fiduciary or not? a "Bait and Switch" game

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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Thu Sep 13, 2012 10:02 am

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Investors ‘clueless’ about fiduciary duty
By Sheyna Steiner ·
Wednesday, September 15, 2010

Investors "clueless" about fiduciary duty

A study released Wednesday by the Consumer Federation of America, AARP, the North American Securities Administrators Association and various investment advisor and financial planning organizations has found that investors overwhelmingly support a universal fiduciary standard and, at the same time, are very confused about which financial professionals are now held to it.

The poll questioned 2,012 Americans, 1,319 of whom identified themselves as investors. The investment questions were asked only of investors.

The poll found that 9 out of 10 investors believe that a stock broker and an investment advisor who provide the same investment advisory services should have to follow the same investor protection rules.

Nearly all, 97 percent, agreed that investors' best interests should be the priority. Eighty-five percent believe that financial professionals should disclose conflicts of interest and the source of any commissions they might receive.

Again almost unanimously, 96 percent of Americans polled believe that insurance agents should be held to the fiduciary standard.

The majority of people polled were unsure which investment professionals have a fiduciary duty to their clients.

Three out of five believe insurance agents are held to a fiduciary standard.

Two out of three believe stock brokers are held to a fiduciary standard.

In a press conference this afternoon, Barbara Roper, director of investor protection at the Consumer Federation of America denounced the policies that enabled a double standard for investment professionals.

"This survey confirms that investors are clueless when it comes to the different standards of care that apply to brokers and investment advisers. This lack of understanding is not because investors are stupid. It is because, bluntly stated, the policy itself is stupid," she said.

"No one in their right mind would create a system in which individuals who call themselves by titles and offer services that are indistinguishable to the average investor are subject to two different standards when they do so," said Roper.

The results of the survey will be given to the SEC as they consider instituting a universal fiduciary standard on all financial professionals. Their decision is expected in January.

The Dodd-Frank Act stipulated that the SEC study the issue for 6 months following the enactment of the consumer protection bill – despite the fact that multiple independent surveys have been done on the issue, all coming to the same conclusion. The survey released today repeated questions asked in 2004 and 2007.

One (high) standard for all investment professionals seems like a no-brainer but some in the financial services industry still oppose it.

The benefit for investors is obvious and, in my opinion, any opposition is indefensible. Those who are against a fiduciary standard want to continue fleecing consumers with impunity.

But, what do you think, should all investment advisors, brokers and insurance agents be held to the same standard?

Get more CD and Investing News with our free weekly newsletter.

Read more: Investors ‘clueless’ about fiduciary duty | ... z26Myo5Hws

(Advocate comment about the trick of fooling the public into belief the are getting something they are not: "Anything else is fraud, because the seller is delivering a service different from what the consumer thinks he or she is buying. " Edward Waitzer, Financial Post · Tuesday, Feb. 15, 2011) (Mr. Waitzer is a Bay Street Lawyer and former Securities Commission chair, and this quote ( by another person) appeared in his article.

Full article found here: ... caf9e71a16
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Sep 07, 2012 5:30 pm

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Schapiro still married to idea of single fiduciary standard
SEC boss says work continues on proposal; 'I've kept the issue alive and moving forward'

By Mark Schoeff Jr.
September 7, 2012 2:50 pm ET
Securities and Exchange Commission Chairman Mary Schapiro said she continues to champion a rule that would impose a fiduciary standard of care for anyone providing retail investment advice, an initiative that advocates say appears to have stalled at the agency.

“I still think this is a really important thing for the SEC to do for investors,” Ms. Schapiro said in an interview with InvestmentNews. “There's a fair amount of work going forward inside the building. I would like to see it happen.”

The Dodd-Frank financial reform law gave the SEC the authority to promulgate a regulation requiring brokers to act in the best interests of their clients, or provide the same fiduciary duty that is required of investment advisers. Brokers now adhere to a less stringent suitability rule when selling investment products.

After delivering a report to Congress in January 2011 that recommended a fiduciary-duty rule and harmonization of adviser and broker regulations, the agency has not acted.

Part of the problem is the crush of about 90 rules required by Dodd-Frank. Another obstacle was the dissent to the SEC fiduciary-duty report by two Republican commissioners, who said its conclusions lacked sufficient economic analysis.

The commission will conduct such a regulatory assessment before proposing a fiduciary-duty rule. It has yet to put out a request for data — even though observers have been expecting it for months.

Though Ms. Schapiro did not indicate when the agency would launch its data collection, she said the issue is not dormant.

“The industry has engaged with us in a reasonable way,” Ms. Schapiro said. “I think we've advanced the ball quite a bit. It continues to have prominence today because I've kept the issue alive and moving forward.”

But some fiduciary advocates are getting impatient.

“We see little if any sign that the agency is ready to move forward on an issue that Chairman Schapiro once identified as a priority,” Barbara Roper, director of investor protection at the Consumer Federation of America, told reporters earlier this week.

On Sept. 11, the Institute for the Fiduciary Standard will meet with Ms. Schapiro to urge her to speed up the SEC's work on the topic. That meeting is part of what the organization has deemed “Fiduciary September,” an initiative designed to create momentum for a regulation.

Ms. Schapiro said that the demands Dodd-Frank placed on the agency have contributed to the slowdown.

“At the end of the day, everything goes through a pretty small funnel,” she said. “It's more been a matter of bandwidth.”

But the issue also has generated controversy. The agency received more than 3,000 comment letters for its study. Commissioners have conducted dozens of meetings with financial firm representatives and fiduciary advocates.

A flawed rule would increase regulatory costs and litigation threats for brokers and potentially price middle-income investors out of the advice market, according to fiduciary skeptics. They have been calling for the SEC to be careful to allow a range of products, services and payment methods under a proposed rule.

Ms. Roper asserts that fiduciary opponents have emphasized cost-benefit analysis as a way to slow the rule. A federal court in 2011 vacated an SEC rule on proxy access over what it deemed weak economic justification.

Ms. Roper said Ms. Schapiro may be reluctant to proceed without the support of at least one of the two Republican commissioners.

“Republican support is seen as essential to buffer against the threat of legal action,” Ms. Roper said.
Conducting a thorough cost-benefit analysis leads to more effective rules, according to Ms. Schapiro.

“I don't think economic analysis is a roadblock,” Ms. Schapiro said. “The new economic analysis approach is informing better decision-making.” ... _term=text
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Sep 03, 2012 6:07 pm

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Wednesday, August 22, 2012

John C. Bogle and Paul Volcker
Among Financial Industry Leaders
Signed on to The Fiduciary Declaration;
Urge SEC, DOL and Congress
To Apply the Fiduciary Standard
To All Advisors, Brokers

Fiduciary Declaration Unveiling for SEC Chairman Schapiro on September 11

WASHINGTON – A “Fiduciary Declaration” signed by twelve highly respected leaders in the
financial services industry urges Congress, the Securities and Exchange Commission and
Department of Labor to heighten and extend protections to investors receiving investment

The “Fiduciary Declaration," will be unveiled and discussed with SEC Chairman Mary Schapiro
on September 11. The meeting with the SEC Chairman is a highlight of Fiduciary September, an
initiative of the Institute for the Fiduciary Standard. The initiative seeks to urge policymakers
and industry participants to faithfully apply and uphold the fiduciary standard for investment

The twelve signatories of the Fiduciary Declaration are: Sheila C. Bair, Alan A. Blinder,
John C. Bogle, Peter G. Fitzgerald, Tamar Frankel, Andrew K. Golden, Roger G. Ibbotson,
Arthur Levitt, Daniel Kahneman, Burton G. Malkiel, David F. Swensen and Paul A. Volcker.
"At a critical moment in history these extraordinary leaders speak with one voice and one vision
about a fundamental truth: Fiduciary advice is right for investors; the trust it engenders is
essential for capital markets," said Knut A. Rostad, president of the Institute for the Fiduciary

Tamar Frankel, a signatory and national authority on fiduciary law, Boston University professor
of law and Michaels Faculty Research Scholar, points out, "Fiduciary conduct is an underpinning
of the economic system, and is in danger of being effectively marginalized. Regulators and
industry participants should keep this threat in mind. Fiduciary conduct requires undivided
loyalty and the highest standard of professionalism.”

The Fiduciary Declaration states that current regulatory regimes leave a “gap” that creates
unequal protection under the law. The Declaration calls for “evenly applying the fiduciary
standard to all advisors and broker dealers who render investment advice,” and emphasizes six
core duties established by the Institute for the Fiduciary Standard that embody the fiduciary
standard. (See

John C. (Jack) Bogle, founder of the Vanguard Group of Funds, and a signatory to the Fiduciary
Declaration explains the importance of the fiduciary standard this way, “Our financial system is
a messy system and investors have to trust the people who are managing their money. There has
to be one North Star that is unchanging, and that is to put the interests of the client first. This
approach will win. It’s morally correct, as well as mathematically correct.”

The state of investor trust deeply concerns former FDIC Chairman and Senior Managing
Director of FTI Consulting, William Isaac. Isaac, who has received bipartisan accolades for his
often blunt criticism of policy makers and industry participants notes, "Trust -- confidence in the
honesty, reliability and fairness of people and their firms -- is essential to democracy, a free
market economy, and the financial system. The breach of trust in recent years by our government
and major financial institutions has been enormously damaging. The fiduciary standard is an
important step toward restoring confidence in our institutions and markets."

Fiduciary September

Fiduciary September features events and actions aimed to advance the fiduciary spirit and status.
It includes: urging Congress and the SEC to apply the fiduciary standard to all professionals
rendering investment advice; urging industry participants to embrace fiduciary duties when
investment advice is rendered; and educating investors about the sharp differences between
fiduciary advisors and sales brokers. Highlights of Fiduciary September events and activities
include the following:

September 5 * 11:00 AM – 12 Noon. Educational webinar for reporters.

September 11 * Unveiling of the Fiduciary Declaration. Delegation of the signatories to
Declaration will unveil, present and discuss in meeting with SEC Chairman Schapiro.
* Press availability with signatories.

September 18 * The Fiduciary Standard: What it Means and Why It’s Important, a guide aimed
at assisting practitioners in understanding the six fiduciary duties.

September 25 * “Fiduciary Forum ‘12: Regulating Investment Advice and The Benefits and
Costs to Investors and the Capital Markets of the Fiduciary Standard in Investment Advice.”
With the CATO Institute. Speakers to discuss economic, legal issues. Venue: CATO Institute.
Speakers include former SEC Chairman Harvey Pitt.

About the Institute for the Fiduciary Standard

The Institute for the Fiduciary Standard was formed in August 2011 as a non-profit, non-partisan
foundation to provide research, education and advocacy on the vital role of the fiduciary standard
for investors and the capital markets. For more information, visit


Knut A. Rostad, President
The Institute for the Fiduciary Standard
Office: 703-821-6616 x 429
Mobile: 301-509-6468
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Fri Aug 17, 2012 9:31 am

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Minding the Chastity Belts: Fiduciary Duties and 900 Pound Lemmings
"Today investors herd around short-term investment strategies adopted by other prudent experts who manage similar funds. This has unleashed a flock of 900-pound lemmings into the economy."
Back to the Future of Pension Fund Trust Fiduciary Duties, Keith Johnson
Crusading Fiduciaries

If you were a medieval knight embarking on the twelfth century equivalent of a Mediterranean cruise, aka going off on the Crusades, you would have needed someone at home to take care of the castle, the gold and the chastity belt keys. That person was known as a fiduciary.

The fiduciary’s duties were those of loyalty and prudence; perfect qualities for today’s equivalent, the financial advisor. Sadly most financial advisors don’t see themselves in this light. Even sadder, those that do are usually to be found in that herd of 900-hundred pound lemmings that constitute the mass of behaviorally compromised investors. Time for a re-think, all round.

Duties, Not Contracts

Historically the concept of a fiduciary was to place certain duties on individuals or organizations entrusted with responsibilities to act on behalf of others; primarily where those others were less able to manage those responsibilities themselves. It’s a relationship of trust, commonly between someone who understands the issues at hand – the fiduciary – and someone who doesn’t – their client. Managing money on behalf of most private investors would generally fit that description.

However, many managers in such positions don’t regard themselves as fiduciaries, placing upon themselves the far less onerous responsibility of managing to the contract in place between them and their clients. A recent report from the UK suggests that this is wrong; and even if it isn’t most investors should run a mile or more from advisors who don’t accept fiduciary responsibilities.

Unfortunately this investment relationship has been dogged by two long and familiar shadows.

Loyalty and Prudence

Firstly, many investment advisors don’t accept the role of a fiduciary, preferring instead to rely on contracts – which usually favour the advisor, who may be able to understand them, over the client, who usually can’t. Many advisors will avoid fiduciary responsibilities because a fiduciary relationship overrides any contract – in common law, if the fiduciary breaks the terms of the trust the contract is irrelevant. This is generally covered by the first duty of the fiduciary, that of loyalty: to act in good faith, and to avoid conflicts of interests, such as taking commissions on products sold to clients, even where disclosed.

Secondly, the actual role of a fiduciary in respect of investment is governed largely by the second duty – that of prudence. In theory this means that they shouldn’t take on excessive risks. Unfortunately this has generally translated into fiduciaries believing that they have a responsibility to maximise profitability while following the mantra of efficient markets. Unsurprisingly this has led them into herd following behavior creating an attitude of "reckless caution”.

Common Law Investing

This has left investors seeking an advisor with two problems. The first one is actually finding an advisor that accepts fiduciary responsibility rather than seeking to maximise their own commissions. The second one is making sure that your fiduciary, when you can actually find them, isn’t a dumb cluck rule following junkie. Unfortunately the laws governing fiduciary responsibilities have tended to foster reliance on herding around the dubious mantra of efficient market theories such that fiduciary responsibility has tended to reduce to following Modern Portfolio Theory (MPT) and seeking to maximise short-term profits.

Naturally enough this has meant that most fiduciaries have produced the same financial returns as most of the rest of the market; lousy. Trust, it seems, isn’t enough to generate decent returns, especially when the common laws’ understanding of behavioral finance is several points under zero.

Psychopathic Markets

We’ve previously looked at the way that the legal system regards efficient markets theory as the touchstone against how investments should be managed, and why this is wrong (See: Behavioral Law and Disorder). Inevitably, however, this bias creeps into all kinds of different areas where investment advice is provided, and it’s understandable that fiduciaries measure themselves against this guidance: you can’t get sued for managing against the law, even if this guarantees your clients a whopping loss when efficient markets inevitably turn into psychopathic ones.

Of course, you’d think this behavior would cut across the duty of prudence, but the legal definition is more complex than this. Most US and UK fiduciaries are covered by something called the Prudent Investor Rule, which is governed by Modern Portfolio Theory, requiring diversification based on the requirements of efficient markets: and the introduction of this rule caused a noticeable change in the investment policies of fiduciaries as Robert Sitkoff and Max Schanzenbach noted in The Prudent Investor Rule and Trust Asset Allocation:
“Using federal banking data spanning 1986 through 1997, the authors find that, after adoption of the new prudent investor rule, institutional trustees held about 1.5 to 4.5 percentage points more stock at the expense of "safe" investments. This shift to stock amounts to a 3 to 10 percent increase in stock holdings and accounts for roughly 10 to 30 percent of the over-all increase in stock holdings in the period under study.”
The Kay Report

The recent Kay Report to the UK government on the management of UK equity markets has placed the idea of efficient markets squarely in the cross-hairs:
“We question the exaggerated faith which market commentators place in the efficient market hypothesis, arguing that the theory represents a poor basis for either regulation or investment. Regulatory philosophy influenced by the efficient market hypothesis has placed undue reliance on information disclosure as a response to divergences in knowledge and incentives across the equity investment chain. This approach has led to the provision of large quantities of data, much of which is of little value to users. Such copious data provision may drive damaging short-term decisions by investors, aggravated by well-documented cognitive biases such as excessive optimism, loss aversion and anchoring. “
The report suggests that all intermediaries should be required to manage to fiduciary standards, not just those that choose to, and that the adherence to MPT and efficient markets needs to be removed:
“Asset holders should recognise that diversification is most likely to be achieved by a diversity of asset management styles, rather than by calculations derived from an asset allocation model, the employment of a large number of managers, or the selection of a large number of stocks. “
Sea Changes

If this report was ever acted upon it would represent a sea-change in the way advisors and their clients interact. Advisors would be legally obliged to avoid – not manage – conflicts of interests and would be expected to “take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide” (Learoyd v Whiteley (1887) 12 AC 727). Simply implementing asset allocation against the MPT would no longer meet this requirement.
“The Review does not believe that there could be any sound basis for placing trust in an intermediary who does not recognise these duties of loyalty and prudence, and considers that a relationship that falls short of these standards fails to show appropriate respect for an investing client … Caveat emptor is not a concept compatible with an equity investment chain based on trust and stewardship. “
Of course, the chances of these recommendations ever seeing the light of day are limited; but that doesn’t mean that we shouldn’t judge our advisors by these standards. An advisor that isn’t a fiduciary isn’t safe and a fiduciary that doesn’t understand the limits of efficient markets theory and can’t provide evidence for how they’re guarding against behavioral biases should be avoided (see Clueless: Meet The Overprecise Pundits).

This is our money, not theirs. We’re owed a duty of loyalty and prudence. Otherwise when we get back to our castle we’ll find they’ve unlocked the chastity belt and run off with the gold and the rest of the lemmings. ... .html#more
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Jun 04, 2012 3:24 pm

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Washington INsider
The adviser's window into political and economic developments

Bachus bill could shutter 41% of advisory firms in this state, survey finds
Small firms in Massachusetts could be decimiated: Finra cites 'critical need to fill an untenable gap in investor protection'

By Mark Schoeff Jr.
June 1, 2012 12:30 pm ET
When the House Financial Services Committee holds a hearing next week on legislation that would shift the oversight of investment advisers from the Securities and Exchange Commission to an industry organization, opponents of the bill are going to try to hit the Republican sweet spot by arguing that the measure will hurt small advisory firms. And they have data to back up their contention.

June 6 is D-Day for SRO legislation
Related to this story »

Finra under fire
FSI goes with 'devil we know' in oversight of advisers
SEC: Firm lied about execs' 'skin in game'

A poll released by the Massachusetts Securities Division on Thursday shows that most Bay State investment advisers oppose an SRO because they believe it will foist exorbitant new regulatory costs on them.

The Massachusetts securities office said in a statement that “41% of those who [responded] volunteered comments that the bill as presently drafted was likely to put them out of business.”

More than half of the state's 649 advisers participated in the poll, with 79% of them reporting less than $30 million in assets under management and nearly all of them having fewer than five employees.

“State-registered IAs are independent small business men,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. “Imposing a national self-regulatory organization on them would create a financial burden with no guarantee of better protection for investors.”

The North American Security Administrators Association is scheduled to testify at the SRO bill hearing on June 6. Their witness is certain to mention the Massachusetts poll.

At the same time, the Financial Industry Regulatory Authority Inc., which also will testify and is pushing to become the adviser SRO, probably will point out that under the bill state-regulated advisers won't be examined by the SRO in states where exams are conducted at least every four years. All advisers with retail clients, no matter their size, would have to pay membership fees to the SRO. But those fees would have to be approved by the SEC, which would oversee the adviser SRO.

The dispute over the price of an SRO likely will be highlighted at the hearing. A Boston Consulting Group study, released in December and sponsored by SRO opponents, said that an SRO would cost twice as much as adequately funding the SEC. Finra later released its own estimate that showed much lower costs.

The challenge for the anti-SRO forces is that as they target one GOP totem – small business – they're going up against another Republican touchstone – Wall Street. Wall Street firms exert plenty of influence over Democrats, too.

The champions of the bill are House Financial Services Chairman Spencer Bachus, R-Ala., and the Democrat with whom he introduced the measure in April, Rep. Carolyn McCarthy of New York.

Mr. Bachus argues that he's trying to increase investor protection by turning over adviser examinations to an SRO. He notes that the SEC examines annually only about 8% of the nearly 12,000 registered advisers compared to the 58% of brokers that Finra, the broker SRO, examines every year.

Although Mr. Bachus' bill would authorize one or more SROs, it's clear that he favors Finra for the job.

The idea of being regulated by Finra sends chills down the spines of most advisers. They say that Finra is biased toward brokers, in the pocket of Wall Street and lacks the expertise to administer the fiduciary standard of care advisers must give their clients. Brokers are held to the less stringent suitability standard when recommending investment products. (advocate comment: I must jump in here and point out the greatest fraud, or "bait and switch" in North America today, namely the pawning off of "brokers", to the public as "advisors". They are leading customers to believe they are getting a trusted, trained professional, whilst delivering only a commission broker. This is fraud, of a criminal nature, in my opinion. Look up your definition of fraud (or misrepresentation) in your own criminal code, here in Canada it is section 380.)

Finra asserts it is the best candidate to be the adviser SRO. The regulator has tried to reassure advisers by saying that it would create a separate governance structure for them that would be sensitive to the characteristics of their business model.

It is unacceptable, according to Finra, that the SEC examines advisers only about once a decade, with 38% never having been examined.

There is a “critical need to fill an untenable gap in investor protection in the investment adviser space,” Finra said in a statement. “One or more SROs overseen by the SEC is a proven way to augment government resources and to provide the needed oversight.”

A Finra witness will make that case in the June 6 hearing. Finra is one of four witnesses invited to testify by Republicans, according to sources with knowledge of the witness list. The others are the Securities Industry and Financial Markets Association, the Financial Services Institute and the National Association of Insurance and Financial Advisors.

The witnesses invited by Democrats are NASAA and the Investment Adviser Association.

Here's what I'll be watching for next Wedneday:

1. Will there be any chinks in the Republican armor? Will anyone in the GOP express skepticism of the SRO bill in defiance of his or her chairman? It would be unusual for a Republican to break ranks in the highly disciplined House. But if the GOP had been in lockstep on the measure, it might have gone straight to a committee vote rather than be subject to a hearing.

2. How many Democrats besides Ms. McCarthy will come out in favor of the bill? The top two Democrats are already on record opposing it – House Financial Services Committee ranking member Barney Frank, D-Mass., and Rep. Maxine Waters, D-Calif.

3. How many Democrats will express support for authorizing the SEC to charge user fees for exams? An SEC study in January 2011 recommended three ways to increase adviser oversight: allow the agency to charge user fees; create an SRO; or expand Finra's authority to include advisers dually registered as brokers. Each option requires congressional approval.

4. Will SRO opponents be able to convince Republicans that an SEC user fee is not the equivalent of a new tax?

Those questions may not be answered definitively. But it's certain that we'll hear an argument like this one:

“If Chairman Bachus achieves the hostile takeover of small business owners in our industry, he will drive good men and women out of business and harm the consumers they work so hard to serve,” Susan John, national chairman of the National Association of Personal Financial Advisors, said in a statement this week. ... term=text#

see also article and post related at viewtopic.php?f=1&t=172#p3357
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon May 14, 2012 7:18 pm

fair, honest good faith rule.jpg

click on the image to enlarge

Isn't OSC Rule 31-105 essentially a fiduciary standard?

OSC Rule 31-505 requires all dealers
and their Ontario registered representatives to “deal fairly, honestly and in good faith with

Although regulators and Ontario courts have not yet recognized that it does so, this rule
arguably imposes a fiduciary obligation on Ontario registrants with respect to their clients. This
goes far beyond the suitability rules of the MFDA and IIROC , two
self-regulators .

Category3/rule_20090918_31-505_unofficial-consolidated.pdf [/url]

A fund salesperson who
knowingly sells an expensive mutual fund to a client whose needs would be satisfied by a lessexpensive
product cannot be fulfilling the obligation to act fairly and in good faith that is
imposed by OSC Rule 31-505.

Source: Read this piece by lawyer Phil Anisman ... -requires-

(advocate comment: the investment and regulatory regime is so morally confused that they claim a duty to “deal fairly, honestly and in good faith with clients”, at the same time that they secretly alter standards of practice to allow their salespersons to call themselves "advisors", and to not even have to put client interests first or to disclose conflicts of interest. Folks who live on willful blindness need to always work things both ways to their favour:) (see image below)

Screen shot 2011-08-11 at 12.10.02 PM.png

click on image to enlarge
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon May 14, 2012 8:49 am

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FP Letters to the Editor: Existing rule requires ‘good faith’
Special to Financial Post Feb 15, 2011 – 10:49 PM ET

Comments Email Twitter

Re: “Cracking down on commissions,” Edward Waitzer, Feb. 15

Edward Waitzer’s column, while laudably advocating an obligation on the part of securities registrants, both dealers and advisors, to provide advice that is in the best interests of their clients, fails to mention an existing requirement in Ontario that may impose this obligation.

OSC Rule 31-505 requires all dealers and advisors registered in Ontario and their registered representatives to “deal fairly, honestly and in good faith with [their] clients.” Although our courts have not yet recognized that it does so, this rule arguably imposes a fiduciary obligation on Ontario registrants with respect to their clients.

To take Mr. Waitzer’s example, a salesman who sells an expensive high-end laptop to a customer whose needs would be satisfied by a less-expensive product cannot be fulfilling the obligation to act fairly and in good faith that is imposed by OSC Rule 31-505.

It is also difficult to understand how an advisor who fails to provide advice that is in the best interests of its client would be acting fairly. Indeed, Mr. Waitzer’s admonition at the conclusion of his article is that we not be perceived to lag behind other countries “in our efforts to ensure fair dealing in financial markets” (emphasis added).

The suitability obligations of Canadian dealers and advisors are an element of fair dealing. So are the requirements in Canadian rules that registrants identify potential conflicts of interest and manage them appropriately, either by disclosure or by total avoidance.

It is worth noting in this respect that the American initiative toward the imposition of fiduciary obligations on broker-dealers who provide advice has disavowed any intention to prohibit their being compensated by means of commissions.

In light of OSC Rule 31-505, one might wonder whether the debate in Canada is as much about labels and attitudes as it is about legal obligations. Our regulators may be better advised to adopt the Ontario rule nationally and enforce it rigorously.

Philip Anisman ... -requires-‘good-faith’/


Best interest? I think not. This seems to have been quietly changed by the various "stakeholders" involved, without bothering to involve the public, the largest stakeholder. Ain't self regulation great? Read the book Willful Blindness.

Screen shot 2011-08-11 at 12.10.02 PM.png
Click to enlarge

The image above is what the "stakeholders" use in 2011 for standard of care to Canadian customers.

CLIENT FIRST 2000-1.jpg
click to enlarge image

while this image (above) is from the Canadian Securities Institute Conduct and Practices Handbook for licensing. It outlines the standard of customer care that the industry pretends to deliver to the public. A magnificent fraud that helps the industry to skim one billion dollars a week from the public. (source )

(thanks for this go to ken at canadian fund )
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sun May 13, 2012 10:00 pm

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Guest column: Whose responsibility is suitability?

Advisors and their firms should avoid the growing trend of blaming clients if it is their own processes that are at fault
By Harold Geller, John Hollander | May 2012

At the core of the relationship between financial advisors and their clients is the assessment of the client's financial situation by the advisor - an investigation intended to match the client's financial goals with the planning and financial products recommended by the advisor. In other words, what financial choices are suitable for the client, given his or her particular situation?

It sounds straightforward. But, as most advisors know, the "know your client" process can be fraught with peril if it is not conducted and documented thoroughly. Witness the rising number of lawsuits against advisors and their firms to recover financial losses. These lawsuits almost always focus on the suitability issue, with even the most sophisticated plaintiffs alleging that they were advised to make financial decisions that were unsuitable for them, leading to catastrophic losses.

So, it's very much in the interest of advisors and their firms to ensure that they are fully aware of their obligations in this regard. Indeed, the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada have established "know your client," "know your product" and "suitability" as the bedrock of the client/advisor relationship.

In our experience, problems often arise because some advisors may not have informed themselves as fully as they should have about their clients' situations (KYC), the features and details of the investments they have recommended (KYP) and how those two investigations should be applied to the client's situation (suitability).

But even if all of these steps have been taken, the advisor is still at high risk for a ruling of liability if he or she has failed to document the suitability process fully. This type of failure leaves advisors and their firms struggling to prove what is their most common defense - that the client made properly informed choices.

Indeed, it is typical for defendant advisors and firms in civil claims and disciplinary hearings to place the blame for client losses on their clients. These defendants often point to the "sophistication" of the client and the apparent understanding by the client as proof that the client was fully aware of his or her investment choices. The client's sophistication in employment, business experience or education is often mistaken for investment knowledge. So is the client's history of giving approval of recommendations.
So, who is responsible? And for what?

Clearly, the advisor and the dealer jointly bear the responsibility to recommend an appropriate match between the product and the client. Despite widespread investment industry misunderstanding to the contrary, suitability analysis is never the responsibility of the client. IIROC Rule 1300.1(q) requires that both dealer and advisor, "when recommending to a customer the purchase, sale, exchange or holding of any security, shall use due diligence to ensure that the recommendation is suitable for such customer." MFDA Rule 2.2.1 is similar. Nowhere is this obligation for ensuring suitability imposed on the client - even in the case of unsolicited orders.

This debate effectively ended in Canada when the Alberta Securities Commission declared (in Re Lamoureux, 2002) that the responsibility for ensuring suitability rests solely on advisors and dealers: "The obligation to ensure that recommendations are suitable or appropriate for the client rests solely with the registrant. This responsibility cannot be substituted, avoided or transferred to the client, even by obtaining from the client an acknowledgment that they are aware of the negative material factors or risks associated with the particular investment." This decision has been adopted extensively, including in the decision of the Ontario Securities Commission in Re Daubney, 2008, and that of IIROC in Re Gareau, 2011.

Advisors and their firms have every right to protect themselves from a liability finding by clearly establishing that they have met the suitability standard. The best way to do that is to be thorough in carrying out the suitability obligation and by fully documenting that process. It is this process, not the result, that advisors must answer for.

Indeed, it can be argued that the intentional denial of a regulatory obligation, such as the suitability obligation, is itself a breach of both the regulation and the civil duty of care owed to the client.

When looking for evidence to support the conduct of the advisor, firms are well advised to avoid blaming the client, as is the current trend. Advisors and dealers promote their skills and assessment processes to their clients. When an advisor error is alleged, the advisors and dealers should do one of two things: either they should show how they complied with suitability standards or they should own up to their responsibilities. Failing that, further regulatory and judicial sanctions against the advisor and his or her firm are necessary to serve as a general deterrent against these types of failures. IE
Harold Geller and John Hollander are senior associates with Doucet McBride LLP. This commentary is not intended as legal advice. ... itability-
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Apr 14, 2012 10:04 am

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Why Bay Street pans the fiduciary standard: In the absence of fiduciary obligation, broker-dealers and their representatives are able to exploit the information imbalance by extracting extra “agency rents” from clients. An option to purchase financial services products compensated by commissions is a choice that consumers can make for themselves and may even represent a less expensive option, especially for the small client. The basic tenet of doing what is best for the client transcends business models- fee-only advisory arrangements aren't the only way to do right by the customer, because bad apples can turn up among those advisers, as well. In civil actions, the imposition of a fiduciary standard may deprive the investment adviser of certain defences, including that the client is at least partially responsible for his/her own losses, or that the losses are attributable to market events rather than negligence or bias. A fiduciary standard could have the unintended consequence of making legal cases move even more slowly in the courts if advisers fight harder because the potential penalties are greater. Canadian Courts have demonstrated they will rule for clients who argue their advisers have breached the lower standard of “Duty of care,” without needing to argue there's been a higher breach of fiduciary duty. Securities regulators should focus on tackling the unregistered advisers, like Earl Jones, who
have caused many of the biggest investment fraud scandals. In our view, the real conflict has never been about suitability vs. fiduciary, per se, but about advice vs. sales. If you want to give personalized advice, you subject yourself to a fiduciary duty, which can be accomplished regardless of compensation model; if you want to avoid the fiduciary duty, just don't give personalized advice, or hold yourself out as being an advisor.

(advocate comments)
See "bait and switch" comments further to this industry game of misleading customers, and avoiding accountability through systemic tricks at :
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Wed Apr 04, 2012 4:31 pm

Fiduciary standard doesn't raise costs: Study
Brokerage industry's claims of more expensive products fail to take "agency rents' into account

April 1, 2012 6:01 am ET
A new study out of Texas Tech University casts significant doubt on brokerage industry claims that the fiduciary standard leads to higher costs and fewer product choices for investors.
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Ever since the 2010 Dodd-Frank Act empowered the Securities and Exchange Commission to extend the fiduciary standard to all investment advisers who provide personalized advice to retail investors, the formidable brokerage industry lobbying machine has been working overtime to delay, dilute or defeat imposition of the fiduciary standard. The higher-cost-and-reduced-choice argument stands at the heart of these efforts even though opponents of such a standard have not offered any evidence to back these claims.

Now the issue has been examined in an independent academic study entitled “The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice.” In the interest of full disclosure, this study was funded in part by fi360 Inc. and the Committee for the Fiduciary Standard, of which I serve as chief executive and a member of the steering committee, respectively.

Professors Michael Finke and Thomas Langdon designed the study to “take advantage of differences in state broker-dealer common-law standards of care to test whether a relatively stricter fiduciary standard of care impacts the ability to provide services to consumers.” In other words, they observed that several states unambiguously impose a fiduciary standard on brokers, and several others unambiguously do not impose a fiduciary standard, while the majority of states fall somewhere in between.


By comparing the fiduciary and nonfiduciary states, the researchers were able to test the hypothesis that the fiduciary standard leads to higher costs and fewer choices, among other things.

The study results contradict brokerage industry contentions on all counts.

“We find no statistical differences between the two groups in the percentage of lower-income and high-wealth clients; the ability to provide a broad range of products, including those that provide commission compensation; the ability to provide tailored advice; and the cost of compliance,” the study concludes.

In effect, the fiduciary standard is not more expensive for investors; it is more efficient. They can acquire advice that is subject to higher accountability without higher costs or reduced choices.

Why doesn't the fiduciary standard lead to higher costs to investors? After all, it is a higher standard under the law than the suitability standard, with stronger investor protections. Moreover, all other things being equal, investors who know the difference between the fiduciary and suitability standards would prefer that their adviser be held to higher obligations for objectivity and competence, so fiduciary advice is inherently worth more.

The study offers a clear explanation for why there is no apparent cost differential.

It has to do with the ability of firms that adhere to a nonfiduciary standard to take advantage of the information imbalance between advisers who know a great deal about investments and the products they offer, and their clients, who typically know much less. In the absence of fiduciary obligation, broker-dealers and their representatives are able to exploit the information imbalance by extracting extra “agency rents” from clients.

Agency rents, the authors of the study explain, “occur when the broker recommends products that benefit the broker to the disadvantage of the customer. Examples of agency rents include recommending products that have higher commissions or not taking the time to consider alternative financial strategies for a customer.”

The results of the study suggest that when obligated to place investors' best interests first, broker-dealer firms should accept lower profits rather than raise prices or cut services.

Fiduciary principles embody the high ideals attendant to professional advice. The higher-cost, fewer-alternatives argument against the fiduciary standard seeks to put a price on the cost (or value) of professional principles.

Even if one were to accept the dubious theoretical idea that we should compromise professional principles based upon cost considerations, the study from Texas Tech helps make clear that this a false choice based upon practical observations in the real world.

Blaine F. Aikin is chief executive of fi360 Inc. and a member of the steering committee for the Committee for the Fiduciary Standard. ... d=REGALERT
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Mar 24, 2012 5:30 pm

Screen shot 2012-03-24 at 6.21.22 PM.png

Short video describes the difference between a broker selling product and a fiduciary giving advice. Keep in mind that the investment industry is the broker selling product despite trying valiantly to portray it otherwise........
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Mar 24, 2012 4:00 pm

Another case of technically correct, but contextually out to lunch:

The report correctly states that you cannot ascribe a fiduciary duty to a
simple investor initiated transaction relationship, but it ignores the fact
that many of the relationships regulated by transaction based regulation
operate well outside of such a context and this document does not address
this issue. If you are going to understand this issue you need to have a
firm grasp of the underlying processes, since these transcend the legal
niceties upon which most of the arguments to date have rested: the law
should always be driven by the facts and not vice versa. This is a concern
with the palpable legal monopoly of regulatory discussion and decision in
this country.

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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Sat Mar 24, 2012 9:43 am

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(thanks to Ken Kivenko at for sending us this)

This document (In the link above) from Groia & Company Professional Corporation 365 Bay Street, Suite 1100 Toronto, is titled EXTENDING A FIDUCIARY DUTY TO FINANCIAL ADVISORS and gives a look at the duty (or not) that people calling themselves financial "advisors" owe to you, the customer.

As you will see, the self regulating nature of the business has allowed some remarkable misrepresentations to take place in order to better gain access to your money. Professional best practices appear to be not important in this quest.

My advice is for those seeking a fiduciary duty (your interests served professionally) you should only hire one who will give you this in writing. see for examples.

the pdf from Joeseph Groia is also found at this link if needed: [url]
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Re: fiduciary or not? a "Bait and Switch" game

Postby admin » Mon Mar 19, 2012 9:40 am

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Goldman flap underscores fiduciary issue
By Darla Mercado
March 18, 2012 6:01 am ET

When midlevel Goldman Sachs executive Greg Smith blasted his firm publicly last week for what he deems its rapacious behavior toward corporate and institutional clients, many retail advisers whose résumés include wirehouse stints nodded in recognition.

“During the last 30 days that I worked at a brokerage firm, I received 25 e-mails from my branch manager on why every one of my clients needed to have [some] new proprietary mutual fund,” said Bob Rall, a fee-only adviser at Rall Capital Management and a veteran of Prudential Securities Inc.

“Everything was about the YTB on the product — the yield to the broker — not the yield to the client,” he said.

Russell G. Thornton, a vice president at Wealthcare Capital Management Inc. and a Merrill Lynch alumnus, agrees.

“Within the commission and sales environment of the wirehouse world, the general operating principle is: "How can I sell the most stuff to my clients?'” he said.

Although Mr. Smith's frame of reference reflects the institutional market, some advisers hope that his Op-Ed will be a wake-up call for clients, getting them to demand better quality of service they receive from advisers.

“One thing this ... will certainly do is make the idea of a client-first duty of care harder to ignore,” said Michael Branham, an adviser at Cornerstone Wealth Advisors Inc. and 2012 president-elect of the Financial Planning Association.

“Regardless of your legal obligation, it makes business sense to put the client's interests first,” he said. “Whether it's [The Goldman Sachs Group Inc.] or a small independent broker-dealer, that's what clients are really asking for.”

Some of the media coverage declared that advisers' true loyalties are to themselves and their firms, not their clients.

“A blazing resignation at Goldman Sachs shows us once again that financial advisers too often put their own interests first,” blared a sub-headline in an article posted last week on Time magazine's website.

Some advisers think that they are far enough from Wall Street so that the Op-Ed won't spur clients to question their commitment.

But others said that all the attention the Op-Ed generated only made a stronger case for highlighting the distinction between advice from a fiduciary and product information from a sales representative. If anything, it gives the public a hint of the battle brewing in Washington over from whom a fiduciary standard of care should be required.


“I think clients want to know that whoever is working with them has their interests at heart, and that there's more loyalty to the client than to the firm,” said Susan John, chairwoman of the National Association of Personal Financial Advisors.

“In the world of Greg Smith, the affected clients are institutional and presumed sophisticated — they should know and understand the rules of the game,” said William L. McCollum, a portfolio manager and chief compliance officer at Eagle Financial Management Services LLC.

“To the retail client, the revelation of conflicts of interest may come as a surprise: They have been misled to believe that their interests come first, when in most cases, there exists no fiduciary relationship,” he said.

“These firms and their representatives should not pretend to be something they are not,” Mr. McCollum said.

But other advisers think that the basic tenet of doing what is best for the client transcends business models. In other words, fee-only service arrangements aren't the only way to do right by the customer, because bad apples can turn up among those advisers, as well.

“The whole fiduciary thing has been blown out of proportion, and ultimately it boils down to trusting someone,” said Mr. Thornton, who describes his fee-only business model as “not better, but different” from his previous commission-based work.

“There were people I didn't like and didn't trust at Merrill, but I also know fee-only people who I don't truly trust or understand. Bernie Madoff should have been a fiduciary, and he was the worst.” Mr. Thornton said.

“If you do what's best for the client, you still make money — but that's long-term, as opposed to short-term,” said Rick Peterbok, chief executive of Interactive Financial Advisors, a dually registered firm. “If you do more to help the client, the rest will be OK.” ... sueAlert01
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Thu Mar 01, 2012 9:34 am

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UK panel calls on regulators to impose fiduciary duty


Panel says it’s not reasonable to expect consumers to understand complex financial products and associated risks
By James Langton | February 29, 2012 12:35

A British investor advocacy group argues that it's unreasonable to expect ordinary consumers to understand complex financial products, and it calls on regulators to impose a fiduciary duty on the industry.

The Financial Services Consumer Panel Wednesday published a briefing paper on consumer responsibility, which maintains that it's not reasonable to expect consumers to understand the detail of highly complex financial products and services, and the risks they create.

The panel, which is a statutory body that provides advice to the UK Financial Services Authority from the consumer perspective, argues that the overwhelming advantage firms have in knowledge and understanding means that it is essential for the regulator to ensure that products and services provided by the industry should do what consumers reasonably expect.

"Clearly consumers need to act sensibly when making decisions about financial services. However, all too often the products they are being sold are so complex and the risks involved so obscure that it is impossible for them to make reasoned decisions," says Adam Phillips, chairman of the panel.

The paper comes amid a parliamentary debate over new legislation, which would facilitate the creation of a new regulator amid the pending separation of the existing FSA's prudential and conduct regulation responsibilities. The legislation contains a proposal that the new regulator (the Financial Conduct Authority) should "have regard" to the principle that consumers should take responsibility for their decisions.

"Given the complexity of financial services, knowledge is power. This power currently resides in the hands of firms rather than consumers. It is time to redress the balance, not to load further responsibility onto consumers," Phillips says.

He adds that the panel believes that the new FCA should be able to make rules to impose fiduciary responsibilities on the industry. "This would ensure that consumers could be confident that the firms would act responsibly and treat them fairly. At present, the financial services industry is beset by low levels of compliance with regulation and high levels of complaints," he says. ... EN-morning
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