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fiduciary or not? a "Bait and Switch" game

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Re: fiduciary: lets play it both ways

Postby admin » Sun Jun 26, 2011 9:22 am

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Report: Clients confused about standards and don't care
http://www.investmentnews.com/apps/pbcs ... /306199968
By Lavonne Kuykendall
June 19, 2011 6:01 am ET
While the financial advice industry wrangles with regulators and lawmakers over a universal fiduciary standard, most investors are far more concerned about getting their phone calls returned.

According to a J.D. Power and Associates survey released last Thursday, [color=#FF0000][color=#FF0000]85% of 4,200 full-service investors say they have never heard of — or don't understand the difference between — the suitability and fiduciary standards.[/color][/color]

The Securities and Exchange Commission has recommended to Congress a rule change that would place broker-dealers under the tighter fiduciary standard. Currently, only investment advisers must adhere to that more onerous requirement.

But investors don't seem very concerned about the different standards.

Among full-service investors whose financial advisers adhere to the fiduciary standard, 57% said that this increased their comfort level. Then again, 42% said that it decreased their level of comfort.

The survey also showed how clients rate their advisory firms. RBC Wealth Management received the highest rating from clients.

Although clients appear confused about fiduciary standards, they do have a very clear idea of what they want from their adviser. Most are focused on how often they hear from their representative or adviser, and whether they get the information they need.

“There is a growing expectation for outreach” among investors, especially since the market downturn battered their portfolios over the past couple of years, David Lo, director of investment services at J.D. Power and Associates, said in an interview.

The lack of investor enthusiasm about a single fiduciary issue might make firms consider whether it is worth the extra cost of meeting the higher standard, particularly for an imprimatur of which most clients are unaware, he said.The findings suggest instituting a set of best practices that will leave their clients “a lot happier” at little extra cost, said Mr. Lo.

At the top of the list: Clients have clearly indicated that they want more frequent and clearer communication that explains their investments' performance and how fees are charged.

That should be easier than in the past because investors have become much more interested in communicating online, the survey found.

Nearly six in 10 said that they visited their investment firm's website in the past year, up from 52% who said that they did in 2009.

More than half the investors said that they have exchanged e-mail with their adviser this year. In 2008, that percentage was more like 19%.

Among investors who visit their investment firm's website, older investors are far more active. Clients more than 64 years old said they visit the sites more than 35 times a year. Somewhat surprisingly, respondents under 45 said that they only visit their advisory firm's site 12 times a year.

The most common actions on investment company websites are reviewing documents posted by advisers and reviewing tax information. Advisers should take advantage of their investors' online activities and reach out via e-mail and on their websites, Mr. Lo said.

That said, investors also want their phone calls returned, preferably within 24 hours, he said.

Investors also were asked to rank their advisers on factors including investment performance, fees, product offerings and website quality. RBC Wealth Management earned the top score, Charles Schwab & Co. Inc. came in second and Fidelity Investments ranked third.

E-mail Lavonne Kuykendall at lkuykendall@investmentnews.com.
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Re: fiduciary: lets play it both ways

Postby admin » Fri Jun 24, 2011 8:53 am

From http://faircanada.ca/top-news/statement ... listening/
The investment industry looks poised on the very cliff edge.......of spending another fifteen to twenty five years milking their lucrative bait and switch. ("lets advertise trusted "advisors" and then deliver commission salespeople instead, and pocket the rewards from that")

Statement of Priorities Signals that New OSC Chair is Listening
The Ontario Securities Commission (OSC) has published its 2011-2012 Statement of Priorities (Statement of Priorities) revising the draft Statement of Priorities published for comment earlier this year. The revisions include a number of specific initiatives that have been added in order to address public comments they received. These initiatives include:

Research the pros and cons of imposing a fiduciary duty on financial advisors and identify what problems the OSC thinks that introducing a statutory fiduciary duty would resolve;
Work with the CSA, IIROC and the MFDA to develop harmonized standards for cost disclosure and performance reporting to investors, thereby improving clients’ account statements;
Monitor the Point of Sale initiatives’s (POS) impact on price competition in mutual funds as implementation of POS moves forward and is expanded to other investment fund products;
Work with the Ontario Government to explore a mechanism by which the OSC could award compensation to Ontario investors who suffer losses because of Securities Act violations; and
Conduct town hall meetings and investor round tables to gather views of investors.
FAIR Canada is encouraged to see the addition of these specific initiatives to the Statement of Priorities. While the Statement of Priorities does not fully meet recommendations made by FAIR Canada, the OSC’s Investor Advisory Panel, the Small Investor Protection Association and other investor advocates, it does constitute a significant improvement over previous years’ statements of priorities.

The Statement of Priorities signals Chair Howard Wetston’s vision for the OSC as a more investor-focused regulator.

Fiduciary Duty
FAIR Canada has been advocating for a fiduciary duty or best interests of the client standard for some time. FAIR Canada strongly believes that the framework within which registrants operate needs to shift from “suitability” and “know your client” rules to one where a client’s best interests are put first, so that registered firms and individuals that provide investment advice are required, when providing that advice, to put their client’s best interests first. The suitability requirements currently in place in Canada are insufficient to adequately protect individual investors. FAIR Canada believes that such a change is key to remedying the imbalance and misalignment of interests in current registrant-client relationships.

These misalignments may occur for a number of reasons. First, under the existing framework, registrants are often compensated and incentivized to sell products that may be “suitable” for a client, but not necessarily in the client’s best interests. Second, there is no specific requirement that a client’s best interests be put first in the provision of investment advice.

The OSC’s Investor Advisory Panel also supports the implementation of a fiduciary duty. The Investor Advisory Panel commented in its submission on the OSC’s Statement of Priorities that a fiduciary duty would eliminate the need to prove the existence of a fiduciary duty on the facts of a specific case and would greatly enhance the access of retail investors to rights of action against financial service professionals.

FAIR Canada believes that obligations arising out of the relationship between clients and advisors should be built around a duty to act in the best interests of clients. FAIR Canada suggests that the best interest of the client or fiduciary standard be tailored to the different types of investment services provided by intermediaries to investors. Regulators need to set out the expectations under such a standard. The Investor Advisory Panel similarly believes that the imposition of a fiduciary duty, on its own, is not sufficient and that the Commission should also specify the types of behavior that would run contrary to the standard by issuing a companion policy or other guidance.

We hope to see a draft rule or policy document for comment from the OSC prior to the end of 2011.
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Re: fiduciary: lets play it both ways

Postby admin » Sun Jun 12, 2011 6:27 pm

from ken kivenko www.canadianfundwatch.com, great stuff

IFIC speaks out on Fiduciary duty

.... 7. Will the introduction of a statutory fiduciary duty address any concerns regarding possible conflicts of interest?
Not really. If a conflict of interest exists as a result of compensation, it will continue to exist even if there is a statutory fiduciary duty. A financial advisor still could make the same recommendations to clients as long as the financial advisor’s compensation is fully disclosed to the client and the client agrees to proceed. In many ways, existing securities regulation is more strict since it includes numerous outright prohibitions regarding compensation in order to eliminate various opportunities for conflict of interest. Existing securities regulation also includes requirements relating to the disclosure of, and proper handling of, conflicts of interest.

Investors can also choose an advisor who provides a fee-based account.A “fee-based account” is one
where the client is charged an annual fee by their dealer, rather than commissions for each transaction they request. The fee is calculated as a percentage of the value of the account. Source: IFIC, FAQ :Fiduciary Duty And Financial Advisors (DRAFT) , Dec. , 2010

Any comments? [ note that IFIC implies that fund dealer Reps are Advisors [ The UK FSA, England's financial services regulator has passed new rules prohibiting financial advisers from receiving commissions from companies for recommending their products to clients, starting at the end of 2012. Customers will be told up-front what fees they are paying for investment advice. The change means advisers cannot collect fees from mutual fund companies when they recommend their products, representing a major shift for the fund industry.“What we’ve seen over the years is consistently bad advice over which products to be purchased, driven particularly by the fact that commissions exist,” - Peter Smith, head of the investments policy department at Britain’s Financial Services Authority]

UK getting better, Canada going backwards : The UK’s Financial Services Authority (FSA) has made improved complaint handling is one of central features of its new, more intrusive approach to regulation. On June 3rd , the FSA announced new complaints handling rules as part of a package of measures designed to drive up standards within the investment industry. Among the changes, the FSA confirmed that the limit on awards made by the Financial Ombudsman Service will increase from £100,000 to £150,000, effective January 2012. The FSA 's new limit is necessary in order to prevent a decline in consumer protection. Additionally, the new rules include the planned abolition of ‘two-stage’ complaints handling; a move opposed by the industry, but supported by consumer advocates, which is intended to make sure firms resolve complaints fairly, faster and do not dismiss them the first time. The rules will also require firms to identify a senior individual responsible for complaint handling; and, provide guidance to help firms understand the processes they might need to meet FSA requirements on root cause analysis, and guidance requiring firms to take account of ombudsman decisions and previous customer complaints e.g. organizational learning .

This is an industry with confusing products and an appalling record for mis-selling. It feels designed to generate problems for its customers. To require consumers to endure a drawn out and unresponsive complaints process is bad for dealers and bad for investors. Companies deny themselves crucial insight into what they are getting wrong and consumers need herculean powers of resilience and determination to get a problem sorted out. Good complaints handling contributes to customer loyalty and should provide the opportunity for firms tocorrect problems in product design or sales before issues become widespread. Recently , the FSA announced a fine for Bank of Scotland of £3.5 million for failures related to complaints handling of its retail investment products. Last year, Royal Bank of Scotland and Natwest were fined £2.8 million for multiple failings in the way they handled customers’ complaints. http://www.fsa.gov.uk/pubs/cp/cp11_10.pdf In Canada , 5 investment firms want to dismember OBSI and pick a dispute resolver that suits them better!
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Re: fiduciary: lets play it both ways

Postby admin » Wed Jun 08, 2011 12:52 pm

Is it the role of the IFIC to define regulatory standards and common law edicts such as fiduciary responsibility? What worries me more than the propaganda piece itself (George Orwell would have been tempted to place it as Appendix A in Animal Farm) is the very fact that such a document may be (it is currently a draft) communicated with impunity and without regulatory oversight. After all, this is the IFIC defining standards governing financial relationships.

Also note that this is really an opinion piece, and, given the public profile and vested interests (a conflict which is not disclosed in this document) of the organization, should be clearly marked as such (ethics) : there are no references to any case law (legal precedent) or any other authority that would support their arguments where these subtly veer from what one could rationally consider the “consensus” view. On the one hand, when discussing the standards that many would like to see implemented, there is an incredible vagueness, yet on the other hand, a pointed degree of illogical certainty when discussing the “Maginot” like characteristics of current regulation of the transaction.

“Even with a statutory fiduciary duty, financial advisors would remain entitled to be paid for what they sell, as long as it is disclosed to the client and the client agrees to proceed.“

Really (re above)! I think the actual fiduciary standard is several leagues removed from this embarrassing attempt at codification.

The government/Canadian people really need to decide whether ethics, integrity, accountability, transparency, independence and objectivity are factors and characteristics worthy of reinforcing in the Canadian retail financial services market place, because from my point of view you are penalised if you even attempt to be seen to be acting in the best interests of the individual investor.

I think the attack on OBSI is a defining moment: a barometer of an underlying and confident ascendance of a long standing moral decay in the financial services industry. We will see, but this moment, I feel, represents a move back to the last redoubt on the battlefield.

Andrew Teasdale
(advocate comment......I have to agree with Andrew, and add that financial advice is far removed from sale of financial products, and it is the incestuous need of the industry to co-mingle those to near opposites that are holding them from doing the honest thing. They (industry) just cannot let go of the cash cow that deception provides them) See Bait and Switch article at http://www.examiner.com/crime-in-calgary/larry-elford
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Re: fiduciary: lets play it both ways

Postby admin » Sun Jun 05, 2011 6:12 pm

From the Investment Funds Institute of Canada: IFIC

1. What is a “fiduciary duty”?

In general terms, a “fiduciary duty” is a concept used by Canadian courts to impose a duty of loyalty on a person who has been entrusted to look after the best interests of someone else. It usually arises in circumstances where one person is vulnerable to the other because of the personal nature of the relationship, or because of the broad scope of authority given to the other.

Some types of relationships always include a fiduciary duty. Lawyers have a fiduciary duty to their clients because of the personal nature of the relationship. Directors have a fiduciary duty to the companies they serve because of the scope of authority they have over the company.

With other relationships, a fiduciary duty does not automatically exist, but can arise in specific circumstances. For example, a fiduciary duty may arise when one person places so much trust, confidence and authority in another as to become vulnerable to that other person, and that other person proceeds with an awareness of such trust and confidence.

2. Are financial advisors in Canada already subject to a fiduciary duty?

Generally, no, but in some situations, yes. Pursuant to Canadian common law, whether or not a financial advisor would be found to be a fiduciary to his or her client would depend on the particular facts. The existence of a fiduciary duty in a given situation would depend upon the reasonable expectations of the parties based on such factors as vulnerability, trust, reliance, discretion, confidence, complexity of subject matter and community or industry standards.

The sort of advisor-advisee relationship that would likely be found not to be fiduciary in nature would be one where the client simply placed orders with a discount broker who then carried out the requested transaction. On the other hand, an advisor-advisee relationship that would likely be found to be fiduciary in nature would be one where an elderly, unsophisticated client placed his or her retirement savings in the hands of an investment advisor to invest as the advisor deemed necessary to achieve certain investment objectives for the client (e.g., to provide income through retirement).

Financial advisors are already subject to extensive regulation by Canadian securities regulators. These regulations impose many of the same requirements that apply to situations where a fiduciary duty exists.

3. What is a person required to do under a fiduciary duty?

It varies, based on the circumstances. A person who has a fiduciary duty toward someone else as well as authority to make decisions on that other person’s behalf must place that other person’s interests ahead of their own when exercising that authority. This is the case with directors of corporations. In some contexts, this means that the person with the fiduciary duty cannot personally benefit from the relationship except to the extent that the other person has provided informed consent. There are other variations of the duty based on the risks that the courts are trying to address. Canadian courts have held that the fiduciary duty is different in important respects from the ordinary duty of care, and that, while the fiduciary obligation carries with it a duty of skill and competence, the special elements of trust, loyalty and confidentiality that underlie a fiduciary relationship also give rise to a corresponding duty of loyalty.

4. What would a financial advisor be required to do under a fiduciary duty?

It’s not clear. The obligations of a fiduciary duty vary depending on the circumstances and how the Canadian courts define it. One expectation is that a fiduciary duty would require that the financial advisor disclose to his or her client the amount of compensation that the financial advisor is going to receive as a result of the client’s investments, and obtain the client’s consent before proceeding. The existing regulation of financial advisors already requires that this information be disclosed at the time that the client opens their account. There are other occasions during the relationship when the financial advisor discloses his or her compensation to the client before the client decides to proceed with an investment.

5. Why are some people proposing that a fiduciary duty should be imposed on financial advisors?

There are mainly two concerns expressed by the people who are proposing a fiduciary duty for financial advisors.

The first concern is that some financial advisors may be doing a sub-standard job for their clients due to insufficient knowledge or skills.

The second concern is that there is a perception that financial advisors will recommend to their clients that they purchase the product that will best compensate the financial advisor, rather than the product that is most appropriate for the client.

6. Will the introduction of a statutory fiduciary duty address any concerns over knowledge or skills?

No. Financial advisors already are subject to regulatory and other legal requirements to use care, skill and diligence when providing advice to their clients. Introducing a statutory fiduciary duty would add a requirement with respect to loyalty, not skill and knowledge. The way to deal with any person who has inadequate knowledge or skills is to train and educate them better. Think about the issue of unskilled car drivers. We already have rules of the road that prohibit bad driving. Adding a new rule that “everyone must put the interests of other drivers ahead of their own” won’t improve unskilled drivers.

7. Will the introduction of a statutory fiduciary duty address any concerns regarding possible conflicts of interest?

Not really. If a conflict of interest exists as a result of compensation, it will continue to exist even if there is a statutory fiduciary duty. A financial advisor still could make the same recommendations to clients as long as the financial advisor’s compensation is fully disclosed to the client and the client agrees to proceed. In many ways, existing securities regulation is more strict since it includes numerous outright prohibitions regarding compensation in order to eliminate various opportunities for conflict of interest. Existing securities regulation also includes requirements relating to the disclosure of, and proper handling of, conflicts of interest.

Investors can also choose an advisor who provides a fee-based account.

A “fee-based account” is one where the client is charged an annual fee by their dealer, rather than commissions for each transaction they request. The fee is calculated as a percentage of the value of the account.



8. Should Canada restrict or prohibit embedded fees, similar to what is apparently being done in the U.K. and Australia, and what the U.S. is considering?

To be clear, “embedded fees” usually refers to up-front commissions and ongoing trailer commissions that the mutual fund’s manager pays to the financial advisor and later recoups over time out of the management fees paid by the mutual fund. In Canada, embedded fees are not hidden: they are disclosed in the mutual fund’s prospectus and by the financial advisor to his or her client.

Embedded fees are handy tools for investors. When the manager, rather than the investor, pays the up-front commission to the financial advisor, it enables 100% of the investor’s money to be invested in the mutual fund, rather than first deducting a commission from the investor’s money. When the manager pays the annual trailer commission to the financial advisor, it ensures that the investor’s advisor is compensated annually for ongoing service in circumstances where the investor may not be able to do so through a fee-based account where the investor pays their financial advisor directly.



9. What is the current state in Canada with respect to statutory fiduciary duties for financial advisors?

Canadian common law already addresses in what situations a fiduciary duty will appropriately be found to exist between a financial advisor and his or her client. In addition, financial advisors already are subject to extensive regulation by our securities commissions and by the SROs, a fundamental goal of which is to protect investors. Also, every financial advisor must work through a dealer company that also is subject to further extensive regulation. On top of that are further regulations that govern the way products are sold and operated. Every financial advisor and his or her dealer also is under the supervision of at least two regulators – the securities commission in their jurisdiction and an industry-specific regulator: either the Mutual Fund Dealers Association of Canada or the Investment Industry Regulatory Organization of Canada. In most cases, members of the public and media are not aware of the scope and extent of these regulations. The impact of these regulations begins long before an investor ever becomes a client of the financial advisor, and continues at several levels throughout the relationship between the client and his or her financial advisor. These regulations include the following:
A requirement to deal fairly, honestly and in good faith with clients
A requirement to observe high standards of ethics and conduct in the transaction of business with clients
Proper disclosure and handling of conflicts of interest
Prohibited sales practices
Supervision of activity in client accounts
Background checks (such as police, credit, employment, education and proficiency course completion)
Industry-specific education requirements
Compensation disclosure
Insurance and bonding

Every dealer is responsible for maintaining systems to monitor compliance with all of these regulatory requirements.

10. If introduction of a statutory fiduciary duty would not add much protection for clients, then why not institute it?

The main reason is that it would perpetuate a myth that it would dramatically improve the regulation of financial advisors. Financial advisors already are subject to specific rules and regulations that clearly address the main issues that arise in the relationship between a financial adviser and his or her client. These include existing requirements to deal fairly, honestly and in good faith with clients and to observe high standards of ethics and conduct in the transaction of business with clients (2.11 of the MFDA Rules; 29.1 of the IIROC Rules). The introduction of a statutory fiduciary duty would not help to clarify the scope of an advisor’s duties from situation to situation.

Another reason is that a fiduciary duty is not as comprehensive a solution as many think. Even with a statutory fiduciary duty, financial advisors would remain entitled to be paid for what they sell, as long as it is disclosed to the client and the client agrees to proceed. A statutory fiduciary duty does not mean that clients always will buy the product for which the advisor is paid the least amount.

Last, investors need to remain focused on what is the best investment for them, rather than rejecting good investment recommendations simply because of how much their advisors would be paid.

We also would emphasize the securities regulators and mutual fund industry are in the process of rolling out the new point-of-sale regime that is intended to provide investors with more simplified disclosure of the types of information that investors find most helpful, including past performance and dealer compensation. More than ever before, investors will have immediate access to information which will help them ensure they are buying the right investment for their circumstances, and can balance it against the amount they know their dealer is being paid to complete the sale for them.

We also encourage both investors and members of the media to become more familiar with the scope and extent of existing regulation in Canada that protects investors throughout their investment cycle.
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Re: fiduciary: lets play it both ways

Postby admin » Tue May 17, 2011 8:48 am

NO FIDUCIARY STANDARD NEEDED IN CANADA
David Di Paolo, Kara Beitel / May 12, 2011
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In the wake of numerous instances of financial fraud in North America, there has been increased focus on the duties and obligations owed by investment professionals to their clients. In the U.S. and elsewhere, regulators are proposing changes that would impose a fiduciary standard on those entrusted with managing investor funds.

In Canada, however, regulators have been reluctant to move to a fiduciary standard, in part because some of the new standards being proposed in other countries have been in place in Canada for some time — and in part because they do not believe imposing a fiduciary standard is necessary.

That said, while a fiduciary standard applicable to all registered individuals is not on the table in Canada, the OSC, IIROC and the MFDA are moving ahead with regulatory reforms that will change advisors’ relationships with their clients, bringing them closer to a fiduciary standard.

The fiduciary

The legal concept of a fiduciary is exemplified by agent-principal and trustee-beneficiary relationships. The agent or trustee has absolute obligation to act for the sole benefit of the principal or beneficiary. A high standard is imposed on the fiduciary because he often has discretion over the interests of the beneficiary; thus, the beneficiary is reliant upon the fiduciary.

Part of the impetus to move to a fiduciary standard in the U.S. was existing legislation that applied a fiduciary standard to financial advisors but not broker-dealers. Because financial advisors and broker-dealers can both provide personalized investment advice or recommendations about securities to retail investors, different standards for each were confusing and could lead to regulatory arbitrage.

The fiduciary standard in the United States is comprised of:


A duty of loyalty, which prohibits advisors from putting their interests first by requiring conflicts of interest be avoided or disclosed
A duty of care, requiring advisors to determine that they are not basing recommendations on materially inaccurate or incomplete information, and to seek best execution of the clients’ securities transactions.
Over the years, Canadian courts have considered relationships outside of the agent-principal and trustee-beneficiary categories and developed a principled approach to identifying situations in which a fiduciary duty is owed. Having considered the relationship between financial professionals and clients, the courts have clearly stated the relationship is not presumptively fiduciary.

A financial professional owes clients a duty of care. However, a fiduciary relationship, and all the attending obligations, may or may not exist, depending on the circumstances of the specific relationship. The Ontario Court (General Division) provided useful guidance on fiduciary duties in the context of the broker-client relationship (Varcoe v. Sterling, 1992). This description has been cited and approved by the Supreme Court of Canada in describing the principles of fiduciaries in the context of independent professional advisory relationships.

In addition to civil standards, there have been regulatory requirements for a number of years — at least in Ontario — that a registered individual deal fairly, honestly and in good faith with his or her clients. Self-regulatory organizations (SROs) such as IIROC and the MFDA have included similar requirements in their rules.

IIROC Rule 29.1 requires that investment professionals observe high standards of ethics and conduct in the transaction of their business; not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and be of such character and business repute as is consistent with the standards of the rule. The MFDA has the same requirements, but also states explicitly that investment professionals under its jurisdiction must deal fairly, honestly and in good faith with their clients.

The duties imposed on investment professionals by the civil courts, the OSC and SROs provide important protections for investors. Canadian securities regulatory agencies have proposed strengthening and enhancing regulations to further protect investors.

In September 2009, amendments to National Instrument 31-103 came into effect that contain provisions relating to “know your client” and suitability obligations, as well as conflict of interest management, identification and disclosure. Moreover, IIROC and the MFDA have proposed, and in the case of the MFDA passed, amendments to their rules pursuant to the Client Relationship Model (CRM) project. Neither the amendments to NI 31-103 nor the CRM proposals impose a fiduciary duty on IIROC and MFDA members, but they do codify and in some cases add to the obligations these investment professionals owe to their clients.

A fiduciary standard in Canada?

The existing duties and obligations imposed on investment professionals, together with the rules developed through the CRM project, provide investors with significant safeguards in their financial dealings with registered investment professionals. They are similar to the protections that would be afforded under the uniform fiduciary standard being proposed in the United States.

In many instances, the advice of investment professionals, while no doubt valued, is not relied upon or even followed by the client. Many individuals conduct their own research and analysis and take an active role in determining which investments to hold in their portfolio. In cases where a client is made aware of and is knowledgeable of the risks of a particular holding or strategy, investment professionals, who are not acting in the capacity of a true fiduciary, should not be held to the higher standard applicable to fiduciaries.

In civil actions, the imposition of a fiduciary standard may deprive the investment professional of certain defences, including that the client is at least partially responsible for her own losses, or that the losses are attributable to market events rather than negligence.

Moreover, the damages that flow from a finding of breach of fiduciary duty can be higher than those flowing from a finding of negligence, in some cases significantly so. A blanket imposition of a fiduciary standard would ignore the realities of many advisor-client relationships. In this regard, Canadian regulators have taken the correct approach to enhancing investor protection.

David Di Paolo and Kara Beitel are partners at Borden Ladner Gervais LLP (BLG) specializing in securities litigation.
| Take the poll | U.S. previews new financial rules |

Filed by David Di Paolo, Kara Beitel, editor@Advisor.ca
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Re: fiduciary: lets play it both ways

Postby admin » Fri May 13, 2011 2:07 pm

http://tv.investmentexecutive.com/video ... with-notes


Expert's Podium
Tell us what an adviser really does
S. Kelly Rodgers
Published Thursday, Apr. 22, 2010 11:00AM EDT
Last updated Sunday, Apr. 25, 2010 8:18AM EDT
S. Kelly Rodgers is president of Rodgers Investment Consulting

This article by Janet McFarland on the potential for tougher rules for financial advisers raises some interesting questions. While I strongly support tougher enforcement and higher standards within the investment industry, I wonder just how it might work.

In Britain, the practice of an adviser receiving commissions for the sale of products from the company offering products will be banned in 2012. In Canada there is much talk of applying a ‘fiduciary standard of care’ to advisers. Which is better? Which has some chance of working?

Before we can answer that question, we must first examine what we mean by a ‘fiduciary standard of care’. I am not a lawyer, so my explanation may be criticized by those trained in the law but it is a plain English definition that I have been told by lawyers is fair.

A Fiduciary must put the interests of those to whom they owe a duty ahead of their own and a Fiduciary must avoid conflicts of interest.

The current standard for an adviser is that they must recommend only products that are suitable. A Fiduciary would be required to recommend the most suitable products.

More on financial advisers:
Let's get the ethics clear here
What if advisers couldn't accept commissions from mutual fund companies?
Video: How your adviser is paid
Video: Is your financial adviser just pushing funds?
Take a closer look at your adviser, and be skeptical
Provide true value or advisers are 'toast'
Let’s examine this distinction. Hypothetical investor, we will call him Jim, goes to see his Manulife adviser. Manulife has recently introduced a group of funds managed by Mawer Investment Management, a very highly regarded firm. Jim has seen the many press reports on the quality of the Mawer funds and management team and thinks the Manulife Mawer Balanced fund would be an appropriate.

Current Standard of Care

Manulife adviser: "Jim, this is an excellent fund from an excellent company and I agree this is appropriate for your objectives. While our version of the fund is new, the original fund has been given a five-star rating by Morningstar. You can purchase this fund on a front end load basis or a rear end load basis. If the former, I will receive a higher trailer fee and you will pay an upfront commission, which we will negotiate. If the later, I will receive a lower trailer fee but the company will pay me a commission and you will be locked in for a number of years. Which option makes the most sense to you?"

Fiduciary Standard of Care

Manulife adviser: "Jim, this is an excellent fund from an excellent company and I agree this is appropriate for your objectives. While our version of the fund is new, the original fund has been given a five-star rating by Morningstar. There are a number of ways you can make this purchase. As a Fiduciary, I have to avoid conflicts and act in your best interest so I will explain all of the options.

"You can purchase our version of the fund and the MER will be 2.45 per cent annually. I will be paid a service fee, called a trailer. I will also get a commission at the time of purchase, which we will negotiate or you can chose the deferred sales charge method.

"Now, since I am a Fiduciary and must act in your best interest, I should also tell you that you can purchase the original version of this fund directly from Mawer. You call their 1-800 number or purchase through a discount broker for a small commission. The MER when you purchase this way is 1.03 per cent annually, less than half of the MER for our version. They will not pay me a service fee out of the MER, so you and I will have to negotiate what is a fair payment for my time and advice.

"Saving 1.40 per cent annually in MER expenses will allow you money to grow much faster, and over the next 20 years, this will make a very significant difference in your wealth. We can figure out how much of a difference by going to the Ontario Securities Commission website and using their MER calculator.

"So Jim, would you like to purchase the Mawer Balanced fund with a 2.45 per cent MER or the one with the 1.03 per cent MER? For every $100,000 you invest in this fund, the difference in the annual expenses will be $1030 every year that you own it. "

There are many other firms and products where this type of conversation could take place and readers should not think the issue only applies to Manulife. Investors Group and Industrial Alliance also have products that can be purchased much more cheaply directly from the managers. And for readers who think this is only a problem for insurance company products, many of the investment firms participating in managed account programs offered by investment dealers can be accessed directly by clients for much lower fees.

As you can see from this hypothetical conversation, I believe it is highly unlikely that advisers will adhere to a fiduciary standard of care as long as the industry maintains its current structure.

My concern would be that the current fiduciary standard would be weakened and lessened in its interpretation. Instead of ‘you must put the client’s interest ahead of your own’ it would become ‘you must make recommendations that are the best for the client, within the context of the products you have to sell’ (even if those products are not the best) which is the current standard.

Given the current structure of the investment industry and the overwhelming number of advisers who are little more than distributors (salespeople) I cannot see how a true fiduciary standard is practical.

Simpler Approaches

Perhaps some simpler approaches that would not require a complete industry restructuring and could be implemented immediately would be useful.

We could start with reversing the recent change in categories of registration. Canada has eliminated, with the stroke of a pen, salespeople in the investment industry. They changed the name of the registration category from Salesperson to Dealing Representative. Investment and Mutual Fund Dealers have also assisted. Never did you see a business card that said Salesperson. They have titles like, Financial Planner, Investment adviser, Account Executive and Vice president, if they are a really good salesperson.

Most of us understand what salesperson means. How many people outside of the investment industry know that the rest of these titles mean the person is a commissioned salesperson.

The second thing that could be done is to require IIROC, the regulator for the Investment Dealers, to actually publish on their website the registration of all advisers. Currently this must come from the Provincial Securities Commissions and the OSC site is excellent for this, but it does not contain much detail on IIROC registrants, such as whether they are registered for options or when they joined the industry.

The third thing would be to disclose the components of the pricing. What is the client paying for the investment management and what are they paying for the sales commissions and service fees? An investor cannot assess the value of the advice received if they do not know the cost of that advice.

The fourth thing would be for each of the provincial securities commissions to engage more actively in the regulation and oversight of the investment dealers and mutual fund dealers and rely less on ‘self regulation’.

And finally we could begin to move to a system like Britain is moving to by banning commissions. If advisers want to be treated like investment professionals, then they should begin to act like investment professionals, not sales professionals. If they want to be treated like sales professionals, then they should acknowledge that they are sales people and not try to hide it.
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 8:23 pm

ConductPracticesHndbk.jpg


Another Industry course training manual from the Canadian Securities institute that the industry fails to follow
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ConductHnbk.jpg
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 8:20 pm

93 Uniform Fiduciary Standards_020.jpg
once again the US is a few years ahead of understanding and admitting what relationship truly exists.
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 8:13 pm

58 industry codes_059.jpg
58 industry codes_059.jpg
funny, that your canadian investment dealers, some claiming the highest degrees of ethics and transparency in their codes of conduct cannot even be upfront with customers and tell them in advance what duty of care they should expect......instead they rely on the industry "bait" with trusted professional advice, and then the industry "switch" by delivery of a correspondence trained commission salesperson
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59 Playing the market_060.jpg
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 8:06 pm

54 Courts Approach_055.jpg
54 Courts Approach_055.jpg
a bit more common sense from the Fair Dealing Model


there is an awful lot of fraudulent and negligent misrepresentation involved in selling someone on the concept of trusted advice, and then delivery of commission sales. Those are two different services, and fraud is the only way to sell one and deliver the other.
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57 advisory relationship_058.jpg
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 8:04 pm

53 Law and Fair Deraling_054.jpg
the industry killed this FAIR DEALING MODEL. I felt that it was to .........um.......fair.
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 8:00 pm

51 RBC Investment Philosophy_052.jpg
seems to me this firm is promising a fiduciary duty........or certainly leading customers to believe such a relationship exists:
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 7:57 pm

47 Hunt V TD_048.jpg
another big bank beats an elderly couple in court

(best bait and switch in the industry) see http://www.examiner.com/crime-in-calgar ... and-switch
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 7:55 pm

44 introduction Case Study_045.jpg
Here is more from industry training manuals:
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