advisor fraud, professionals, or salespeople masquerading?

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Postby Advisor » Thu Oct 20, 2005 2:36 pm

I love how the fact that moving from DSC to FE costs investors NOTHING, and in some cases reduces their fees, only gets 13 words out of this entire article.

Nice bias!!! Gotta wonder what is in it for a journalist to try to turn something that is only positive for investors into something seedy. You are hurting this industry by doing that, not helping it.

Also didn't mention how in many cases if you don't convert your 10% free each year, you LOSE them, so any advisor who isn't on the ball and doing this with their clients is doing them a great disservice. How about THAT??? I wonder how you could make THAT sound dishonest?

nevermind, you'd find a way.

Postby Guest » Sun Oct 09, 2005 7:07 pm

Trick of the trade for fund advisers bears scrutiny


Tuesday, October 4, 2005 Page B21

Under the guise of helping clients, investment advisers and mutual fund companies have devised a neat little trick for helping themselves.
Pay attention if you bought funds with a deferred sales charge, or DSC, because you may have had this happen in your account. It's common enough to have prompted the regulators at the Mutual Fund Dealers Association of Canada (MFDA) to issue a notice to advisers reminding them about their obligations to clients.

DSC funds are losing popularity, but they still account for a lot of fund sales because they enable you to avoid an upfront sales commission. Instead, you only pay if you redeem your investment in the six or seven years after you buy. What can be done about this potentially expensive limitation on your flexibility to change funds?

The fund industry's solution is to allow 10 per cent of your holdings in a DSC fund to be taken out each year without penalty. In a process that is starting to become automated, the money is then moved into a front-end load version of the same fund, with the upfront sales commission waived so that there is no cost involved.

The MFDA's concern is that these switches are being done without investors understanding the process or consenting, which might on the surface seem like a minor thing. After all, investors are getting out of their restrictive DSC funds and into front-load funds, which can be redeemed cost-free at any time, short-term trading fees aside.

The controversy comes from the fact that DSC conversions allow advisers to make more money in fees off a client's account while doing nothing extra to warrant the pay increase. Fund companies benefit here as well in that they've got a nice incentive for advisers to keep client money in the same funds once the DSC schedule is up, rather than moving to a different fund company.

Where clients provide their consent, those 10-per-cent annual DSC conversions are defensible. What's much harder to justify is a different switching scheme that has the same ultimate result -- more money for advisers.

Here, the switches involve money held in DSC funds for a long enough period that redemption fees no longer apply. At this point, a DSC fund is not different from a front-load fund in that clients have total freedom to move their money. Instead of just letting these DSC fund holdings alone, though, advisers are switching them into front-load versions of the same fund.

Some fund companies offer a lower management expense ratio on front-load funds, so in a few cases clients might gain from having their DSC money switched. But the true beneficiaries here are advisers -- again, they squeeze out a little more income for themselves and their firms.

To understand how this works, you have to know the differences between DSC and front-load funds from the adviser's point of view. Front-load funds bring in an upfront sales commission ranging from zero to 2 per cent, while DSC funds generate a fat commission of up to 5 per cent that advisers share with their firm.

Front-load funds also compensate advisers for client service by paying so-called trailer fees of 0.5 to 1 per cent a year in most cases. Because they offer a big commission at the beginning, DSC funds pay about half the trailers that front-load funds do. Here, you see how an adviser gets the best of both worlds with a DSC conversion. There's the upfront commission of up to 5 per cent and, after the conversion, there's the 1-per-cent trailer fee.

It's important to note that investors don't pay anything extra for these conversions. The MFDA says it's still possible for investors to be hurt through DSC conversions, however. For one thing, it's possible that a switch from a DSC fund to a front-load fund could be considered a sale of an investment, which means taxes would apply in non-registered accounts. Some fund companies have obtained rulings saying these conversions are not taxable events, but the MFDA says there's been no definitive word.

The real issue here isn't potential tax liabilities, though. Rather, it's the idea of an adviser sneaking around behind a client's back, with the collusion of the fund industry.

To prevent this, the MFDA wants advisers to tell clients all about DSC conversions, including any extra remuneration and tax implications, and then get a signature to indicate consent. There's no specific regulation saying this has to be done, but it is considered to be part of an adviser's duty to deal with clients in a fair, honest and clear way.

Ideally, investors who own DSC funds will have a chat with their advisers about conversions into front-load funds. Most investors will sign off on the move without another thought, even though there's an argument that says a pay increase for the adviser should be earned through enhanced service.

As for advisers who don't disclose their DSC conversions, it's hard not to see them as commissioned salespeople working primarily for themselves rather than clients.

Postby admin » Tue Sep 13, 2005 8:24 am

Canadians tired of high fees, lack of transparency in investment industry, survey finds

Sep 8, 2005 - Canada Newswire


Investors seeking low fees, transparent pricing, unbiased advisors

TORONTO, Sept. 8 /CNW/ - Canadian investors believe they are paying too much in fees to those who manage their money, and many find the complex fee structures of the investment industry confusing, according to a new survey by Decima Research.

The survey, commissioned by Stratos Wealth Management (Stratos), a division of MD Management Limited, reveals a troubling picture of frustration and dissatisfaction among Canadian investors when it comes to understanding and receiving value for the fees they pay for investment products and services. Stratos is a new business venture from the MD Financial Group, one of Canada's largest independent financial services organizations.

The survey also reveals that while many feel the investment industry lacks clarity and transparency in disclosing the fees investors pay, many have little or no idea what they pay - leaving a large proportion of investors in the dark when it comes to their personal financial management.

"It's clear that investors are dissatisfied with the fees they pay - and those who aren't should be, given the negative effect high fees have on investment returns," says Sandy Wilson, chief operating officer for CMA Holdings, the parent company of both MD Management and Stratos Wealth Management. "Canadians are looking for clear, competitive and transparent pricing - with no hidden fees."

Here are some key findings of the survey:

Investors tired of high fees, low transparency

- 48% of Canadian investors believe they are paying too much in fees, compared with just 40% who are comfortable with the fees they pay. A further 12% don't know one way or the other. Of those who offered an opinion, therefore, 55% believe they are paying too much.

- A surprising number of investors - 43% - believe that the investment industry lacks clarity and transparency in disclosing the fees investors pay.

Investors in the dark

- It seems that the information provided by investment firms is not doing the job. 44% have only "a vague idea" or "no idea" of the fees they pay on the management, purchase and sale of investments by their fund managers, securities dealers or investment advisors.

- Of those who do know what they are paying, 43% report paying 3% or more of their total investment portfolio in fees. Of that number, an incredible 6% claim they pay more than 10% in fees. This contrasts with data from Investor Economics, which show that, on average, Canadians pay between 2.2% and 2.8% of their portfolios in fees(x).

- Individual financial advisors seem to get a passing grade: 67% agree that their advisor or investment company has taken the time to provide information on fees. Still, almost one-third (31%) disagree, notwithstanding regulatory efforts to improve disclosure of fees.

Stratos Wealth Management is modeled on its highly successful parent company, MD Management Limited, part of the MD Financial Group, which manages more than $19 billion in assets. The company plans to leverage this experience by providing wealth management to all busy professionals seeking more customized, comprehensive and cost-effective services.

Stratos is based on a simple idea: offering quality investment products and ongoing financial advice and service - all for a low fee. The new company offers one other point of differentiation: its unbiased financial advisors are measured and rewarded based on client satisfaction - not sales commissions.

About the survey

This telephone survey was conducted with 376 Canadian investors between the ages of 25 and 64 between August 18 and August 21, 2005. It was conducted by Decima Research Inc., on behalf of Stratos Wealth Management. Results to the survey can be considered accurate to within plus or minus 3.1 percent, 19 times out of 20.

About Stratos Wealth Management (

Based in Toronto, Stratos Wealth Management is a division of MD Management Limited, one of Canada's largest and most respected independent investment companies. With more than $19 billion in assets under management, MD Management has been serving members of the Canadian medical profession and their families for more than 35 years.

About MD Financial Group

MD Financial Group(TM), refers to various CMA Holdings Incorporated companies offering financial planning through MD Management Limited, mutual funds by MD Funds Management Inc. and MD Private Trust Company, discretionary investment counselling and portfolio management services through MD Private Investment Management Inc., executor and trustee services through MD Private Trust Company, banking referral services in collaboration and through National Bank and insurance products by MD Life Insurance Company and Lancet Insurance Agency Limited.

(x) For Canadian industry wrap products, "The Fee-Based Report," Investor Economics, Winter 2005, p. 87.
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Postby admin » Wed Aug 31, 2005 11:10 pm

NEW BOOK: Diana Salomas and Henry Dembicki, Why swim with the sharks? Paperback ISBN: 0973706007 Fine Print Press, April 2005. The authors may not be “financial gurus” but the 213 page book is full of common sense financial wisdom that will keep you firmly on track to early retirement (if that’s your goal), years sooner than you think possible. Lots of ideas on how to deal with financial advisers. Sample - "It'd be like asking someone who sells time-share vacation condos for help planning your holidays. Do you really expect them to tell you about cheaper alternatives, like camping?”
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advisor title misleading?...innapropriate for salespeople?

Postby admin » Wed Aug 10, 2005 10:34 pm

Read this if you are interested in discussion, debate, or the exploring some legal aspects surrounding the question of whether investment advisors are really salespeople masquerading as something that they are not. I am quite willing to be proven wrong on the topic by healthy debate.

Taking a short tour of some of the rules and regulations surrounding the use and or misuse of the “advisor” title, as it is either used or misused by a large majority of investment salespersons in Canada.

Starting with this OSC web site: ... s.html#857

This site gives us a glimpse into the more than one thousand (yes,1000) registration categories in the investment industry

1 Category number one, “advisor” is found in approximately NONE of the fifty five pages of registrants at the largest investment firm in the country.

2 Category number 1083 (salesperson)is by far and away the most common category of registration found at this same firm.

And yet, most of the registered salespersons at this firm are claiming the title of “advisor” on their business cards, their web advertising, and their promotions, and have done so since shortly after 1987 in an effort to improve or alter the public image and the marketing results of their sales job. ... rities.jsp

For each individual seeking registration in an advising capacity, we require confirmation of education and investment experience to demonstrate that the relevant proficiency requirements of OSC Rule 31-502 have been met; i.e. the requirements of either per s. 3.1 of Rule 31-502. The details should be provided in the proficiency and employment sections of the 33-109F4. The individual should include letters from previous supervisors, or, in the alternative, the contact information for those supervisors, to confirm the investment experience. This information should be provided in paper format to the Registrant Regulation Section of the OSC. ... 02rule.jsp

(From this page we see the proficiency requirements for advisors, in short, they need to be finished the CIM course or partly finished the CFA course etc. to call themselves this title)

3.1 Securities Advisers and their Representatives, Partners, Officers, Branch Managers and Compliance Officers
(1) An individual shall not be granted registration as a securities adviser or a representative, partner or officer of a securities adviser unless
(a) the individual has been granted registration previously as a representative, partner or officer or an associate partner or associate officer of a securities adviser, investment counsel or portfolio manager or as a securities adviser, investment counsel or portfolio manager;
(b) the individual has
(i) completed the Canadian Investment Manager Program or the first year of the Canadian Financial Analyst Examination Program, and
(ii) established that the individual performed research involving the financial analysis of investments for at least two years under the supervision of a registered adviser; or
(c) the individual has been granted registration as such by his or her principal regulator, as that term is defined in National Instrument 31-101 Mutual Reliance Review System for Registration, and that registration has not been suspended or terminated.
(2) An individual shall not be designated by a securities adviser as the compliance officer under section 1.3 of Rule 31-505 Conditions of Registration or as a branch manager under section 1.4 of Rule 31-505 Conditions of Registration unless the individual has been granted registration previously as a representative, partner or officer of a securities adviser, investment counsel or portfolio manager.

“After two decades, I have yet to meet a registered salesperson, calling themselves an advisor, who had actually completed the requirements necessary to lay claim to the “advisor” title. Yet it was used extensively, as mentioned above, for marketing reasons.”

“It was (and is today) misused, in my opinion, in order to lead clients into the false sense of security that they were not dealing with self-interested salespeople, but instead were dealing with client-interested professionals. It was used to lend credibility and trust to client relationships that were then often abused and used to pursue the greatest sales commissions for the occasional bad sales rep. In addition, most of the firms advertising and promotion supported this trusted professional stance.”

“However, when push came to shove, as it did when 92 year old Norah Cosgrove of Toronto took RBC to task in small claims court, their statement of defense spoke to the truth and spoke volumes about the misleading aspect of claiming trusted professional status:

RBC stated something to the effect that at no time were they acting in a fiduciary capacity and they felt they owed “no duty of care” to this and presumably all other RBC clients. See Ontario Superior Court, Small Claims action # for the exact wording of their statement of defense.”

“In summary, firms may talk the talk (when talk is easy), but fail to walk the walk. And when called onto the carpet by this disgruntled 92 year old client, to use one public example, they may recant even the talk. I maintain that use of the title, “advisor” on investment salespersons business cards commits each and every one of them to a fiduciary level of responsibility to the client, and to claim anything less is misleading and damaging to the public interest. This fiduciary level of responsibility to the client should and could be used by class action lawyers to obtain redress and compensation for all clients over the past decade or two, who have received a sales pitch by sales people, rather than the professional investment advice, as the firm and the representatives promised instead.”

“For a look to the future, and the potential size of the actions possible towards these firms, see the NASD web site and investor alerts: ... odeId=1249

In July 2002, NASD charged a broker with securities fraud involving, among other abuses, purchasing large volumes of Class B shares that kept his customers from taking advantage of the lower sales charges available through different classes of shares.
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Postby admin » Tue Aug 09, 2005 5:36 pm

Trailer mathematics and the impact on behaviour

Generally speaking equity mutual funds sold on a DSC basis earn advisers 0.5% trailer fees while funds sold on a front-end load (FEL) basis cost investors 1% of assets for trailer fees each year. On top of this, FEL investors pay a 0-5% sales commission to the advisor. Investors buying a DSC fund are tied to an early redemption penalty schedule typically from 6 percent down to an NIL. after six or seven years. Let's take a look at the numbers We’ll have to make a few assumptions as fund financial statements do not isolate out these commissions but you’ll get the idea.

For the advisor:
FEL: He earns, say 2% upon sale plus N (0.5%) where N is the number of years the fund is held
DSC: The advisor receives a 1.0% trailer for each year you hold the fund.
Roughly, without considering changes in NAV, his breakeven is 0.02 plus N times 0.005=0.01N or N= 0.02 / 0.005 equals 4 years
After four years he’d be better off had he sold you a DSC fund which in fact is the observed result in the majority of cases.

For the firm:
FEL: The firm didn't pay out any commission at the time of sale; the investor paid for this. The firm is committed to paying 1.0% trailers annually out of the management fee for as long as you hold the fund. The MER has this embedded, so in fact, investors pay the trailer-there’s no free lunch.
DSC: The firm is committed to paying out 0.5% trailers for as long as you hold the fund plus a 5% commission at the time of sale. This upfront commission is embedded in the MER; we’ll assume it's amortized faster than the typical six-year DSC penalty, say five years.
Thus, after five years the firm has received its original 5% (more, if the NAV has increased) and the MER which contains the 0.5% trailer fee is a flow-through cost thereafter. After five years, since the MER does not reduce, the firm is sitting pretty. If you redeem early, the firm’s cunningly designed redemption schedule guarantees they more than recover their initial commission investment.

For the investor:
FEL: The investor pays, say 2%, upon buying the fund and has 1% p.a. extracted from his assets as long as he holds onto the fund. Note that the MER of an FEL. sold fund is, with a few rare exceptions, the same as a DSC sold fund.
DSC: The investor pays 0.5% per annum as long as he holds onto the fund. This is subtracted from assets and of course reduces returns. If the investor sells the FEL. fund in six years or less his cost has been 0.02 plus N times 0.01. If he sells a DSC fund during this period his cost is N times 0.005 plus DSC penalty relative to N. According to some sources, the average hold period is four years. So, the FEL fund has cost him 6% of assets in trailers. The DSC fund has cost him 6% also. If he were to hold on to the DSC fund beyond six years, he'd be better off in terms of trailer payouts long-term IF the MER were in fact reduced at this point.

Here lies the catch. The MER’s of FEL and DSC funds are the same and stay constant. After the DSC penalty period (and even earlier) the MER should in principle come down as the initial 5% commission payment has been fully amortized (recovered). This doesn't happen, so someone's getting hosed -- it isn't the advisor or the firm. Guess who?

One other point. Most fund prospectuses and Annual reports boldly proclaim that the firm pays the trailers, not you giving the false imprssion of free service. Physically, they do cut the cheque but it's you who'se really paying the bill. This is one reason that investor advocates have argued that any redemption penalties after the firm has recovered its initial investment should be rebated to the fund. In practice, all early redemption penalty amounts go to the firm which is maybe why you should consider investing in fund companies rather than their funds.

You might ask why advisers act this way. A large part of the problem lies in the infamous compensation grid. This is a table, usually on one sheet of paper and usually marked “ for internal use only ” that sets out the percentage split the firm will pay the individual adviser. Down the left side are gross commissions and fee production levels in ascending order. Across the top are transaction commission sizes also in ascending order. The details vary from for the firm, but the percentage split for the individual advisor starts very small and rises with increased sales production and the size of the order. While the training courses for advisers promote understanding of their clients needs, establishing a suitable investment strategy and periodic review of accounts to make sure things are on track, the compensation grid virtually assures that unless they push product they will starve. Rookie advisers quickly learn that the way to stand well with the branch manager is to qualify for the list of producers published monthly in the branch, not by helping clients get the best possible return on their investments. Thus the system drives them to sell products rather than solutions. Many advisers feel the pressure to sell a small group of products rather than the best ones available. That also explains why low cost funds and ETF’s aren’t found in most client portfolios. It’s all in the math.
(thanks to Ken k for this article)
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Postby admin » Fri Aug 05, 2005 8:20 am

I had a couple of hedge funds pitched at me with the intent that I should market them to my clients. They had commissions and or trailing commisisons of about double what an ordinary or similar investment might have paid. this was clue number one. When underwriters are paying huge commissions, they are usually aware that they are marketing a pig.

The benchmark depends on each type of investment, but the best professionals I have met usually meet the test of, "what would you like your parents account to be charged for this investment". They are true professionals, putting their client interests first and they are always going to succeed.
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Postby Guest » Tue Aug 02, 2005 8:15 am

Anonymous wrote: Lots of (un-named) hedge funds were promoted to the industry with extra-ordinary commissions. The results are now coming out on some of them.

I must have missed this. Which investments were/are paying extra-ordinary commissions? What are extra-ordinary commisions (what's the benchmark?)?

Postby Guest » Mon Aug 01, 2005 10:15 pm

good comment noticed in the July 2005 Advisor's Edge Report, available at for those who missed it:

"If someone agrees to pay you a ton of money in commission, it's probablly a bad product".

this could not be more true, and it is a terrific indicator to any advisor who has enough experience (and ethics) in the business. Lots of (un-named) hedge funds were promoted to the industry with extra-ordinary commissions. The results are now coming out on some of them.

Postby Guest » Thu Jul 28, 2005 9:30 pm

thanks for your response, but humor me if you will just because I am slow. Does this mean that you can represent, or misrepresent yourself as anything you would like your title to be, regardless of what it is that you are officially registered as?
To be clear, does it mean I could call myself anything I preferred to call myself regardless of my qualifications? Or I could call myself a title that I am not legally registered as in the industry?


Postby Mike H. » Thu Jul 28, 2005 7:39 pm

To simplify:

The securities act and regulators regulate activities of trading and advising.

A person who gives advice on securities but is not licensed to trade, must register with the securities comission unless they are an accountant, lawyer, or teacher giving securities advice incidentally to their main occupation.

A journalist is allowed to give general advice in a publication without registration as long as it is not directed to an individual.

A person licensed to trade is automatically allowed to give advice. A giver of advice may call him or herself an advisor, as that is what they do, even though it is not a category of registration.

So 'advisor' is not a category of registration, but a permitted activity and a permitted job title. To further complicate matters, the OSC does not regulate job titles, but the IDA and MFDA do.
Mike H.

weasel words, or answers?

Postby Guest » Thu Jul 28, 2005 4:03 pm

I dont understand the OSC answer to your question posed to them about advisors being allowed to call themselves advisors, even though they do not meet the educational requirements to be registered with the IDA or the OSC as advisors.

Are they simply using language to dodge the issue, or are they actually saying that you can give yourself (as a salesperson) any title you like and that they are not interested in what title you use?

from Town Hall web site ... -and-a.jsp
see question and answer below:

18. Why are investment salespeople who are officially registered as either "registered representatives", or as "salespeople", at the Securities Commission, allowed to represent themselves to the public as "investment advisors", indicating a different level of fiduciary duty to the public, when the Securities Act is clear on which titles are allowed and which are not?

The OSC registers individuals in the categories of salesperson, officer, director or partner. These categories are then further designated as trading or advising. The firm can be registered as either a mutual fund dealer, an investment dealer, or as investment counsel or portfolio manager (ICPM). The latter ICPM category is what we refer to as an adviser (spelled “er”). While advisor (spelled “or”) is widely used in the industry to represent a salesperson or representative, it is not a registration category. The OSC does not register job titles.

Before investing, investors should check the registration of anyone selling securities or offering advice with the OSC. They can do this on the OSC website, or by calling the OSC Contact Centre.

Postby Guest » Thu Jul 21, 2005 9:09 pm

What “professional advisor” means

It usually brings on the legal and moral obligations of a fiduciary nature

By Glorianne Stromberg

There cannot be a financial advisor alive who is not having to deal with the changing expectations of clients and regulators regarding the provision of financial services. These expectations include a heightened emphasis on the advisory role and the need for professionalism. Given the controversy provoked by David Brown, outgoing chairman of the Ontario Securities Commission, when in a recent speech to the Toronto CFA Society he said that financial advisors are professionals with a duty to understand the products they recommend and the risks they entail, it is timely to look at what just what it means to be a “professional financial advisor.” The starting point is to remember that when you hold yourself out as providing advice, regardless of the descriptive words you use, you are representing to your clients that: > You have recognized expertise in your chosen field; > You are competent to provide the particular type of advice you are offering to your clients; > They can rely on you for such advice; and > You can be trusted to act and conduct your operations with integrity, objectivity and in the client’s best interests. This implicit representation normally gives rise to the legal as well as the moral obligations of a fiduciary, whether or not you are exercising discretionary authority. In the days when people simply called themselves mutual fund or insurance “salespeople,” the consequences of being in the advice-giving business didn’t arise. The public knew it was dealing with people whose job was to sell products and that any “advice” given was purely incidental to the sales transaction and usually didn’t create fiduciary obligations.One of the consequences of positioning yourself as a professional financial advisor rather than a salesperson is that you are exposed to being judged by standards that are applicable to professionals rather than salespeople. The common characteristics of a professional with a capital “P” include:> Successfully completing a common post-secondary educational program whose curriculum has been independently and rigorously designed to encompass independently and rigorously identified competencies and is delivered by institutions accredited to do so by an independent oversight body;> Being a member in good standing of a self-regulatory organization that sets standards of practice and conduct that are rigorously monitored and enforced, including standards that prohibit conduct and transactions in which the professional has a conflict of interest or in which the client is vulnerable to the influence of the professional;> Clearly disclosing in a written engagement agreement the services to be provided, who will provide them, what that person’s qualifications are, what reporting will be done, what form the reporting will take, how and when you will be compensated for your services and by whom, what conflicts of interest exist (if any are permitted to exist), and the like; and> Clearly disclosing to the client the amount of the fees and other compensation, including referral fees (if any), that you receive or are receivable in respect of the services you have provided.Professionals with a capital “P”, are not paid on a commission basis. They do not receive embedded compensation from third-party suppliers; they do not borrow money or receive financial assistance from clients or third-party suppliers who are hoping the “professional” will use their services or products. They do not accept incentives from such suppliers. Referral fees (if permitted at all) are strictly regulated, disclosed and flowed through to the benefit of the client, unless the client’s express consent to do otherwise has been obtained. Any deviation from these standards is looked on as being conduct that is unbecoming to the professional and exposes the professional to disciplinary action.These expectations of a professional financial advisor are reasonable ones for clients to have. The industry and the regulators need to work on making sure advisors meet these expectations. IE

Postby Guest » Tue Jun 28, 2005 10:36 pm

A professional should act like one
Clients deserve to know how their advisor is paid (summary)

John De Goey
Financial Post
Monday, March 28, 2005

Having spent more than a decade as an extremely active member of what is now Advocis, I eventually despaired at the association's unwillingness to accept the notion of compensation transparency. To date, Advocis has fought the OSC's Fair Dealing Model at every stage of the process. This is largely, but not entirely, due to the FDM's desire to make advisor compensation more transparent for consumers. Advocis believes it is inappropriate to clearly disclose how and how much advisors are paid. The organization generally wants its payment structures to remain a mystery to the client.
When a person uses the services of a lawyer or accountant, that person knows how much the service costs because that person gets a bill for services rendered. Too many financial advisors think and act like sales agents; they believe it is none of their clients' business how or how much they get paid.

Postby Guest » Tue Jun 28, 2005 10:31 pm

Union Tribune Nails the Problem
SEC needs to protect investors, not brokers
April 17, 2005
During a time when the Nazis were bombing Paris and Allied forces were frantically fleeing across the English Channel, securities regulators in the United States were preoccupied with more prosaic financial concerns.
Thanks to their efforts, Congress passed the landmark Investment Advisers Act of 1940, which has been protecting investors like you and me ever since. The document is simple in its most basic premise. The legislation requires that investment advisers always act in their client's best interests.
While it might seem sad to think that legislation was necessary to mandate this, we're revisiting this historical act today because of who was not originally covered by its language. The act notably exempted traditional stockbrokers, who simply traded securities for commissions. At the time, the exemption made sense because brokers have historically been sales reps, not financial advisers.
But as anybody who has watched the recent commercials for brokerage houses knows, brokers aren't just pushing stock tips anymore. In fact, many of them would probably rather staple their mouths shut than admit they are stockbrokers. Instead, they are calling themselves financial consultants, financial advisers and wealth managers.
It's probably better for investors that many brokers have evolved beyond simply handling sales transactions in return for commissions, but that evolution has triggered a debate that's centered on this question: If a stockbroker is behaving like an investment adviser, shouldn't he or she be subject to the same higher standards that any financial planner must observe?
While the answer is certainly obvious to me and probably everybody reading this column, regulators have been agonizing over the issue for many years. In 1999, the SEC floated a proposed rule that would have extended the exemption to brokers, who had started charging fees instead of relying strictly on commissions. Brokers began switching to fee-based pricing when the increasing popularity of do-it-yourself discount brokerage firms caused commissions to plummet.
But as stockbrokers started repositioning their business to offer customers advice, they encountered a potential problem. The 1940 act states that any advice brokers provide to their clients has to be be "solely incidental" to their jobs as sales reps. Since 1940, the SEC had never defined what "solely incidental" meant or enforced the provision. Wall Street, however, pretty much defined the term to mean anything goes. In television commercials, magazine spreads, and marketing materials, stockbrokers promise to help investors meet their retirement goals, plan wisely for college and find ingenious ways to afford a second home. Does that sound like "solely incidental" advice to you?
The SEC must have been swamped with other really important things because five years later, the controversial decision to expand the exemption to include brokers charging fees – presumably for advice – still hadn't made it on the commission's agenda for approval.
I can understand how these things happen. Sometimes the laundry piles up at our house for an awfully long time. But plenty of staunch critics of the expanded broker exemption, including the Consumer Federation of America, which represents roughly 300 nonprofit organizations, the AARP and financial planning groups, weren't so understanding. And for good reason. Paradoxically, the SEC's inaction, procrastination, or whatever you want to call it, meant that Wall Street, for all these years, could act as if the proposed rule was in effect.
Clearly peeved, the Financial Planning Association, which represents certified financial planners and other professionals, filed a lawsuit last year to force the SEC to vote on the revised exemption. That got the government's attention. The commission solicited a new round of comments from interested parties on the proposed exemption. Only one major brokerage firm, T.D. Waterhouse, sided with consumer groups, who wanted the expanded exemption hacked to itty bitty pieces.
Which brings me to what happened a few days ago in Washington, D.C. The SEC commissioners unanimously voted to allow brokers to keep their prized exemption, but there were some changes. The SEC now says that a broker must register as an investment adviser if he or she maintains discretionary control over an account or engages in financial planning. That's a good thing, but at the same time the SEC only encouraged the anything-goes interpretation of that pesky "solely incidental" standard. The SEC now says financial advice will be considered solely incidental if it is in "in connection with and reasonably related to brokerages services." That could mean just about anything.
While planting a fat kiss on the brokerage industry's cheek, the SEC did acknowledge that investors are terribly confused about the differences between an investment adviser and a broker. No kidding. Consequently, the SEC announced that it would pay for an outside study to determine whether brokers and investment advisers should abide by the same regulations now that we're in the 21st century. So the SEC hasn't ruled out future changes. Thank goodness.
If you're on the verge of dispelling this controversy as a big stink about inconsequential wording, it's not. The regulatory language is important for many reasons. For instance, if you have a brokerage account with a stockbroker, you need to understand that the interests of the brokerage firm come before yours. This means that a broker, for example, could recommend a mutual fund, not because it's excellent, but because his brokerage firm is getting extra cash from the fund company to promote it. A broker could also urge that his client invest in a variable annuity because he could win a free vacation if he meets a sales quota.
Certainly not all brokers are going to conduct themselves in this way, but the point is, it's perfectly legal. In fact, even if a broker wanted to act as a fiduciary for his or her brokerage clients (and plenty would like to), the firm would forbid it. By the way, you won't necessarily ever find out about the behind-the-curtain investment motivations because the disclosures for brokers' conflicts of interest are weak. In contrast, investment advisers are prevented from behaving this way and their disclosure requirements are much stricter. Investment advisers are fiduciaries, who by law, are required to act strictly in their client's best interests.
When you're shopping for a new refrigerator at Sears and the salesperson is praising the latest Kenmore side-by-side model, you may naturally wonder if this refrigerator is really better than the Whirlpool or General Electric model displayed on the same aisle. Or is the salesperson just being partial to his employer's brand? Maybe he is, maybe he isn't. It's up to you to decide. If you have a brokerage account, you need to maintain that same sort of skepticism when a broker advises you. Too bad it has to be like that.
Lynn O'Shaughnessy is the author of "The Retirement Bible" and "The Investing Bible." She can be reached at


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