Tricks of the Trade. Sales tricks, investment abuses.

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

Postby admin » Sat Aug 07, 2010 3:03 pm

Keith Ambachtsheer
Globe and Mail Update
Published on Monday, May. 21, 2007 10:02AM EDT
Last updated on Tuesday, Mar. 31, 2009 10:49PM EDT
The deadly combination of investor naiveté and industry marketing savvy is costing Canadians investing though mutual funds as much as $25-billion per year. Sustained wealth reductions of this magnitude will cut the retirement income of Canadians investing their retirement savings through the mutual fund sector in half or worse. This is a case of market failure on a massive scale, seriously undermining the retirement prospects of millions of Canadians, especially those working in the private sector. Rather than fiddling with ABM fees, it is this potential massive private sector pension shortfall that our politicians should be focusing their attention on.

The Rotman International Centre for Pension Management at the University of Toronto recently directed a study comparing the investment results of similar investment mandates between Canadian pension funds and mutual funds. It found that the pension fund results bettered the mutual fund results by a startling average 3.8 per cent per year. Applying the 3.8 per cent return ‘haircut' to the $690-billion Canadians have invested in mutual funds implies a wealth transfer from Canadian mutual fund participants to others (mainly to the mutual fund industry itself) of some $25-billion per year, leading to material shortfalls in retirement income down the road.

These disturbing findings provoke two important questions:

(1) Why do Canadian mutual fund investors willingly put themselves in this highly disadvantageous situation?, and

(2) Why do Canadian pension fund participants achieve materially higher returns relative to their mutual fund counterparts?

Half of the answer to the first question lies in the naiveté of mutual fund investors. Behavioural finance research suggests that most people are far from the rational ‘utility maximizers' theory assumes. Instead, they are financially unsophisticated, lacking in knowledge, self-discipline and firm preferences, and easily influenced by outside ‘experts'. For example, a recent Pollara survey asking Canadians why they had invested in mutual funds, found 85 per cent were persuaded by “someone who provided me with advice and guidance”. This response leads directly to the other half of the answer to the first question. The mutual fund industry has been very good at exploiting the naiveté of its customers. If customers want “advice and guidance”, the industry has been only too happy to provide it, either directly or through its coterie of well-paid financial advisers. And what is that advice? Naturally to invest in mutual funds and prosper!

Regarding the second question, pension funds produce materially better investment results because they do not pad their own bottom-line profitability by exploiting the financial naiveté of their ‘customers'. Instead, their single goal is to achieve the highest possible return for pension plan participants within pre-assigned risk budgets. So pension funds have no marketing costs. They have no obligation to produce profits for owners, the way most mutual fund management companies do. Pension funds also don't need to play bravado games trying to continuously prove they are smarter traders than the competition, often leading to far too high (and expensive) turnover rates. Instead, thought-leading pension funds have recognized that simply trading shares with each other is largely a waste of time and money. Instead, real investing is about transforming retirement savings into new productive wealth, from which future pension payments can be generated. This is why pension funds are becoming increasingly pro-active investors in major infrastructure projects around the world, and why they are willing to take a public company like BCE private when they believe value can be unlocked through that process.

What about Canada's governments? Should they treat the $25B pension haircut Canadian mutual fund investors will experience this year just a simple case of ‘caveat emptor'? Or is this a case of massive market failure requiring aggressive remedial action? The Australian and Dutch government responses to this issue 15 years ago are instructive: mandated coverage of their entire national work forces by occupational pension plans. This is pretty well the case for Canadian public sector workers. In contrast, only 27 per cent of our private sector workers are members of occupational pension plans. And the other 73 per cent? Our governments' current position appears to indeed be ‘caveat emptor'. Not so in the United Kingdom. A British government White Paper on pension reform calls for the creation of a National Pension Savings Scheme, which foresees enrolling the entire non-covered part of the UK work force in occupational pension plans specifically created for this purpose.

Meanwhile, our politicians seem to be content fiddling with ABM fees while almost three-quarters of Canada's private sector work force lack adequate pension provisions. Maybe we should close the honourable members' generous pension plans. That should get their attention.

Keith Ambachtsheer is Adjunct Professor of Finance and Director of the International Centre for Pension Management at the Rotman School of Management, University of Toronto. He is the author of “Pension Revolution: A Solution to the Pensions Crisis” (Wiley, 2007).

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

Postby admin » Fri Aug 06, 2010 11:37 am

7billion a year skimmed off our savings
More than £7.3billion a year is being “skimmed off” the value of Britons’ savings by City bankers and fund managers, an investigation by The Daily Telegraph has found.
By Holly Watt, Jon Swaine and Elizabeth Colman
Published: 10:36PM BST 30 Jul 2010

City bankers and fund managers are 'skimming off' more than £7.3billion a year from the value of Britons' savings Photo: Getty
A range of questionable hidden fees and levies are being deducted from investments, making it difficult for a typical saver to make money from the stock market. Britain’s eight million investors are losing an average of £800 a year each to the hidden levies.
An investor putting £50,000 into a fund providing typical returns over 25 years would lose out on £108,000 because of unnecessary charges, said David Norman, a former chief executive of Credit Suisse Asset Management.

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Customers have no way of claiming back their lost savings because fund managers are not doing anything illegal or beyond the rules. However, they are now likely to face increased scrutiny from regulators, while the Government could come under pressure to announce an inquiry to clean up the industry, which millions rely on to save for their retirement.
The problems have been compounded by the lacklustre stockmarket, which has hit savers as City firms have rushed to protect their profit margins by increasing fees.
Research has shown that fees in this country are far higher than those in America, where investment funds have been the subject of several regulatory and other official investigations.
Several senior City figures have decided to blow the whistle on the practices, with one fund manager describing the system as a “legalised cartel”.
Alan Miller, a former senior fund manager at New Star, one of Britain’s biggest investment firms, and a co-founder of SCM Private, told The Daily Telegraph: “The time is right for exposure of various elements of the industry.
“It is riddled with blatant self-interest and conflicts of interest that would never be tolerated elsewhere. Investors have become victims as the charges they have to pay have risen and risen while the returns they get have been consistently below par and the actual cost of managing their money has continued to fall.”
Research compiled by the Financial Services Authority and leading data analysts suggests that investors face losing three per cent of their investment each year in charges and fees. However, Mr Miller and Mr Norman said annual charges as low as 0.5 per cent were achievable.
When a saver invests in an ISA, unit trust or other fund, they are informed that they will pay an “annual charge” – typically 1.2 per cent of the value of their savings. The majority of funds levy exactly the same charge.
But the firm also deducts a range of other vaguely defined fees – covering everything from research to office costs from the savers’ money.
In particular, funds charge savers fees and commission every time they buy or sell shares. In some funds, hidden fees can be more than three times higher than the publicly-released annual fees.
For example, according to the data company Lipper, the Halifax UK Growth fund, one of the country’s most popular investment schemes, has only returned 7.47 per cent to savers over the past five years.
Therefore, someone investing £10,000 would have received interest of £747. However, that the fund has actually risen by 15.79 per cent and the extra returns have been pocketed by the fund manager and City brokers.
Data from Morningstar, a research company, shows the average investment fund has an annual charge of 1.25 per cent. But lesser known administrative fees amount to 0.45 per cent. And trading costs total another 1.35 per cent, according to the FSA and Financial Express. This 1.8 per cent being deducted from the total £406 billion invested amounts to £7.3 billion being “skimmed off” each year.
Julie Patterson, director of authorised funds and tax at the Investment Management Association said: “The UK fund management industry is one of the most competitive in the world.
“Less than 50 per cent of the annual management charge (AMC) is retained by the manager, to cover fund costs, including investment management and administration. The majority of the AMC is used to pay advisers, brokers and platforms. Charges for UK authorised funds are fully disclosed and they vary.”
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Thu Jul 22, 2010 8:43 am

How do investing costs hurt returns? Let us count the ways

The fees investors pay on their portfolio holdings
can have a large compounding effect on total gains.
Know what they are, says Garth Rustand of
Investors-Aid Co-operative of Canada

John Heinzl
From Wednesday's Globe and Mail Published on Tuesday, Jul. 20, 2010 7:00AM EDT Last updated on Wednesday, Jul. 21, 2010 5:07PM EDT
Fees are the silent killers of investment returns. Many investors are only dimly aware that fees even exist, but over the long term, fees can cause serious damage to a portfolio.
Consider that $100,000 invested at 8 per cent for 25 years will grow to $684,847. Take off just 2 per cent in fees and that same $100,000 will grow to $429,187 – a difference of $255,660.
Studies show that about half of mutual fund investors have no idea they’re paying any fees at all. What’s more, those that are aware of fees often believe that higher costs are the price for higher returns, when in fact keeping costs low is the key to successful investing.
With that in mind, today’s Investor Clinic provides a comprehensive list of the many fees and other costs investors face. This information comes from the Investors-Aid Guide to Protecting Investment Returns, by Garth Rustand, a former investment adviser who runs the Vancouver-based Investors-Aid Co-operative of Canada.
“To manage your investment costs, you need to know what they are. The investment industry charges at least 18 different types of fees, and taxes add a 19th,” Mr. Rustand writes.
“Some costs are transparently disclosed on investors’ statements, but many are hidden. Some are non-negotiable, while others can be waived upon request.”
See how many of these costs you are paying:
1. Stock-trading commissions. When you buy or sell a stock or exchange-traded fund, you pay a commission ranging from less than $10 at some discount brokers to $150 or more at full-service firms. The more you trade, the higher your costs. Mutual funds that trade a lot also have higher expenses.
2. Fixed-income commissions. These costs are built into the price of bonds, T-bills and even guaranteed investment certificates. Because investors often don’t see these costs, they assume – incorrectly – that they aren’t there.
3. Initial public offerings. No commission is charged on new stock issues, but a premium is added to the price to compensate the seller.
4. Management expense ratio. Expressed as a percentage of assets, the MER of a mutual fund or ETF includes the management fee, operating costs and trailer commissions paid to advisers. The average MER of an equity mutual fund in Canada is about 2.5 per cent.
5. Performance bonuses. Some actively managed funds pay performance bonuses to managers if they beat their benchmark. This may cause the manager to take additional risk.
6. Front-end loads. Some mutual funds charge upfront sales commissions ranging from 1 to 6 per cent. This commission is often waived if the investor asks.
7. Mutual fund switch commissions. Jumping from one fund to another can result in a charge of 1 to 3 per cent. This fee is also often waived upon request.
8. Deferred sales charges. One of the sneakiest types of fees, DSCs – also known as rear-end loads – are charged when an investor redeems a fund before a certain number of years has elapsed. The fees decline from a high of about 6 per cent down to zero after six or seven years.
9. RRSP administration fees. Depending on the size of your registered retirement savings plan, you could be paying an annual fee of $50, $100 or more.
10. Listed unit management fees. Closed-end funds charge annual management fees, which can be as high as the MER of a mutual fund.
11. Asset-based fees. Instead of working on a commission basis, some advisers and portfolio managers charge clients a flat percentage of assets – often 1 to 2 per cent – annually.
12. Layered fees. Investors who hold mutual funds in an asset-based account pay the mutual fund MER plus a percentage fee to their adviser, so it’s important to hold only low-cost funds in such accounts.
13. Fee-for-service. Some financial planners charge on an hourly basis for drawing up financial plans.
14. Tracking fees. Some planners charge a fee to track multiple portfolios at different financial institutions.
15. Transfer fees. When you move an account from one institution to another, the sending institution charges a “transfer-out” fee. The receiving institution will often reimburse you for this fee if you ask.
16. Liquidation costs. When an adviser at a new institution takes over an account, he or she may decide to sell investments to buy other products. Liquidation costs “can easily wipe out an entire year’s return,” Mr. Rustand says.
17. Capital gains distributions. When a mutual fund distributes capital gains, the money is taxable in non-registered accounts.
18. Price spreads. For illiquid stocks or ETFs, the price you pay to buy will be higher than the price you’ll get when you sell, all other things being equal. Mutual funds that buy or sell large blocks of stock can also cause price spreads to widen, adding to costs.
19. Taxes. Some mutual funds turn over 100 per cent of their holdings every year, which means investors lose about 25 per cent of their returns to taxes. “The most tax-efficient products are index funds or units. They have almost no turnover and let you compound your capital gains indefinitely,” Mr. Rustand says.
Is there an investing fee or cost we’ve missed? Let me know about it.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Tue Jun 29, 2010 5:49 pm

Assessing the skill of mutual fund managers

Laurent Barras, Desautels Faculty of Management, Financial Post · Tuesday, Jun. 29, 2010

How many mutual funds can consistently outperform the broad stock market? And does it make sense to try to identify these successful funds?

These are essential questions that individual investors or pension funds face when they make investment decisions.

Unfortunately, addressing these issues is difficult, as one can only rely on past returns to determine future performance among several thousand funds. In particular, investors must distinguish between true skill and pure luck, as managers that were lucky in the past are unlikely to reproduce the same performance in the future.

In a recent study published in the Journal of Finance (available on,Prof. Olivier Scaillet (Swiss Finance Institute-University of Geneva), Russ Wermers (University of Maryland) and I apply a new technique that separates skill from luck in order to precisely measure performance in the U.S. industry of actively managed mutual funds (equity only).

Our study comes to a rather sad conclusion:

n At the end of 2006, less than 1% of the funds in the population are able to outperform their passive benchmarks, after deducting transaction costs and expenses.

n Even worse, we find that 24% of the funds actually destroy value, since their benchmark-adjusted performance is negative.

Of course, these results do not imply that fund managers have no stock-picking skill – some of them do, but the price investors have to pay for it is simply too high.

This poor performance contrasts with the early '90s when the proportion of outperforming funds was close to 15%. This downward trend is striking and leaves little hope for recovery.

Several factors have contributed to this decline. First, the mutual fund industry has witnessed a substantial growth in the number of funds and an improvement in information systems.

These changes have certainly made markets more efficient and superior performance more difficult to achieve. In addition, many talented fund managers have migrated to the hedge fund industry for its more generous compensation schemes.

If actively managed funds have progressively lost their ability to generate superior returns, they should have charged lower fees to their clients.

However, this has not been the case:

n While the value of the assets managed by the U.S. mutual fund industry has skyrocketed from US$3-trillion to near US$10-trillion between 1995 and 2006, the average fund expense ratio has remained roughly constant at 1.5% per year.

n Stated differently, investors have not benefited at all from the economies of scale generated by the increasing value of assets under management.

Unsurprisingly, some investors are disappointed with active management because they are not getting the performance they are paying for.

As a result, they tend to focus on passive strategies that simply combine diversification and cost reduction. A striking illustration of this change is the success encountered by Exchange Traded Funds (ETFs): Between 2002 and 2006, the money invested in ETFs has increased by 50% per year.

Investors can use the wide range of ETF products to diversify across investment styles, such as "value" or "small cap", for an expense ratio as low as 0.2% per year. Investing in ETFs also represents a simple way to diversify internationally.

Another advantage is liquidity, since ETF shares are traded on stock exchanges, just like shares of large companies.

The recent development of passive investing is likely to affect mutual funds. Although they have been reluctant to reduce commission fees and operating costs, competitive pressures may force them to do so. From this perspective, the future is looking brighter for investors.


-Prof. Laurent Barras teaches at McGill University, Desautels Faculty of Management, Montreal.
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Mon Jun 28, 2010 9:28 pm

image001-10.jpg (12.45 KiB) Viewed 18146 times
Mike Macdonald
Monday, June 28, 2010 ... ommissions

SKIM: Skimmed milk refers to milk which has
had the rich cream taken off the top, leaving a
less rich milk product.

For our purposes skimming refers to removing
a hidden fee from a mutual fund portfolio prior
to valuing the portfolio for an investor.

It also leaves a less rich portfolio for investors.

The media and casual investors intently follow the stories of investment scams and how they devastate the lives of investors and their families. It is understandable of course: a good human interest angle will definitely get the attention of readers!

In fact, the damage done by investment scams and frauds is very minor compared to the damage done within the standard “rules of engagement” between investors and investment firms. F.A.I.R. Canada has reported that as little as 2% of the dollars lost in major frauds over the past decade in Canada involved a regulated investment firm. In short the odds of being “scammed” in a recognized mutual fund are near zero. The odds on having your investments “skimmed” however are close to 100%!

THE SKIM: As an investor you put money into a fund to gain diversification and professional management. Those are worthy goals and the fund industry is fully capable of delivering on both fronts. The issue that leads to the skim is putting a value on the services you want. In effect the industry has clouded the process on two key fronts by:

n Adding mandatory “advice charges” to many mutual funds, most often through hidden and excessive sales fees being mislabelled as an advice fee.

n Portraying licensed fund sales persons as “Financial Planners”, “Advisors” or some form of Vice President / Director. These titles imply an advice or planning offering often not available.

The net effect, for most investors, is a steady skimming of your investment portfolio in return for little or no advice or planning services.

In fact, there is no requirement for a fund salesperson (your planner or advisor based upon their job title) to even talk with an investor in order to justify the skimmed fees for “advice”.

You can, in effect, be charged fees for an unlimited number of years without even knowing who your current advisor / salesperson is! Your salesperson could sell their clients to other salespeople and the advice fee continues to be skimmed annually and forwarded to the new “advisor” you have often never even met.

WHAT IS MISSING: At its most basic level, what is missing is the quality professional advice and financial planning most clients need—deserve but cannot identify or articulate without having experienced it. Basic advice such as:

n a detailed financial plan,
n an annual review of the Investment Policy Statement,
n disclosure of material information on changes made in fund management,
n an assessment of client need versus risk
n etc.

All of these would require a salesperson to spend time before a meeting doing preparation, time in a meeting reviewing client requirements and current finances, and post meeting time to implement any required changes. If a salesperson spent 3 hours per client per year doing a proper review then the fee likely could be earned.

Does it happen? No it does not. How do I know? I worked for a major bank with a large financial planning team. The bank would never allow sufficient time to do even a basic annual review. We always had literally thousands of uncompleted reviews and no prospect of ever getting caught up.

Why? Take 250 clients times (x) three (3) hours and you have 750 hours of review work. That is roughly 100 days of work per year.

So, the salesperson gets the fee if they do not do the work and

n they get the same fee if they do complete the work.

How many salespeople do you think will opt to do the work? What if you have 300 or 400 clients? The system clearly cannot work as it is structured.


As an ex-banker I was always amazed that bank robbers would risk up to ten years in jail to rob a bank for $300 (average take from a bank robbery these days is quite low) when instead passing bad cheques/cheque fraud could earn you thousands with virtually no risk of jail time. Only a dummy robs a bank using a mask and a gun these days.

Similarly, I cannot understand why fraudsters would go through the hard work and stress of scamming investors (false documents, false statements, a risky paper trail, high risk of being exposed and charged with a crime),

n when you can legally “skim” investment accounts with fees that add no apparent value and are not required to be disclosed to investors.

What Does Add Up:

Investors pay a number of innocuous sounding fees either directly or indirectly from their investment accounts. Most investors work on a basis of trust and have no clue what dollar amount they are paying in sales commissions nor what they should be receiving for those sales commission fees. This is the environment that makes the skim possible and lucrative.

The average financial planner / salesperson may have a portfolio under administration of $20 million dollars. At a mere 0.5% skim the portfolio is diminished by $100,000.00 per year. Many trailer fees are as high as 1% which translates to $200,000.00 being taken every year from client accounts. There is no accountability that would require any work to be done by the salesperson.

n The money is skimmed by the fund firms and forwarded directly to the salespersons firm.

Many salespeople lock clients into the fund via a deferred sales penalty program for up to seven years. In the simple example given, with a 0.5% trailer fee, the total money skimmed by the average salesperson over that sales cycle will be $700,000.00. Now picture a firm with 1,000 salespeople on staff. I think it becomes clear why fund sales are such a lucrative business and why your salesperson can drive a nicer car than you can.

For those who say, well the salespeople have to eat too – I will remind you of two things:

1. Front-end loaded fees: Salespeople often receive 5% of the invested funds up front from the fund firm. On a $20,000,000 portfolio that is $1 million dollars. The commission is split amongst the 600 or so client accounts of the salesperson and is again a hidden charge.
(Investor Economics data suggests the average portfolio for a salesperson in the advice business is just over $20 million)

2. With the skimmed fees we are talking about a forced, concealed payment for a service that is often neither articulated nor delivered to the client.


We do not have to be skimmed as fund investors. You have several options to help fix the problem.

1. Set clear expectations with your salesperson for what you expect for the fees you pay.

a.) Communication should include monthly updates, and semi-annual conversations as well as at least one face to face meeting every year.

b.) Investment information should include an estimate and explanation of all fees paid from your account, performance results versus a set benchmark, and current versus targeted asset allocations.

c.) Planning information should include a review of your financial situation, income, expenses, and liquidity needs going forward.

2. Ensure that your salesperson has the capacity to handle your account effectively. A salesperson with 100 clients is more likely to have the capacity for a review than a salesperson with 600 accounts. Ask about support staff but remember support staff is to aid with internal paperwork not to handle client reviews.

3. Purchase low cost mutual funds and you will not have as many worries about skimming. You can purchase funds without imbedded advice fees from a number of fund firms and can purchase ETF funds without imbedded advice fees as well. Ditching your advisor / salesperson does not ensure you avoid the skim as discount brokers often take the skimmed fees that normally went to the salesperson.

n That is of course the height of skimming as discount firms are not even licensed to provide any advice to investors.

It is not easy to be a wise investor when the market is such a deceptive place.

It truly is a “buyer beware” experience and not a safe place for those who tend to trust without verifying.

sois mike
Posted by sois mike at 4:18 PM
Labels: hidden fund fees, skimming commissions, trailer fee ... ommissions
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Mon Jun 28, 2010 7:45 am

Deferred sales charges: Stealth wealth killers
In a fast-changing financial world with unprecedented market swings, this fund option should be avoided

Rob Carrick
From Saturday's Globe and Mail Published on Friday, Last updated on Friday, Jun. 25, 2010 8:05PM EDT
After the global financial crisis took a chunk out of Roger Ryan’s investments, his mutual fund companies took a turn.
Mr. Ryan invested $150,000 in three funds several years ago. He switched his investments into money market funds in the dark days of late 2008, and then cashed out altogether earlier this month. In selling his funds, he incurred $5,839.98 in redemption fees.
They call these deferred sales charges (DSCs) in the fund world and they’re a factor in 21 per cent of funds sold last year, according to data from the analysis firm Investor Economics. (advocate comment DSC funds have in previous years accounted for up to 80% to 90% of funds sold according to industry stats, MFDA, IFIC, with one company (CI FUNDs) chairman saying that up to 91% of sales depended on the DSC))
The DSC share of the fund marketplace has fallen sharply in recent years. Now, let’s finish the job and eliminate DSCs altogether. DSC funds were an irritant in years gone by, but in today’s fast-changing financial world they’re potential wealth killers that should be avoided.
Mr. Ryan is a 59-year-old freelance translator in Montreal who in late 2005 invested a small part of his savings in three mutual funds suggested by his adviser – Manulife China Opportunities, Fidelity Global Real Estate and a fund from the Franklin Templeton family that is now called Quotential Balanced Growth Portfolio.
Each of the funds was purchased in a DSC version, which means Mr. Ryan paid no commissions to buy them but put himself in a position of having to pay a redemption fee if he sold his holdings in the first seven or so years after buying them.
Mr. Ryan’s experience highlights the first big problem with DSC funds – investors too often don’t have a sense of what they’re getting into.
“I definitely didn’t understand,” Mr. Ryan said. “I certainly didn’t expect that four years down the road, a deferred sales charge of that size would still apply.”
Deferred sales charges work on a declining scale that typically starts at 5.5 per cent in the first year (sometimes that applies to the amount you invested, and sometimes to the current value of your holdings) and declines to 1.5 to 2 per cent in the seventh year before disappearing altogether.
DSC funds evolved as an alternative to selling funds with a big front load, the industry term for an upfront sales commission. In offering the DSC option, an adviser could say to clients that they would be able to put all their money to work – no commissions or fees to pay – and avoid redemption charges if they did the sensible thing and held for the long term.
Mr. Ryan doesn’t recall his adviser asking about whether he was investing for the short or long term, which highlights a second problem with DSC funds. If a lot of thought hasn’t gone into picking your funds, deferred sales charges can really compound your problems if you need to make changes in your portfolio.
The Quotential Balanced Growth Portfolio is a conservative type of investment, but the Manulife China and Fidelity real estate funds were significantly higher risk. You shouldn’t invest in them if you plan to invest for only a short time, if you need your money and can’t afford to lose any of it, or if you have a low tolerance for volatility.
“I have to say that I don’t recall my adviser asking those kind of questions,” Mr. Ryan said.
The question of risk tolerance became relevant in the fall of 2008, when the stock market was posting the worst losses many investors had ever seen. Mr. Ryan asked his adviser to get him out of the three funds he had purchased (the China fund was up a lot, the other two were down), and he doesn’t recall getting any pushback about needing to stay in for the long term.
Not that it would have mattered. “At that point,” he recalled, “I’m pretty confident I would have just said it’s time to get out.”
Mr. Ryan was able to move into money market funds at no cost because DSC funds allow switches within the same family without triggering redemption fees. But when he decided to use his money market fund holdings to buy a condo recently, the redemption fees finally kicked in. Between them and market losses, his $150,000 investment was reduced to $135,108.13.
Deferred sales charges are stealth wealth killers that investors can ill afford in these uncertain times. That’s a third reason to avoid DSC funds.
The standard investment industry justification for deferred sales charges is that they provide an incentive for investors to stay in their funds for the long term and not make self-destructive moves in and out of the market.
There’s some validity to this because investors do hurt themselves by jumping in and out of the market too much. But flexibility matters more. Today’s market swings are unprecedented and some investors are discovering that they – and their advisers – have taken on too much risk. It’s unacceptable to have to pay charges of up to 5.5 per cent simply to adjust a portfolio to make it more liveable.
Look to the commissions paid advisers who sell funds to understand why the deferred sales charge option persists. Fund companies pay advisers who sell DSC funds a 5-per-cent upfront sales commission that must be shared with their firm. The adviser then receives ongoing yearly compensation – called trailing commissions – of 0.15 to 0.5 per cent.
Advisers who sell funds with an upfront commission may charge 1 to 2 per cent, or nothing at all, and then collect higher trailing commissions of up to 1 per cent in most cases. DSC pays more in total compensation to advisers in the short term, it’s a wash with front loads over the medium term and it trails front load over the long term.
The reason why advisers prefer DSC in some cases is that it works better from a business point of view, said Dan Richards, a consultant who works with advisers to help them build their businesses.
For one thing, new clients sometimes require a lot of upfront planning work. The upfront pop of a DSC commission helps pay for that, Mr. Richards said. DSC funds also address those increasingly common situations where advisers work with new clients who end up moving on in fairly short order.
Also, some advisers just like getting paid upfront, Mr. Richards acknowledged.
“It’s the bird in the hand scenario,” he said. “That’s where advisers say, ‘Yeah, frankly I probably do get paid more over time if I do the front end, but I’d rather have the money today.’ ”
Mr. Ryan’s feelings about mutual funds suggest the industry itself might have something to gain by phasing out DSC funds. He said his experience has made him extremely reluctant to buy any more funds.
“I’m looking at ETFs [exchange-traded funds] in a whole different light now.”
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Re: Tricks of the Trade. Sales tricks, investment abuses.

Postby admin » Wed Jun 16, 2010 9:33 am

Here is another "insider view" that I will try and make sense of, enough to put in on my web site under sales "tricks of the trade".

When I was in the "biz" the holy grail of investment sales was to be a "million dollar" producer. That meant that a person generated one million or more in commissions from his trusting clients. That made one a demi god within the firm and earned all kinds of sales trips, sales incentives, sales rewards, and goofy titles like "vice president" etc., etc. (By the way, when I was in the biz and right up until sept 2009, each and every one of the 130,000 investment salespeople in canada were officially and legally licensed in a category called "salesperson". That title was just changed last year by your Securities Commissions in an effort to avoid the extensive litigation resulting from allowing people licensed as "salespeople" to represent themselves to the public as "advisors". But I digress)

To earn one million dollars in commissions can be a mathematical exercise (and often is for your sales manager) by just looking to a salesman's "turn ratio". Stay with me this will not become complicated. To get right to the simplest of math, imagine you are a salesman who holds $100 million of client assets within your clientele. (I had this amount after nearly twenty years of work, and it is not bragging, it is simply having 200 great clients who each had $500,000 in assets with me) Some salespeople in Canada manage books approaching $1 bil.

If you were a salesman with a $100 million in client assets, and you wished to generate $1 million a year in commissions, then you simply need to generate 1% each year in commissions (or fees) from your clients. One percent is considered reasonable for a retail account, and it tends to provide a decent balance between earning the broker a living and not gouging the clients.

But think about the poor young broker, who only has a few years under his or her belt, and might manage $10 million. How much commission is this person going to generate, and what amount of gouging are they going to do to get up the "ladder of success" at their firm. (my firm actually had a "ladder of sales success" which posted each and every persons sales commission generated in some kind of "look at me, and how well I am doing", sales contest, testosterone mentality. My sales manager in Edmonton actually referred to his top producers as his "big swinging dick's). Crude and unnaceptable, yes, but that was and is the mentality at far too many sales organizations who earn a living on commission. Again I digress.

If your young inexperienced broker has little in client assets, he may need to "churn" or turn over your account or "their" accounts at a much higher rate than is necessary. Why might they do this? Because in the selling business, the name of the game is "achieve or leave". If brokers in my firm (years back) were not generating over $200,000 in sales commission, we were told by our managers that we were "losing money" for the company. I imagine the bar has been raised every year so that the breakeven point might be more like $300,000 today. Ask someone who is in the industry. They may not tell you since conversations like this are not for public consumption.

Anyway, imagine the poor rookie broker with $10 mil in assets, trying to earn his $300,000 breakeven commission point. He has to churn his clients for 3% commission in order to reach his "achieve or leave" level. Just to keep his or her job.

I guess I am saying that key factor in "knowing your broker" (like "know your predator" in a survival game) is to ask them how long they have been in business, how many clients they have, and how much assets they manage. Rather than refuse this info, until they know what you know (this math) and why you are asking, they may proudly tell you the answers, although they might be inflated slightly. Discount them for the bullshit factor and then do the math. If they have $20 mil in assets, then they need to generate 1.5% annual fees or commmissions (on average) from each client, just to keep their job (estimated at $300,000), and 5% if their hearts and minds are set on being a "big swinging dick" as Don from Edmonton used to call them.

If your salesperson is one of those younger, or newer, or wants to be a "vice president", (run for the freaking hills if you deal with a vice pres) then you might be one of the clients he needs to generate 5% from. He needs to average that to be a big dick in the firm, you might pay more, you might pay less, but your return WILL suffer big time for them to meet sales goals.

But then Don was a dick himself. An old school sales manager type who used to come to town to pump up the troops, take everyone out for dinner and drinks and hit on the pretty secretaries in each office if he could get them drunk enough..............Why can't I stay on topic?

Protect yourself from the dicks of the trade, with this little mathematical formula. This formula in no way assures that your salesman will not lie to you, nor abuse you financially, as that is all to often the result from my experience. But it might come in handy as one measuring stick. Sticks, dicks and tricks.

Larry, with apologies for the image, from the US media, but it seemed appropriate to make my point.
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Sat Jun 05, 2010 8:51 am

Here is a great trick of the trade.........charge clients a full management fee of 2.5% or more while giving them simple stock market index investing choices (which require little to no expertise or management) . It is like charging customers for a gourmet prepared meal and giving them a microwave dinner.

see below ... in-canada/
Almost $250 Billion Invested in Closet Index Funds in Canada


Who would’ve thought that almost 40% of mutual fund assets in Canada were indexed? Definitely not the people selling them since these are all supposedly actively managed funds. (The Investment Funds Institute of Canada reports that as of April 2010, mutual fund assets in Canada are $620.4 billion.)
What Is A Closet Index Fund?
A closet index fund is a term given to an actively managed fund that looks so similar to the benchmark you’re left wondering why you are paying the higher costs of active management for it. If the fund’s holding looks really similar to the benchmark index, this is a closet index fund. One way of trying to sort through the thousands of funds available to screen for closet index funds is to look at the R-Squared rating. This is also known as the coefficient of determination and ranges from 0 to +1. The closer to +1 it is, the more closely it looks like it’s benchmark index. (Note: a high r-squared does not necessarily indicate a closet index fund, but it does mean the fund warrants a closer look.)
1,290 Mutual Funds Worth Over $245 Billion Qualify as Potential Closet Index Funds
I went over to and did a simple “Fund Filter” query and looked for all mutual funds that had an R-Squared value of 0.9 or higher. I came up with 1,290 funds with a total of $245,343,380,000 in assets amongst them. The asset-weighted MER on these funds was 1.98%. That works out to almost $5 billion in Management Expenses. Assuming the going rate for advice is 1.00%, then if advisors switched investors out of these potential closet index funds and into actual index tracking funds you might find a portfolio MER closer to 1.35% (not all funds are domestic mandates, remember). This would yield a savings of over $1.5 billion annually to Canadian investors. Wow.
YMMV (Your Mileage May Vary)
Your cut-off for a closet index fund may be higher/lower than 0.9. Further, more analysis is needed to determine if the funds are closet index funds. It IS possible that a fund with a high r-squared is not a closet index fund.
Not all funds on this list (i.e. the pooled funds) included advisor trailer fees which means the weighted average MER would’ve been higher on an apples-to-apples basis.
Clearly you could save even more by not using an advisor, but that is a different story for a different time and for the record, I think the vast majority of investors need an advisor of some sort (…a good advisor – which again is another can of worms altogether).
Do not blindly sell your funds if they have a high R-Squared rating – do your due diligence, or speak with a qualified financial professional for more guidance. Just providing food for thought here.
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Tue Jun 01, 2010 6:50 am

Online tool breaks out mutual fund fees

Vikram Barhat / May 31, 2010

With the Ontario harmonized sales tax (HST) set to take a bite out of almost all Canadian mutual funds, The Investor Education Fund has launched a new online calculator to help Canadians determine the impact of the increase in mutual fund fees.

The calculator shows investors how fees and other costs can affect the return of different funds.

"Canadians pay some of the highest mutual fund fees in the world and many investors don't understand the impact they have on their investments over the long term," says Tom Hamza, president of The Investor Education Fund. "According to a recent Morningstar study, investors in Canada pay between 2% and 2.5% for equity fund fees versus less than 1% paid in the United States and between 1% and 1.49% paid in Australia and New Zealand."

It should be pointed out that Canadian MERs include some costs which are charged separately in other countries.

Those fees are set to go up for investors with the introduction of the HST in Ontario this summer. Because the vast majority of mutual funds are domiciled in Ontario, investors across the country will be subject to the new tax. An existing MER of 2.1% (including GST) could increase to 2.26% with the introduction of the HST. Assuming a portfolio of $500,000, the impact would be an $800 drag on returns in the first year alone.

The Mutual Fund Fee Calculator can also provide past average returns and the MERs of thousands of funds available in Canada.

Investors simply enter the names of their mutual funds, their investment amounts and the length of time expect to hold their funds. They then choose between the available options on sales fees and the calculator estimates the final investment returns based on the historical performance of the fund.

Pie charts and numeric details offer a comparative illustration of the impact of fees over time on two different mutual fund investments.

"A 1% difference in fees can make a big difference in the amount of money an investor makes over the long term," says Hamza.

There is an option to create a custom scenario in which investors can choose both the MER and the past average return percentages.

"The Mutual Fund Fee Calculator helps investors understand important details about their mutual fund investments — in particular the type of fees they're incurring and the effect these fees have on their final investment returns," says Hamza.


Filed by Vikram Barhat,
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Wed Apr 14, 2010 5:32 pm

images.jpeg (2.75 KiB) Viewed 18652 times,1,2752436.column

Fees can take a big bite out of retirement fund contributions

For the average saver who adds $4,000 annually to an IRA, a whopping 54% of the contribution goes to fees, a trade group's study finds.

Kathy M. Kristof

Personal Finance

April 11, 2010

Making an annual contribution to a retirement plan? A recent study could give you pause. It says that more than half of the average person's IRA contribution is being eaten away in fees.

"People need to understand that fees are lethal," said Mitch Tuchman, chief executive of a self-help portfolio management website called MarketRiders, which conducted the study of fees. "They are a hidden tax that people have no idea they're paying."

The study focused on the $1.88 trillion in retirement money that's invested in mutual funds. (An additional $2.3 trillion in retirement money is invested in certificates of deposit and insurance products. The study did not attempt to assess the effects of fees on that portion of retirement savings.)

Using data published by the fund industry's primary trade group, the Investment Company Institute, Tuchman estimated that fees paid by the average investor amounted to roughly 2% of assets -- or some $2,180 annually.

The average saver contributes $4,000 annually to an IRA, which means that a whopping 54% of this contribution is eaten up by fees each year.

Allan S. Roth, a certified financial planner and Colorado-based wealth advisor, has also analyzed investor fees and believes that Tuchman's conclusions are on the mark.

"Fees are a huge deal," said Roth, who sponsors a website called "The more you save, the bigger the impact."

Fees hit diligent savers the hardest because mutual fund fees are calculated as a percentage of your assets. Thus, a person with a $10,000 account would pay just $200 annually if he or she were paying 2% in fees, while a person with a $100,000 account pays $2,000 for essentially the same service.

"Even though 1% or 2% seems like a little bit, it's 1% to 2% of all of your money every year," Tuchman said. "That's a big portion of your investment profits."

In fact, it's about half of the average investor's "real" return, Roth said.

The typical investor can figure on a 7% to 7.5% average annual return in a diversified portfolio, Roth said. But about 3% of that return is eaten up by inflation. If you earn 7%, your return after inflation is just 4% on average. Now pay 2% in fees and roughly half of your return is gone.

What does that cost you in real money? The answer depends on how much you save and for how long.

Tuchman estimates that a 35-year-old who puts $4,000 in IRAs each year will lose roughly $1.1 million to high fees and lost investment income by the time she's age 76. (That assumes a 7.5% average annual investment return. If she saves more, or earns a better return on her money, the cost is higher.)

So, what's the solution? Both Tuchman and Roth recommend the same course: Buy only index mutual funds or so-called exchange traded funds, which mimic the returns of a broad market index.

Index funds and ETFs typically charge paltry fees because there's no "management" required. They simply buy all the stocks that make up a set index -- such as the Standard & Poor's 500 -- and hold them.

The only time these funds will trade the stocks they own is when a company disappears from the relevant index as the result of a merger, acquisition, business failure or change in the index structure.

(That's a benefit to people who invest outside of retirement accounts too, Roth notes. That's because actively managed funds trade stocks, generating capital gains that investors have to pay tax on each year. Because index funds don't trade, they don't generate taxable gains. Their shares appreciate, just like the others. But you have to pay tax on the gains only when the stock is sold.)

What if you're investing in a 401(k) plan that doesn't offer index funds or ETFs? At least find out how much you're paying, Tuchman suggests.

To do that, look up your fund at Morningstar, an investment research and mutual fund rating firm headquartered in Chicago.

At the top of the page, you can enter the ticker symbol for any fund you are invested in to access a full report. Near the top of the fund report page is a button for "expenses." Click on that and you can find out what percentage of your assets are being paid out to manage the fund.

Now multiply the amount you have invested in that fund by the relevant fee to find out how much you, personally, pay annually. If you had $100,000 in the Vanguard Mid Cap index fund (VMISX), for example, you'd discover the total fees paid in 2009 amounted to 0.14% of assets. That works out to a cost of $140 a year.

On the other hand, if your assets were invested in Van Eck Multi-Manager Alternatives (VMAIX), an actively managed fund that tries to beat market performance, you'd be paying 2.3% of your assets, or $2,300 annually.

"The investment advisor does no more work to manage a $25,000 IRA than he does to manage a $250,000 IRA, but the customer is charged 10 times more because of the asset-based fee model," Tuchman said.

"So the closer this investor gets to retirement, the more he's paying in fees," he said. "It's like pressing on the brakes when you start getting near to your destination."
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Sat Feb 27, 2010 9:41 am

Think about it. In a average Canadian mutual fund, 4% of your investment disappears annually. By comparison the aggregate dividend yields of U.S. and Canadian markets are currently 2.7% and 1.95% respectively. At this rate, you miss completely the first 2% of annual capital gains on your investments, and if markets are flat, these costs eat up 2% of your capital annually.

In the U.S. it is estimated (see Swedroe or as a PDF doc.1552E and ETFdb or as a PDF doc.1553) that society in general incurs U.S. $ 80 billion in unnecessary costs due to active management. We know of no specific equivalent estimate for Canada where the market is much smaller, but where management fees are also much higher, but Robert Pouliot doc.1559 estimated in 2007 that mutual fund fees in Canada were between 23 and 46 billion dollars higher then they should be in Canada. What we also do know is that the Canadian mutual fund industry estimates the number of direct and related jobs at 90,000, a staggering number for a country of thirty million people:

The mutual fund industry currently employs more than 90.000 Canadians, both directly through fund management companies and fund dealers, and indirectly through operational staff, researchers and administrators. Source: IFIC or as a PDF doc.1554. ... ully+saved.
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Sat Feb 27, 2010 9:40 am

Management expense ratio (MER)

Here is the sad story as told by Morningstar:

An average Canadian equity fund purchased through an advisor with a front-end load might conservatively carry 3% to 4% in recurring annual fees after accounting for the fund's management-expense ratio (MER), trading costs, and any associated load. That takes a huge bite out of the long-term expected return on equities, which many experts peg somewhere in the high single digits.
A big part of the problem is that the rich trailer fees paid to advisors for as long as you hold the fund (0.5% to 1% annually for a typical equity fund) are bundled right into its MER whether an investor makes use of an advisor or not. And while there are lower-cost actively managed mutual funds out there, they typically require more substantial initial investments. An investor with less than $5,000 to invest who doesn't need the help of a financial planner is going to find it very difficult to avoid paying a trailer fee. Source: Morningstar or as PDF doc.1552. ... ully+saved.
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Wed Feb 24, 2010 4:06 pm

Why MFs should be only a niche product for investors.


Mike Macdonald, B.A. (Econ), FMA
Vice President, Consulting
Weigh House Investor Services
300-3310 South Service Road
Burlington, On
L7N 3M6

905-573-6533 office
416-802=7967 cell
1-866-918-0550 x 225
Fax 416-640-0552

Mike Macdonald

Tuesday, February 23, 2010



A lot is being written about Mutual Funds being the investment of choice by Canadians. The fund industry has done a great job of sales and marketing, and since the bankers joined the fund party there are really very few competing products to turn to. In fact many Canadians would have no idea what alternatives they should consider if they did chose not to invest in Mutual Funds. So that begs the question; why are so many bloggers and DIY investors so upset about funds and how they are sold? Can funds be all bad if almost every Canadian adult seems to own at least one fund?

Let’s start by acknowledging that few things in life are all bad. Mutual funds began life as a low cost, highly diversified product that allowed average investors to participate in the equity and bond markets. In the 70’s and mid 80’s you could well have made an argument that freeing investors from falling GIC rates allowed investors to break free from the bank GIC’s and share in the rising stock markets. So let’s concede that mutual Funds began their life as a very good concept to bring investment options to the masses. Having conceded that point, what is so different today?

Let’s review some of the old strengths of funds and why they might no longer be strengths in today’s world!

Old: When funds first gained popularity investors generally could not invest in equity markets unless they utilized a brokerage house that charged what we now call “full service” brokerage fees. In short you might pay $300.00/trade and constructing a diversified portfolio could cost $8,000-10-000 in broker fees. That generally meant most investors were shut out of the equity markets unless you were wealthy.

New: Today investors can utilize a discount broker (DB) to access the equity markets at fees ranging from $10-29/trade. The DB web sites offer research that is less likely to have a bias and that allows investors to utilize security screens and other investment tools to assist them in choosing securities.

Old: Fund fees in the booming 80’s were often in the range of 3% MER on funds that were earning 12-15% in annual returns. Investors looked at the net return (often over 10%) and felt the returns in excess of GIC rates warranted the fund fees ... and they were probably right.

New: New products such as ETF index funds have been created. The new ETF index funds offer low cost diversified portfolios at MERs that are often less than a tenth the cost of current mutual funds. Now you can build a whole diversified portfolio for less than a half of one percent in fees. On top of that, the past decade has seen extremely low returns on equity markets. With MERs refusing to decline as economy of scales grow, investors are now finding themselves paying over 2% in MERs for funds that have lost them money for years. While a 3% MER once allowed for a 10% net return on funds, investors are now paying 2.5% to earn less than they would make by buying a GIC.

Old: When funds first arrived on the scene they were often small and nimble. A high quality manager could make a difference and truly add value through smart trading decisions. As well, a well connected manager could gain advantage by having better knowledge of a specific firm or market sector. Indeed, if you check some of the largest and most successful long lasting funds you will see many examples of funds having a great first few years in the market.

New: We now have over 2,000 mutual funds in Canada holding over $600 billion in assets. Fund managers also manage pension plans in many cases. Every one of the 2,000 funds has a team of highly trained analysts and portfolio managers with MBA’s and CFA’s. It is now virtually impossible for a fund manager to outperform the markets because everybody has similar skills. As well, the fund industry is so large that they “are” the market! Trading between fund managers nets out over the year but the fees continue to increase with every trade. New laws on disclosure of financial data mean that the well connected broker/trader can no longer get information before the market. Despite what you see on TV, every fund manager knows where Russia is located and that they buy winter tires!

THE FEE FACTOR: I was reading a popular finance blog by a Canadian journalist and I am sure one of the comments must have come from a fund salesperson (unattributed of course). He expressed the view “fees do not matter, it’s the net return on investment that counts”. Only a fund salesperson could believe the two issues are not connected to one another. I agree wholeheartedly that fees are irrelevant if a fund can consistently earn better than the benchmark return after fees! The problem of course is that fund returns very rarely manage that feat. In fact the frequency of mutual funds beating the benchmark seems to be about what you would randomly expect with 2,000 managers trading securities with each other. Typically, less than 1 in 5 can match the standard benchmark indexes for any length of time. For those looking for empirical evidence, you can review the Standard & Poor’s SPIVA scorecards.

I would suggest the question is not “can a mutual fund with a 2.4% MER beat the index”, but rather can anybody tell me which one will manage the feat in any given year? If not, why would I not just buy the index for one fifth the cost?

SOLD NOT BOUGHT: THE ADVISOR FACTOR: The evidence clearly shows that Canadians have a greater willingness to pay fund fees (MER) than international investors. With MERs averaging near 2.4%, and with Canadians having $600 Billion in funds, the industry stands to pull in billions of dollars a year in fees. In the U.S. market fund fees are considerably lower than in Canada (even allowing for different rules on what is contained in the MER) and American investors are making ETFs the fastest growing securities product in the marketplace. So why are Canadians different?

Funds are sold not bought! Investors place their trust in salespeople who are licensed as a “salesperson” but who prefer to give themselves the title of “ADVISOR” on their business cards.

There is no licensing available in Canada for a mutual fund “ADVISOR” or “FINANCIAL PLANNER”, but there are licenses for mutual fund “salesperson” and “registered dealing representatives”. Canadians place their faith in their banks and their advisors and choose to believe they will be rewarded by unbiased advice from those they trust their hard earned money to. What Canadian investors seem to be unaware of is that the trusted advice is coming from people trapped in a commission system. It truly is a case of “don’t hate the players, hate the game”.

WHY YOUR SALESPERSON HAS NO CHOICE: A salesperson is either self employed (rarely) or works for a larger firm. The large firm will both manufacture and sell funds (think Investors Group) or will just sell funds. Fund salespeople tend to wrap themselves in the “financial planner” title, although they rarely provide comprehensive planning. Planning is a labour intensive task for which salespeople do not receive a fee or commission. It is similar to the free toaster when you open a bank account. Salespeople receive fees ONLY when they convince you to invest your money into a fund. At that point the industry forces the behaviour of the salesperson to mirror the fund’s objective. The funds objective is to maximize commissions. Only behaviour that maximizes commissions will generate payments to the salesperson.

SKIMMING YOUR MONEY: Mutual Funds take their revenue from YOUR account. Most investors understand the fact that fund companies and salespeople get paid, but few realize how or more importantly how much they get paid.

The primary reason investors are unaware is that the industry intentionally hides the fees and commissions from the investor. Imagine if fund companies ran a credit card business the same way they manage your funds. You would never get a statement of interest charges, would rarely be aware what the current interest rates are, would never know how much they took from your bank as a payment and your sign up documents would be written as a 50 page legal contract. Your statement would show a balance but no way for you to confirm how they arrived at the balance. In short, you would not allow this type of reporting to happen with a $500.00 credit card. So why is it acceptable for your life savings?

MANY WAYS TO SKIN A CAT: The fees are hidden as discussed above; however a further issue is that the commission splitting between the fund and the salesperson is also hidden. Salespeople often argue that "how" or "how much" they get paid is not relevant to investors. Nothing should be or could be further from the truth

Hidden Gems: One reason why it matters is that different fund companies can pay your salesperson different commissions to sell Fund A instead of Fund B. Now consider the last recommendation from your salesperson to buy ABC Canadian Equity.

n Did you know that XYZ had a lower cost to you and a similar performance history but paid lower salesperson commissions?

n Did your salesperson recommend ABC because their firm wants more high commissioned funds sold and they pressured your salesperson?

n Was it because your salesperson was having a rough spell financially and needed the commission?

The key point is I do not know, and neither do you.

A second hidden gem is the fact the very same fund can be sold to you in a variety of ways, all with different costs to the investor.

So if you believe ABC fund was the best choice,

n was that based upon a seven year lock-in requirement known as “deferred sales charge” that pays a hefty up-front fee to salespeople; or was it based upon a “front end load” that paid a smaller up-front fee to the salesperson?

n Did you know your salesperson could sell the fund with a 0% front end load and still receive the annual trailer fees from the fund company as compensation?

n Did you know the salesperson could sell you an “F Class” or advisor class fund with very low expenses and no commissions?

In this case the salesperson negotiates a fee with the investor for their services in an open agreement that sheds light on your costs.

The third broken leg of the commission process is hidden trailer fees. Trailer fees are a hidden commission paid to your salesperson every year by the fund company. The fee is only paid if you stay invested – are kept invested – at the fund company.

n Now ask yourself why your salesperson insisted you “stay the course” in the recent market meltdown?

n Was it because going to cash would end their trailer fee revenue and cost them income?

n Did you know that the salesperson benefited by keeping you exposed to a falling market?

To compound things further, the annual trailer fee varies by how you were sold the fund.

This means your salesperson has a very direct conflict of interest.

The higher your fees the more commission your salesperson likely makes from behind your back trailer fees.

n Do you still feel confident your “salesperson” is a trusted “advisor”?

As I stated earlier, the salespeople are caught in the system. The fund companies outline the commission rules and the salespeople have a difficult time avoiding the conflicts inherent in the system. A few truly good ones manage to balance investor needs with their own income requirements, but most slowly give in to the system and begin to feel they are “entitled” to the fees. When asked about the practice of accepting hidden commissions the most common refrain is a combination of “investors do not care” or “I work hard for my money”.

The first is hard to assess since the investor is unaware of what is happening for the most part.

The second is an irrelevant comment, since we all work hard for our money but few of us feel we need hidden commissions to make our business model work.


If we put aside the issues of excessive cost, manipulative sales practices and poor performance; is there an argument for mutual funds as an investment vehicle?

The answer is “yes”. The cost or MERs make mutual funds expensive as a core holding in a portfolio versus a low cost index fund, however mutual funds offer diversification and professional management. If an investor wants to hold some small cap or emerging market assets, a good fund manager can likely add value. The cost is high but so are the risks in investing in small cap or emerging markets without knowledge of the markets. As an example, I hold an Asian focused mutual fund as a very small weighting in my portfolio. I could not do the research required to build a high quality diversified Asian portfolio and I did not want to own the whole Asian market via an ETF index fund. I felt the professional management was worth the cost, not to make greater gains but to reduce the risk of large losses in a higher risk market.

CONCLUSION: Mutual Funds are a niche product being used to build core portfolios by salespeople who generally know better. The rationale for this volume of fund sales, from my perspective, can only be based upon the desire by the industry for the billions of dollars in hidden revenue streams.

In the light of full disclosure of fees, commissions, performance numbers and knowledge of available options, I believe investors would make different choices. Where more of disclosure is provided (the U.S. for example) investors have selected ETFs for their core holdings in many cases. In Canada we may never know what an informed investor might do because our current system does not generate sufficient numbers of informed investors to determine how we might choose to invest.

What Can You Do: In a world of busy people trying to make a living, raise families, and manage day to day cash flows there is precious little time to ride shot gun on your salesperson.

The average person has two viable options:

a) manage your own investments with a low cost “couch potato” ETF based portfolio


b) separate who gives you advice from who sells you your investments.

The second option can be attained by hiring a financial planner or investment consultant who gives advice but does not sell securities, and then take that advice to a salesperson for the execution of your security purchases and sales. In both situations mentioned the conflict of interest between advice and security sales has been reduced or eliminated. That is a vital first step in taking control of your investments.

Sois mike
Posted by sois mike at 1:13 PM
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Mon Feb 08, 2010 7:53 pm

from the web site

The Dirty Secret About Investments – What Type To Avoid
Your financial planner doesn’t want you to know this: investments are just financial products. The financial industry has been successful in convincing you that you’re ‘investing’ when you’ve just been buying products.
A mutual fund is a classic example of a financial product. Like other products, mutual funds are manufactured and then distributed. They aren’t made in factories like automobiles, instead they are manufactured in office buildings. You can think of a mutual fund company as a manufacturer of mutual funds.
After a mutual fund is built, it needs to be distributed (sold). Mutual funds are distributed through a network of investment dealers. You should think of the company that your financial advisor works for as the distributor of mutual funds and other financial products.
Here’s why this is important.
While manufacturing and distribution can both be profitable, manufacturing is where the real money is. Every firm in the financial industry wants in on the manufacturing side of the business. Almost all investment dealers also manufacture their own products and make far more money selling them than on other products. Some companies are honest and upfront about the connection, other companies aren’t so upfront. They simply manufacture and sell their own in-house products under a different brand name and hope you don’t figure it out.
Almost all investment dealers have some form of in-house products for sale and many dealers force their advisors to sell them. They simply mandate their financial advisors to sell the company line up. These in-house products aren’t pushed on you because they are superior, in fact, they often under-perform and have higher than average fees. Investment dealers push in-house products because their margins are higher. They can make more money selling them than selling you a better investment. The amount of money you make is secondary to the money they make.
Choose a financial planner that works for a firm that doesn’t have its’ own products, or at least, doesn’t require you to buy them. The more independent and unbiased your advisor is; the better off you are.
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Re: Double Dipping, DSC, and other methods to extra bill clients

Postby admin » Sat Dec 12, 2009 9:19 am

Spoiled advisors want their 1%
New offerings are ETFs – but with the high costs of mutual funds

National Post

By adding 1% trailer fees to the management expense ratio
of the underlying ETFs, much of the cost advantage of
traditional ETFs is cancelled.

Jonathan Chevreau, Financial Post
Thursday, December 3, 2009

The trouble with Invesco Trimark Ltd.'s new Power shares Funds is it's hard to suck and blow at the same time. Forgive my use of the vernacular, but it's an apt way to summarize the conflicting currents swirling around these new hybrid ETFs-in-a-mutual-fund-wrapper.
The latest in a string of critics of the funds is Rudy Luukko, the influential investment funds editor for Morningstar Canada. He says pressure from ETFs to lower mutual fund fees conflicts with comparable pressure to keep advisor compensation up. By adding 1% trailer fees to the management expense ratio (MER) of the underlying ETFs, much of the cost advantage of traditional ETFs is cancelled.

This "embedded compensation" is one reason Canada's mutual fund MERs remain so stubbornly high. Apparently, the industry has decided advice is "worth" 1% of assets a year, no matter how much or how little a client needs or wants.

From an advisor's perspective, this is a significant new product. It gives the 50% of advisors who aren't licensed to sell ETFs a way to respond to clients demanding to jump on the ETF bandwagon.

It also gives securities-licensed advisors who could already sell ETFs a way to get paid more. Normally, brokers gets paid on ETFs only when clients buy or sell them, generating transaction-based commissions, as individual stocks do. ETFs sold by majors such as Barclays or Vanguard don't pay trailer fees. The exception is Toronto-based Claymore Investments Inc., which pays 0.75% trailers on its Advisor class ETFs. Naturally, the resulting MERs are 0.75% higher than Investor class Claymore ETFs that carry no trailers.

In video interviews airing this week, Invesco Trimark president Peter Intraligi emphasizes MERs of the new funds are lower than comparable actively managed funds. He says portfolios blending both provide better "risk-adjusted" returns.

MERs appear reasonable if you look only at the F class versions. But investors can buy F class funds only through fee-based advisors who tack on another 1% or so for their advice. If you negotiate your advisor down to 0.5%, you may be ahead, but if she can charge 1.5%, you'll pay as much as you did for regular "A class" actively managed funds.

These funds can play a role for customers who value advice and can't otherwise buy ETFs. But if their advisors can sell only mutual funds, the advice would be more valuable if they became dual licensed and could sell clients "real" ETFs -- including the underlying PowerShares ETFs selling on U.S. exchanges. The new hybrids only whet their appetite.

Self-directed do-it-yourself [DIY] investors might embrace these if the industry let them buy F class versions through discount brokers. Invesco Trimark famously once tried to make its actively managed funds available in trailer-fee-less versions to DIY investors, but were rebuffed by industry pressure. They should try again with the hybrids: If they pulled it off, DIY investors would flock to them. As it stands, it would have been better if Invesco had simply created Canadianized versions of the existing U.S. Powershares and sold them on the TSX.

They didn't because while paying lip service to ETFs, its bread is still buttered by advisors. Spoiled by 1% trailers that are twice as high as America's, Canadian advisors will not let themselves be weaned by ETF hybrids paying anything less.

Invesco Trimark should have gone one better than Claymore and introduced trailer fees of just 0.5% on the hybrids. If they had, and if they also made F class units available to discount customers, they would have propelled the mutual fund industry into the 21st century.

As it is, they have one leg in each century and will be dismissed by critics for being neither fish nor fowl. The funds will still sell, however, because we all know mutual funds continue to be sold, not bought. - The first two of four video interviews with Invesco Trimark executives were posted this week at and
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