Edward D. Jones & Co. LP did not make adequate disclosures on its website for its revenue sharing, directed brokerage payments and other payments received for distribution of mutual fund shares.

Edward Jones was also accused of not disclosing information on its website regarding any of the 529 plans that it sold.

Under the settlement, Edward Jones agreed to increase its disclosures on its website about the preferred mutual fund family program and the savings plan.

Edward Jones was censured and agreed to pay $37.5 million in disgorgement and another $37.5 million in civil penalties.

The company settled the matter without admitting nor denying the penalty.
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fee account abuse.........are you a victim?

Postby admin » Mon Jul 16, 2007 2:11 pm

UBS settles suit for $23.3 million

By Diane Hess
July 16, 2007

New York state Attorney General Andrew Cuomo said today that UBS Financial Services, Inc. has agreed to pay a $23.3 million settlement for "inappropriately steering" brokerage customers into fee-based accounts, according to Crain's New York Business.
Under the agreement, UBS will reimburse approximately 3,000 customers $21.3 million and pay a $2 million penalty for placing clients into the fee-based accounts of its InsightOne program.

According to a statement issued by the AG’s office, UBS charged a 91-year-old InsightOne client more than $35,000 for four trades over two years, at approximately $8,800 per trade.

In another example, it says an 82-year-old account holder paid approximately $24,000 in InsightOne fees in 2003 while completing only one transaction.

"UBS convinced customers to rely on its advice and then abused that trust," said Mr. Cuomo in a statement.

"This major settlement is a win for customers inappropriately pushed into unsuitable brokerage accounts and a warning to the entire industry that customers' interests must come first."

UBS confirmed the settlement, but said that it is "disappointed with the AG's statement, which mischaracterizes the program and its operation."

The bank said it settled the case to avoid litigation, and that "despite what the AG's press statement alleges,” it did not “inappropriately steer customers into unsuitable accounts or switch them regardless of whether the accounts fit their needs."

UBS also defended InsightOne as a program that provides a choice of payment plans, and said in its statement that the "vast majority" of clients who chose InsightOne over the relevant period saved money.

A spokeswoman for the AG’s office said the settlement is part of a broader investigation -- the office is continuing to look at fee-based brokerage accounts throughout the state.

UBS reaches settlement with New York Attorney General on fee-based program

UBS will reimburse customers US$21.3 million and pay a US$2 million penalty for inappropriately steering customers into fee-based accounts

Monday, July 16, 2007

By James Langton

UBS AG confirmed that it has reached a settlement agreement with the New York attorney general regarding its fee-based brokerage program, known as InsightOne.

However, it expressed disappointment with the AG’s press statement announcing the settlement, which it says mischaracterizes the program and its operation.

NY’s AG Andrew Cuomo announced that UBS Financial Services, Inc. agreed to pay US$23.3 million in, what he calls, the largest ever settlement in the history of fee-based brokerage accounts. Under the terms of the settlement, UBS will reimburse customers US$21.3 million and pay a US$2 million penalty for inappropriately steering customers into the fee-based accounts of its InsightOne brokerage program.

“UBS convinced customers to rely on its advice and then abused that trust,” said Cuomo. “This major settlement is a win for customers inappropriately pushed into unsuitable brokerage accounts and a warning to the entire industry that customers’ interests must come first.”

His statement added that the settlement was reached after the AG’s investigation led to a lawsuit that asserted UBS placed thousands of traditional brokerage customers to InsightOne accounts, falsely promising comprehensive and sophisticated financial planning services. Additionally, the complaint alleged UBS was fully aware that InsightOne would be inappropriate and more costly for traditional brokerage customers who made few trades per year. The company had a legal obligation to keep these customers out of the program. Instead, UBS financially incentivized brokers to switch customers into accounts regardless of whether the accounts fit their needs, and then charged customers millions of dollars in unnecessary fees, it claimed.

UBS countered that it settled this case to avoid protracted litigation. “InsightOne was developed to benefit clients, not as a scheme to disadvantage them,” it said. “Despite what the NYAG’s press statement alleges, UBS did not “inappropriately steer” customers into unsuitable accounts or “switch customers into accounts regardless of whether the accounts fit their needs” or abuse the trust of clients.”

The firm added that fee-based brokerage accounts provide clients with a choice of pricing methodologies, and said that the vast majority of clients who chose InsightOne during the relevant period realized cost savings over the life of their accounts.

“UBS agreed to pay US$21.3 million to approximately 3,000 current and former InsightOne clients who, after extensive review, would have been better served in a commission-based account,” it allowed. “That number comprises less than 3% of the more than 100,000 accounts that were active in InsightOne during the relevant period. UBS believes this is appropriate and equitable under the circumstances. UBS also agreed to pay a US$2 million penalty.”
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Postby admin » Fri Jun 22, 2007 11:09 pm

NASD fines Wachovia Securities US$2 million for fee-based account violations

Regulator also orders firm to identify and pay restitution to 1,300 customers

Thursday, June 21, 2007

By James Langton

The National Association of Securities Dealers today announced that it has fined Wachovia Securities LLC US$2 million for failing to adequately supervise its fee-based brokerage business between 2001 through 2004.

In addition, NASD ordered Wachovia to identify and pay restitution to approximately 1,300 customers who were inappropriately allowed to continue maintaining fee-based accounts, or who were inappropriately charged account fees on Class A mutual fund share holdings for which they had already paid a sales load. The firm also is required to retain an outside consultant to review its process of identifying and paying restitution to customers.

The NASD found that during 2001 through 2004, Wachovia failed to establish and maintain an adequate supervisory system, including written procedures, reasonably designed to review and monitor its fee-based accounts. While the firm informed its brokers that a fee-based account was not appropriate for customers who made a limited number of trades, buy-and-hold customers, and customers with assets below US$50,000, Wachovia failed to put in place a system and procedures reasonably designed to determine whether Pilot Plus accounts were appropriate for its customers.

NASD's investigation revealed that:
594 Wachovia customers, who conducted no trades in their accounts for at least two consecutive years, paid the firm approximately US$1.9 million in fees.
Also, 620 customers held assets of less than US$25,000 for at least one full year and paid at least the minimum annual fee of US$1,000. This fee represented twice the firm's stated top rate of 2% allowed under the account agreement. During the time that these customers' eligible assets averaged below US$25,000 for at least one full year, they paid a total of approximately US$1 million in Pilot Plus fees.
All of these customers will be entitled to restitution under the settlement.
In addition,
Wachovia failed to reasonably enforce its written procedures designed to protect customers from being assessed both an initial sales charge and an on-going asset-based fee on the purchases of Class A shares of mutual funds.
The NASD also found that the firm failed to adequately supervise certain high revenue-producing brokers.
"Firms must have systems and procedures which are tailored to reasonably supervise their business activities," said James Shorris, executive vice president and head of enforcement at the NASD. "In the case of fee-based accounts, firms had an obligation to their customers to assess the appropriateness of such accounts both when the accounts were opened and periodically thereafter. Here, Wachovia failed to implement a system designed to ensure that an assessment of the appropriateness of the fee-based account occurred. This failure was compounded by the firm's failure to prevent certain fee-based customers from being charged both an account fee and a sales charge for the same mutual fund investments."

Advocate comments.........the above practices were and are some of the bad behaviors that I observed while inside the industry and were the same behaviors that the firm desperately tried to conceal. I hope and trust that legal action will ultimately reveal to the public this kind of behavior and that Canadians will everntually be protected. As it stands, with our "we police ourselves" attitude of financial regulation in Canada, the public is being "violated" by intentional skimming of this sort each and every day.
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Postby admin » Sat Jun 16, 2007 10:18 pm

Mutual funds are sold not bought: Q18: For the next few questions I would like you think about the last time you invested in a mutual fund. When buying those mutual funds did you:
(a) Purchase them from someone who provided you with Advice And Guidance
(b) Purchase them Online or from an individual who just took your Mutual Fund Order
(c) Don’t know
Response was (a) 85 % . Source: IFIC Investor Survey Sept. 29, 2006

source The Fund OBSERVER Mid- June, 2007
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Postby admin » Sat Jun 16, 2007 10:16 pm The Fund OBSERVER Mid- June, 2007

New paper: Losing Ground: Do Canadian mutual funds provide Fair Value for their Customers? , ... ground.pdf CONCLUSION: “The preceding financial analyses suggest that the vast majority of the 60% of the Canadian workforce who are not members of occupational pension plans will have a very difficult time generating adequate pensions by investing their retirement savings through the mutual fund sector. This is so despite the very high 20%-of-pay savings rate assumed in the example. The sales/investment expenses wedge being imposed by Canada’s for-profit financial services industry is simply too large…”. Scary.
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Postby admin » Sat Jun 02, 2007 4:05 pm

Interesting, both polls result in 85%:

- A recent survey of 1865 Canadian mutual fund investors. When asked why they had bought mutual funds, 85% said they were persuaded by “someone who provided me with advice and guidance.”
- IFIC’s Pollara Survey: 85 per cent of mutual fund investors confident in mutual funds meeting their goals

Make your own conclusions

Some rough notes:

Three seniors groups including NPSCF with 1,000,000 members stated in a joint report $5 billion of investor losses annually is due to excessive mutual fund fees.
Canadians pay the highest mutual fund fees in the world by far confirmed a recent study conducted by academics at Harvard and London Business School. The authors of “Mutual Funds Fees Around the World” found the all-in cost including sales charges of holding a mutual fund amount to almost 5% of an investor’s assets each year. This compares with less than 2% in the U.S. and rest of the world.
The industry is ripping off small investors says Glorianne Stromberg a securities lawyer. She cites a rule of thumb that every percentage point of fees, compounded over an investing lifetime, erodes an individual's eventual capital by 20 per cent. small investors taking all the risk will be lucky to beat a GIC over the long term.
Keith Ambachtsheer a pension consultant alluded to deception in “Losing Ground” written for the Canadian Investment Review, mutual funds are sold not bought, behavioural finance support this conclusion. In a recent survey, 85% said they were persuaded to buy mutual funds. Ambachtsheer says even before fees pension funds have higher returns than mutual funds.

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Postby admin » Wed May 09, 2007 11:24 am

So what is the big deal about an extra 2% added to your investment costs??? (over and above industry or world average costs)

Look on the web for any investment return calculator. Ignore the complicated, until you come to one which simply shows net future value on a dollar invested.

Calculate any investment return you wish, on any dollar amount that applies to you, and see what your future value will be in 35 years.

Then remove 2% from the return (the "take" that a self serving firm would try to add) and recalculate the amount.

You will see that after 35 years, the 2% extra charge will result in approximately HALF of your future money going to your investment provider, and your nest egg being about half of what it would have been without the extra billing.

This is tainted, self serving advice, when you are a victim of it. It is or (as the lawyers say) "in the alternative", should be illegal to do this to trusting clients.

If you dispute the 35 year holding period, use whatever you like. Most folks, including a 60 year old, can expect one of two spouses to live for 35 years, and in any event, if the money is not in your hands, ir will be in your heirs hands, and in either event, if it is invested, the firm doing the extra billing will still be getting the extra 2%, even if you are not there to see it.
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Postby admin » Wed May 09, 2007 11:12 am

mutual fund fees in Canada constitute "intentionally tainted" investment advice.

Why intentionally? Because of the inherent conflict of interest where mutual fund fees are one of the largest contributors to investor cost and drags on performance, while at the same time being the largest contributor to revenue for the advisory firm. How to balance that??

It seemed easy at one time and still is if you read the industry promises. Simply put the interest of the client first and all else will follow.

Not in Canada are these promises always followed.

Two independant (non industry, non sponsored) studies by separate bodies have recently alluded to the problem. Canada has an overly strong financial services sector, dominated by five large participants, combined with an overly weak regulatory regime, which in some opinions is "captured", or married to the industry.

One study, by U of T Pension Management Center director Keith Ambachtsheer, and professor Rob Bauer, University of Maastricht in the Netherlands concludes that Canadians are being overcharged by somewhere between $7 billion and $32 billion per year. "The transfer of wealth from Canadians is equal to nearly one quarter of the personal income taxes paid to Ottawa last year". (Toronto Star article by James Daw, May 8, 2007 "New Draft Says Fund Sector Still World's Most Expensive") (original study in Spring 2007 Canadian Investment Review)

Another study, carefully done and then re-done.......(after much hue and cry from those interests in Canada whose salaries depend on a perception of honesty) academics from Harvard, London Business Scool, and Georgia Tech. This study points out that mutual fund fees in Canada are highest by between 2% and 3% per year. These amounts are over and above the average amounts from 18 countries worldwide, and from study of 46,000 mutual funds.

2% to 3% on a fund industry that is sized at nearly $700 billion is between $14 bil and $21 bil per year in overbilling of Canadians. Of taking advantage of the trust, the vulnerability, and the lack of market competition in Canada to abuse client interests.

So we have two independant studies pointing to ten billion or tens of billions, (take your pick), of additional fees given to Canadians by our trusted financial system providers. If you pick a low number, say ten billion, that would be equivalent to the worst years profits of the top publicly listed casino and gaming resorts in Las Vegas. Pick twenty billion and it would be equivalent to the best year profits at these same five or six Las Vegas based companies. Pick the high range of 30 billion and you have approximately enough to run the entire province of Alberta for a year.

By any measure, the amount that Canada is paying is obscene, to the point of being abusive. Some say illegal based on lawsuits and fines imposed for such things in other countries. Time will only tell if Canada remains willing to allow five large financial firms plus a number of smaller ones to continue to "extra bill" this much out of the Canadian economy each year.


Las Vegas Casino illustration used with apologies to the Las Vegas gambling industry for the comparison:

Each year Las Vegas has 30 million visitors.
Canada has 30 million population.
Las Vegas has five or six large publicly traded resort and Casino companies where accurate financial comparables can be obtained.
Canada has five banks which do 90% of the financial business in Canada.
Las Vegas has a history going back to organized crime.
Canada's banks operate in "syndicate" on underwritings and other deals.
Las Vegas earns on average 5% "take" on the gambling dollars that flow through.
Canadian financial service firms have management costs and sales charges that approach, in some cases, and exceed in others, a 5% "take" from some mutual funds, or proprietary house brand funds.

Again, I wish to apologize to the Nevada gaming industry for any insult with this comparison. I would like to thank them for their honesty and integrity in how they represent themselves without misleading the public.
Last edited by admin on Mon May 14, 2007 12:21 pm, edited 3 times in total.
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Postby admin » Wed May 09, 2007 10:43 am

I have to disagree with Dan Hallet slightly, (in the article below) in that I believe when the study came up with numbers over 4%, they were including sales charges in addition to the annual costs to run the funds. My experience tells me they were not as far out as Dan suggests.

In Canada, we have a very high percentage of salespersons who charge commissions or a deferred commission to sell the product to the client. (60% to 91% depending on the company and time period)

In the USA, they call this kind of advice self serving and actually impose fines and costs on such practices. (see NASD web site on investor alerts, class b shares and the suitability issue of advising the client to pay the highest compensating choice) Such advice (to buy the fund type that pays the highest fee to the person advising it) is considered tainted advice in other countries. Unfortunately, due to a lack of regulatory effect and an overpowerful industry presence, here in Canada it is standard industry practice. I worked with too many people who made sure that they turned over clients DSC funds every few years, hitting the client with the DSC each time, and earning themselves a new 5% commission each time. This was not activity that was frowned upon by the industry, but to the contrary, was more likely to earn a person the "vice president" title at some firms.

My research for BREACH OF TRUST suggests that the Harvard, London Economics and Georgia Tech professors are right when they conclude this:

That the greatest input measure of a high fee country is one with a very strong bank presence and a weak regulatory or investment protection regime. That is becoming clearer and clearer to be the case in Canada. Canada accepts and receives tainted advice on a daily basis due to a lack of competition to the bank owed oligopoly, and a regulatory environment which is fairly captured and incestuous with the industry. If we assume nearly $700 billion in mutual funds held by the public in Canada, by very nearly any measure, we then must also assume Canadians are being gouged by tens of billions of overcharging, (over one percent on $700 bil) due to this regulatory failure, when combined with the power of the banks.

One only has to look at seniors and experts recently calling for criminal charges against some of the investment trust offerings, while the top securites regulator in the country was one formerly employed with one of the firms that dealt in these products. Are we likely to get investor protection from a situation like this?

In Canada, all too often, we receive tainted advice, and the greater crime is that tainted advice, unlike tainted pet or human food, is a product in which the provider of the product knowlingly gives it out, despite being aware of it's damaging effects on the financial health of the consumer.

Thanks for your good writing Jonathon. Please keep it up as it stimulates some very needed discussion and disclosure.

best regards
larry elford, (former CFP, CIM, FCSI, Associate Portfolio Manager, retired, 2004)

PS site has a short, rough, and unfinished intro to the film on it (slow loading but...) if you wanted to see some of the initial tone. It is being changed and improved as we speak.

Canada trails pack on fund fees
Pricing still 'competitive,' IFIC insists

Jonathan Chevreau
Financial Post

Tuesday, May 08, 2007

A revised version of a controversial academic study on mutual fund fees around the world still shows Canada's fees to be the highest of 18 nations.

When early versions of Mutual Funds Fees Around the World circulated last year, Canada's mutual fund industry howled in protest at the finding Canada topped all other countries in its Total Expense Ratios (TERs) -- the equivalent of Management Expense Ratios or MERs.

The accompanying chart adapted from Table 2 of the May 1 version of the study shows Canada's TER across all funds is 2.2%. That's higher than 17 other nations, which have a mean global TER of 0.95%. In all, 46,580 mutual funds were scrutinized around the world.

The first runner-up, so to speak, is Norway at 1.89%, followed by Switzerland at 1.39%. Across all fund categories, the United States has an average TER of 0.81% and the United Kingdom of 1.13%.

Canada's equity funds clock in at a world-beating 2.56% TER, compared to a global mean of 1.29%. Italy and Japan tied for second in that category, each with an average TER of 1.92%.

Canada's bond mutual funds beat all comers with an average TER of 1.79% versus a global mean of 0.91%. That compares to an average TER of 0.78% for U.S. bond funds.

Canada's balanced funds also retained their top-fee status with an average TER of 2.63%, compared with a global mean of 0.98%. Only Dublin (Ireland) came close in that category, with an average TER of 2.31%.

In an e-mail, Harvard Business School professor Peter Tufano said Table 2 does not account for GST differences in Canada and Australia and that other tables in the report better control for other factors.

But, the new report says, "even after controlling for these factors, there are differences across countries, which we relate to varying regulation, supply and demand."

Windsor-based fund analyst Dan Hallett says "the Canadian data at least looks more reasonable." Earlier drafts claiming total shareholder costs in Canada were 4.7% are absent in the new report, Hallett said. While picked up widely in the press, "it was a ridiculous number and one I challenged."

Gone too is a comparison of two Fidelity Japan equity funds which seemed to show the Canadian version's TER was far higher.

In October, the Investment Funds Institute of Canada disagreed with several findings. It said some low-fee Canadian funds were excluded, while other low-fee U.S. funds were included in the study. It said 85% of Canadians buy funds through advisors, more than do Americans. Advisor compensation in Canada typically adds 0.5% to 1% to MERs.

IFIC also said that while loads or sales charges are negotiable, the study assumed maximum published loads. And it found money market funds are more common in the U.S. "Canadians are invested much more heavily than Americans in pure equity funds and within that grouping in international funds which are more expensive."

In a reply to IFIC, the professors said "we can understand why you and your members are troubled by our findings."

However, they added, IFIC's comments did not address their central conclusions: that national fees are related to measures of investor protection, investor sophistication and certain supply factors.

Yesterday, IFIC president and CEO Joanne De Laurentiis said the report is clearer about the need to interpret the data carefully. "We should not be interpreting it as an indicator of what the end consumer pays."

Scott Mackenzie is president and CEO of Morningstar Canada, which compiled the Canadian data but did not analyze it.

"There's no question there are pockets of our industry that are pretty expensive," Mackenzie said yesterday, "In my view, it would be useful if the industry actually dealt with it from that perspective rather than justifying it all the time."

Mackenzie says Canadian fees are so high because investors don't seem to care. In other words, the industry charges what it thinks the market will bear.

De Laurentiis bristled at that: "That would be a conclusion based on data not available. Our members would say they feel their pricing is competitive --globally."

The report says fees are lower in countries with stronger legal systems or with regulations that explicitly protect investor rights. It found lower fees occur where there are rules governing conflicts of interest between investors and investment managers.

It seems to hint at the role Canada's banks play in keeping fees high. It says fees are lower in wealthier countries with more educated populations, "where there is either little concentration in the banking industry or where banks are prohibited from entering the securities business."

While the report focuses on average fees, Hallett says there are many ways Canadians can construct low-cost portfolios. We may not be able to buy U.S. mutual funds but are free to buy low-cost U.S. or foreign closedend funds or exchange-traded funds (ETFs).

- - - - Should Canadians care about our world-beating MERs? Post comments to the Wealthy Boomer blog at

© National Post 2007
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$600 mil damages to Canadian Public for mutual fund gouging?

Postby admin » Thu Mar 01, 2007 12:45 pm

With a number of settlements, fines, etc in the United States on the topic of "advisors selling clients a higher costing investment product when a lower cost but otherwise equal alternative was available", it brings into question the role of regulators in Canada. Where are their staff on protection of Canadian consumers? It seems they stand very firmly on the side of the industry instead of being balanced, objective and fair to the public.

I I were to take the number of mutual funds sales (dollar figure) from IFIC for the past ten years, and multiply that by the 60% to 85% average in Canada that the industry admits to selling using the DSC option (highest commission, highest cost to client), it would be a simple matter to calculate the amount of damages owed to Canadian consumers for overcharging them, by an industry that promises to be "advising" them.

First from IFIC site

average sales each year of approx $20 bil
times 60% (lowest end) of DSC sales estimates equals $12 bil sold by DSC
Times 5% commissions earned by selling the DSC version equals $600 million dollars in potential damages owed by mutual fund selling, (oops, should say "advising") organizations for overcharging or gouging clients.
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