fiduciary or not? a "Bait and Switch" game

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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.
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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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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 7:52 pm

Here is what the big firms tell 80 to 90 year old clients who put their faith and trust in people who called themselves, "investment advisors"
20 legal Fiduciary_020.jpg
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Re: fiduciary: lets play it both ways

Postby admin » Fri Apr 08, 2011 7:50 pm

26 Fiduciary Duty open client_027.jpg
here is a page from the Branch Manager course from the CSI

I don't think lawyers and courts should let investment firms skate away freely from the fiduciary word, when I look at the next few posts and documents.

They are simply playing the 800lb gorilla game, meaning they get to do whatever it is that they wish to. Call them on this game, take them to court and hold them accountable to their words, and their promises.
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Re: fiduciary: lets play it both ways

Postby admin » Sun Mar 27, 2011 10:39 pm

Here is illustration #1 which comes from the handbook about fiduciary duty:
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Re: fiduciary: lets play it both ways

Postby admin » Sun Mar 27, 2011 10:37 pm

B Managers.jpg


The Canadian Securities Institute has BRANCH MANAGERS COURSE BOOK which includes some interesting comments on FIDUCIARY DUTY

Unfortunately the investment business does not follow these, and instead prefers to use the great "bait and switch" tactic of advertising and luring customers into a false sense of security using great promises of trust, professionalism, reliance, capability, and wealth management etc., etc. Then the industry uses the average clients trust and vulnerability to make the maximum commissions possible in about 80% to 90% of the cases as researched by industry sales stats of mutual fund class sales, wrap account sales, etc.
to be continued.........
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Re: fiduciary: lets play it both ways

Postby admin » Fri Mar 25, 2011 7:15 pm

In a slight, but not too far deviation, for history sake, the following about the German Hyperinflation of the early 1900's:


characteristics of Weimer Germany are apparent in the United States. Parallel observations are sometimes less than they appear (e.g., in both cases, the people enjoyed eating meat), but are striking. The German incident happened over four years (also arbitrary. It can be argued that any year from 1914 to 1921 was the point of departure.)

Similarities to the U.S. have been in motion for 30 years or so. These include: (1) a high concentration of wealth among those who leverage, (2) the middle- and lower-classes falling behind, but not understanding or knowing it (or - knowing it but not allowing themselves to think about it), (3) the rise of a gambling culture, (4) including financial speculation on the stock exchange, which spread to all ranks of the population, (5) the blossoming of a financial industry, with quantity crushing quality (Weimer bank tellers became financial advisers since most people were at a loss, and would take any advice, which was often horrible, but probably well-intentioned)

read the whole thing at

http://www.aucontrarian.com/
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