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$600 mil damages to Canadian Public for mutual fund gouging?

Postby admin » Thu Mar 01, 2007 12:45 pm

With a number of settlements, fines, etc in the United States on the topic of "advisors selling clients a higher costing investment product when a lower cost but otherwise equal alternative was available", it brings into question the role of regulators in Canada. Where are their staff on protection of Canadian consumers? It seems they stand very firmly on the side of the industry instead of being balanced, objective and fair to the public.

I I were to take the number of mutual funds sales (dollar figure) from IFIC for the past ten years, and multiply that by the 60% to 85% average in Canada that the industry admits to selling using the DSC option (highest commission, highest cost to client), it would be a simple matter to calculate the amount of damages owed to Canadian consumers for overcharging them, by an industry that promises to be "advising" them.

First from IFIC site

average sales each year of approx $20 bil
times 60% (lowest end) of DSC sales estimates equals $12 bil sold by DSC
Times 5% commissions earned by selling the DSC version equals $600 million dollars in potential damages owed by mutual fund selling, (oops, should say "advising") organizations for overcharging or gouging clients.
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Postby admin » Mon May 01, 2006 8:22 pm

further to jon chevreau's article previous about DSC's maybe being on the way out.......................I just wonder how long it will take the full service investment advisors to begin telling clients that they can purchase mutual funds without DSC charge.

When I was at RBC there was a well enforced but unwritten policy that "thou shalt not inform the public of cheaper methods to mutual fund aquisition". I was told this by many RBC senior managers when I worked there. It struck me as inconsistant with industry and company codes of conduct and ethics that the company would enforce rules which were contrary to the CLIENT FIRST promises.

A $13 million dollar lawsuit against RBC is outstanding and should resolve this issue in the next year or two. $10 mil of the $13 is for charity to recognize the multitudes of clients who do not have the knowledge, the wherewithal, or the emotional energy required to hold some of our largest corporations accountable.
See documents filed in Lethbridge court on the process. They will prove very interesting
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Postby admin » Mon May 01, 2006 5:39 pm

DSC may be on its way out
Do the math: You can make more money without it

Jonathan Chevreau
Financial Post

Monday, May 01, 2006

CREDIT: Peter Redman, National Post
Paul Butler, vice-president of national accounts at Royal Mutual Funds, says his firm is moving to eliminate front-end charges altogether.

Since mutual fund mania swept the country in the mid-1990s, the favourite form of compensation for many financial advisors has been the back-end load or DSC model -- DSC being deferred sales charge.

Advisors like the model because it pays them up front 5% commissions. Ostensibly that fee comes from the fund companies, not directly from clients. Clients thought they liked DSC, too, if they bought the line that they were not really paying anything up front -- all their money was "working for them from Day 1."

But DSC is rapidly falling out of favour with advisors. According to Toronto-based Investor Economics Inc., the percentage of funds sold with DSC has fallen from 74.2% at the end of 2000 to 66.9% in 2003 and 56.5% in 2005. Meanwhile, funds sold with a 0% front load have risen from 25.8% to 33.1% to 43.5%. Those figures ignore no-load funds sold by banks and direct-to-consumer firms such as Phillips Hager & North Ltd.

Another nail in the DSC coffin may have been driven home in April. Royal Mutual Funds Inc. has eliminated sales charges on third-party funds sold by its in-house financial planners in Royal Bank retail branches (for accounts of more than $50,000). Previously, it levied either a DSC or a 1% or 2% front-load sales charge on other companies' funds.

"We're moving to a model where there are no front-end charges at all, but we're also saying we're not going to be looking at DSC," says Paul Butler, vice-president of national accounts for RMF.

Butler says the move to eliminate DSC and front-end sales charges is aimed at 7,500 retail-investment specialists at Royal Bank of Canada. They are under the Mutual Fund Dealers Association (MFDA) and licensed to sell mutual funds, not individual stocks, bonds or exchange-traded funds. They only started to sell third-party funds two years ago.

They are on salary, with a bonus for sales levels above certain thresholds. They have little incentive to sell one mutual fund over another, or indeed funds at all, since they can also sell bank deposit and credit products.

Vancouver-based RBC retail investment specialist Jayelene Catala says the end of fund commissions is a "win-win" for all, particularly for clients who gain flexibility. "I see it as being able to bring down one more barrier clients may have in consolidating business with the Royal Bank."

With regard to the front-end zero model, Butler says, "we already know the best advisors out there are doing that already." These include advisors at two other groups at the bank: the 1,500 retirement and financial planners at RBC Investments, and the 1,200 investment advisors at Dominion Securities. DS advisors do not work in the Royal Bank branches and are licensed by the IDA to sell all kinds of securities, including mutual funds.

Even at 0% front load across the board, the bank will collect annual trailer fees of 1% on equity funds and 0.5% on bond funds. "They still get the full trailer fee, so it's not as if anybody's giving up a bunch of money or cutting a special deal," said fund analyst Dan Hallett.

The trend to 0% front load has been going on for years at discount brokers and full-service independents, but RMF (and TD Canada Trust before it) are among the vanguard of financial planners in the branches.

Warren Baldwin, regional vice-president at T. E. Financial Consultants Ltd., sees RMF's move as "the beginning of the end for DSC." Baldwin has never been a fan of DSC. If the reps at Royal Bank branches are going the same route as securities-licensed investment advisors, the only sales channel that will still be using DSC will be independent mutual fund salespeople, he says.

However, industry consultant Dan Richards disagrees this is the final nail in the DSC coffin. And Rudy Luukko, a fund analyst with Morningstar Canada, is less certain DSC is on its way out.

"It's fair to observe that the gains in market share by bank-sponsored funds could represent some shift away from load funds in general and DSC funds in particular," Luukko says. "Market share gains by bank-sponsored no-load funds could in part reflect buyer resistance to DSC."

RBC's in-house line of no-load funds were among the highest-selling funds in the country in March, he says, pointing to big sellers such as RBC Dividend. RBC funds pay trailers of 115 basis points -- 15 basis points more than most third-party funds pay. However, those fees go to the bank, not to the salaried sales person.

Jim Rogers, chairman of Vancouver-based Rogers Group Financial Advisors, says the public is more aware that DSC limits their flexibility. Still, there are situations where clients should not move their money, he cautions. The seven-year DSC schedule may help clients maintain discipline in a normal market cycle.

Even so, customers can be frustrated when they wish to leave a fund that has exhibited the no-no of "style drift" in an attempt to match the performance of rival funds. Changes in fund managers or merging and closure of funds are other events that can tie the hands of DSC clients.

Because RBC is a market leader, its move "will accelerate the rate at which DSC funds are not being sold," Rogers says. He says advisors will just have to live with less compensation.

The shift to front-load zero is proceeding in part because the arithmetic shows established advisors can eventually make more money. Compare compensation in a typical seven-year period of a DSC fund. With DSC, an advisor gets 5% up front and seven years of 0.5% trailers, which is 3.5%. With front-load zero, they get seven years of 1%, or 7%, but that 1% tends to be on rising asset levels, says Dan Richards, president of Toronto-based Strategic Imperatives. And of course, 1% will continue to come in after seven years.

Advisors building a business tend to be hungrier for the up front 5%. But more established advisors are focusing on building the long-term value of their business. "The way to do that is having the largest possible stream of current revenue," he says.

© National Post 2006
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Postby admin » Sun Mar 26, 2006 1:41 pm ... 00114.html

'Punk'd': A Cautionary Tale

By Michelle Singletary
Sunday, March 26, 2006; F01

Imagine your brokerage firm sends you a letter saying your account will now be handled via a centralized call center. So one day, you call to ask a simple question about one of your mutual fund holdings. Next thing you know, you've been persuaded to switch your money into another fund, costing you extra fees and charges.

What does the salesperson get for this switch? Tickets to a rock concert.

What just happened?

To borrow from the MTV show of the same name, you got "punk'd."

However, unlike on the show hosted by Ashton Kutcher, in which getting punk'd means you are the victim of a prank, this is for real. This allegedly happened to some Merrill Lynch customers, according to NASD, the private-sector regulator for the securities industry.

NASD announced recently that it had fined Merrill Lynch $5 million for allegedly holding impermissible sales contests, failing to supervise advisers and other violations in connection with the operation of a financial call center with locations in Hopewell, N.J., and Jacksonville, Fla.

Learn from this story. It's a lesson on how not to get punk'd.

In 2001, NASD said Merrill Lynch began handling thousands of customer accounts throughout the country in what the firm called its Financial Advisory Center, or FAC.

Generally, accounts with assets of $100,000 or less, or those with minimal transactional activity, were moved to this centralized financial center, in part so Merrill Lynch's full-service financial advisers in branch offices could devote more attention to larger accounts, according to NASD. The firm failed to disclose that the brokers staffing the centers often had five years or less brokerage experience and that they were limited to recommending mutual funds.

"These brokers weren't as experienced as the brokers in the regular branch offices," said NASD's head of enforcement, James Shorris. "And they didn't get enough supervision."

From 2001 to 2004, NASD said, the brokers/advisers were found to have "engaged in a pattern of mutual-fund switch recommendations that were accompanied by misrepresentations and omissions of facts to customers."

In settling this matter, Merrill Lynch neither admitted nor denied the charges.

The company, in a statement, said it was going through "growing pains" as it expanded the financial center.

But it sure looks like a profitable pain.

Between March 2001 and August 2002, more than 1 million customers were transferred to the financial center. At its peak size in 2002, this part of the firm had approximately 1.3 million accounts holding approximately $20 billion in assets. That year, the center had gross revenues of approximately $210 million. Shorris said a significant amount of that revenue was obtained through mutual fund switching activity.

Moreover, NASD found that several advisers recommended mutual fund moves that were not suitable for their customers. Advisers also recommended that customers switch without first telling them there might be comparable funds within their existing mutual fund families, which would have avoided sales charges.

Then there were the contests.

We all know that companies often offer incentives to their sales forces to boost revenue. But in the investment world, certain contests are prohibited.

NASD said its investigation found Merrill Lynch conducted three contests that violated the non-cash compensation rule because they favored the sale of the firm's own proprietary mutual funds.

The regulator found that advisers who sold the most proprietary mutual fund products were awarded dinners, concert tickets to see Foreigner and other perks.

Merrill Lynch says it has made significant changes to its operation.

"We have acknowledged that we had growing pains in Merrill Lynch's Financial Advisory Center four and five years ago when it expanded," the company said in a statement. "We are confident we've worked them out."

I certainly hope so. But there are many perils out there for investors. To protect yourself, I suggest you take some advice from NASD.

If you are shifted to a call center, be wary of an adviser who recommends that you move money out of existing investments and into new ones, particularly into their firm's own mutual funds or investment products.

Specifically ask the adviser if there is a similar fund within your existing mutual fund family. Find out the cost to switch. Get him or her to prepare a side-by-side comparison of fees and expenses between your existing fund and the recommended one.

To double-check, use the NASD's "Mutual Fund Expense Analyzer." You can find this analyzer at .

This is also not the time to be polite. I know your mama or daddy may have said never ask people how much they are getting paid, but in this case ignore that advice. Ask how the adviser is being compensated. Ask if selling you this product would help him or her win a contest. Be sure to take notes on what you are told in case you need to complain to NASD later.

I was punk'd once.

A broker advised me to switch from one fund to another. He earned more than $1,800 on that transaction. Naive me, I ended up in a fund similar to the one I had owned. That was a costly mistake I won't make again.

Remember that old saying. Fool me once, shame on you. Fool me twice, shame on me.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online at

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

© 2006 The Washington Post Company

(advocate comments, "of course any and all of this may occur in Canada, with the distinct difference being that there is no client based regulatory agency in Canada, so complaints are all funnelled to the industry based, industry funded regulators, to no avail)
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Sell clients proprietary funds where you collect all fees.

Postby admin » Tue Mar 07, 2006 10:39 pm ... 401981.asp

Financial Advice: The Sacred Trust

By Jonathan Chevreau

The business of dispensing financial advice should be a sacred trust. Just as a doctor is entrusted to the physical health of a patient, so too does a financial advisor occupy a critical role in the well being of the lives he or she touches.

Advice giving should always in best interests of clients

It should go without saying that the advice dispensed should be in the best interests of the client. After all, if a customer is paying for advice through stock commissions or mutual fund trailer fees, he should at least be receiving top notch, truly independent advice.Sadly, however, this utopian state of affairs is a pipe dream in Canada. Too often, financial advice is seen as the ticket to building the retirement of the advisors rather than the retirement of his or her clients. Worse, with many products and services available today, what pays the advisor best is often not the optimum product for the customer.

Bad financial advice can cost you a lot

In my day job at a national newspaper, I've done a series of columns publishing resignation letters from former advisors at big bank brokerages (BBB), where the conflicts of interest are frequently overwhelming. To take one example, fee-based "wrap accounts" have been a popular item for the banks to sell. The problem is that the wraps pay higher commissions for pure equity portfolios than for more balanced portfolios consisting of equities and fixed income, or just fixed income.

During the late 1990s bull market, it was easy to pitch clients on an "all equity" strategy and for awhile it worked. But when the bubble burst in 2000, so too did client portfolios that were absurdly overweight in equity funds and often in technology funds. I heard one story from an elderly retiree whose wrap account was 75% in equities, despite her repeated insistence that she have a "conservative" portfolio. Things are no better at so-called independent financial planners, who flog mostly equity mutual funds sold with a deferred sales charge, which lock clients in for seven years. These DSC funds invariably have high management expense ratios (MERs) which help fund the annual advisor annuity known as the "trailer fee." Again, equity funds pay higher trailers than bond or money market funds. As with bank wrap accounts, the result has been an egregious encroachment of wealth for investors overweight the equity
asset class.

Assante is an Investors Group clone

In the old days, most advisors and financial planners at least were independent and could offer mutual fund customers a choice of several fund families. But those days are fast vanishing. Since 1995, when Assante Corp. started buying up formerly independent regional financial planning firms, we are seeing a new era of "vertically integrated" manufacturer-distributors. This model isn't startlingly new. Another Winnipeg based firm, Investors Group, has long thrived by selling its own in-house Investors Group funds to its captive national sales force of 3,000 advisors. That's quite a different model than the independent advisor who could sell you some Trimark, some Fidelity and some Mackenzie (but seldom low-fee alternatives like Phillips Hager & North or Sceptre Investment Counsel).

The new model is predicated on the fact that, as Investors Group learned long ago, there's far more money to be made selling your own "proprietary" product, rather than third-party funds such as AGF or Trimark. Three other firms, all publicly traded, have jumped on the bandwagon pioneered by Assante. They are IPC, Cartier Partners and Dundee Securities. For awhile, it looked like Dundee was going to buy up IPC but a regulatory snag has delayed matters.

Say goodbye to the independent financial advisor
So what?, you may be thinking. Well, in the first place, we may well witness the death of the truly independent financial advisor. In the second, it's by no means clear that advice to buy in-house product can in any way be construed as independent or in the client's best interests. The fees on these products are frequently higher than superior third party products and the advisor's advice may be further skewed by commission grids which give him a higher payout for recommending the in-house product. Furthermore, ownership of the firm's own stock will put even more pressure on him to advise in favor of his firms products, whether or not they're in the client's best interests.

Let's get back to what the investor is supposedly paying for: independent financial advice which best meets his or her needs to preserve wealth and grow capital. Unfortunately, as William Bernstein wrote in his excellent book, The Four Pillars of Investing, the financial services industry has become increasingly a zero sum game. All fees and commissions extracted for the benefit of fund companies and advisors can come only from the pocket of their clients, namely you, the investor.

Is the old-fashioned stock broker the only alternative?

While the bull market masked a thousand sins, the bear market -- which at 40 months is now the longest in history, according to author Martin Weiss - is starkly revealing the conflicts of interest and abuses in the business. What's the answer? Many do-it-yourself investors have decided to educate themselves and use discount brokers to execute trades at the lowest cost possible. Even the old fashioned stock broker may be a valid route, if you can educate him or her into serving you first and creating a low maintenance, tax efficient portfolio of stocks and bonds held directly, or low-cost exchange traded funds (ETFs) or index funds.

Yes, advice has value and there is much to be said for an experienced broker who can “validate" your preliminary ideas. Ideally, you find an old hand who eats their own cooking, like Dr. Jon Kanitz at CIBC Wood Gundy. Kanitz recommends only what he himself buys, all picks he publicizes in The FundLetter and The MoneyLetter.

Another route is using a fee-only advisor, where you pay "a la carte" for a one time financial plan or tax preparation or estate plan and implement the investment suggestions directly through a discount broker. The latter is the model of Len Hughes, a former full service stock broker who left the business in disgust to found his own fee-only firm, L.A. Hughes Financial.

Fee-for service differs from fee-based managed money
Don't confuse fee-only service with fee-based "Managed Money." The latter amounts to "multi manager wraps" by vertically integrated manufacturer/distributors and in-house wraps by the banks. Fee-based charges say 2% of assets every year while fee-only means a one time fee for a particular financial service rendered.

My conclusion is the old fashioned "transaction" model is the better way to go. Set up a bond ladder, paying only a one time commission to buy each maturity; pay a one time commission to acquire ETFs like the Barclays i60s to cover Canadian equities, Diamonds or QQQs to get exposure to the Dow Jones or Nasdaq, then hold for many years.

After the initial purchase, you're essentially commission free, save for small (0.17% to 0.55%) annual MERs on the ETFs. Collect the interest income inside registered plans, dividends and rarely triggered capital gains outside RRSPs and you have a shot at building wealth.

Any truly independent financial "advisor" worth his salt would tell you much the same thing. If you're not hearing a version of this message, find a new one, preferably a seasoned pro, who is frugal, financially independent and practices what he or she preaches.

By Jonathan Chevreau
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Postby admin » Tue Feb 21, 2006 10:00 pm

Staving off redemptions

Monday, February 20, 2006

Mackenzie Financial Corp. is the latest fund company to address the ongoing debate over how much financial advisers are paid.

In a Feb. 10 prospectus amendment, Mackenzie served notice that new investors in the company's funds "will automatically pay an increased trailing commission to your dealer, once the redemption charge schedule for those units has expired."

What's it mean? The short answer is that advisers that get a client in to a Mackenzie fund will receive a sweetened annual fee after the seventh year of investment. The theory is that by changing incentives for the adviser, clients will hold funds for a longer period.

Adviser compensation for maturing assets is a key issue, especially for fund companies that had strong growth in the 1990s and are fighting redemptions, a group that includes AIC Ltd., AGF Management Ltd. and Fidelity Investments Canada Ltd. "All of the fund companies have been grappling with this," said Dan Richards, a Toronto fund marketing consultant.

In the 1990s, funds were typically sold "back-end" with an upfront commission. Financial advisers received a 5-per-cent commission based on assets under management (AUM) from the fund company. The planner received an additional annual trailer or management fee that came out of the management expense ratio. In general, planners pocketed half of 1 per cent of AUM for an equity fund and a quarter of 1 per cent of AUM for a fixed-income fund.

Then the market capsized in 2000 and upfront commissions took a body blow. Investors are now keen on more transparent fee-based compensation. The bulk of funds these days are sold "front-end" with no commission but a sweetened trailer for the planner: 1 per cent of AUM for equity funds and half that for fixed income.

In both scenarios, the DSC or "deferred sales charge," the cost to the investor to sell his or her units, declines over time. By the end of year seven, investors can unload their units without a financial hit.

The problem is all those fund sales in the nineties are now coming off the DSC schedule. Fund companies keep the details under lock and key but it is safe to say that every month, there's less incentive for billions of investment dollars to stay put and it has created a mess of competing interests.

Fund companies are tackling the issue in very different ways. After year seven, funds managed by Brandes Investment Partners & Co., for example, are automatically rolled into a front-end schedule with a sweetened trailer. AIC, meanwhile, has a DSC schedule that increases trailer fees to planners over seven years.
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Postby admin » Mon Jan 30, 2006 12:23 am

I keep wondering why the OSC and other securities Commissions granted an exemption to Assante in 1999 on the law against commission rebating.

It is a client protective rule. It exists to prevent advisors from "paying off", or "bribing", clients with proceeds or part of the very commissions they may have paid, to get them to move thier assets in the direction desired by the advisor.

see info below and ask yourself why a securities commission would give an investment firm a "free ride around the law".

OSC documents show that increases in revenue to a firm by switching clients from third party funds to in-house or proprietary funds (perhaps using commission rebating to do this?)............can increase revenue by between twelve and twenty six fold.

Why would the OSC allow this to occur?
(the firm was subsequently sold for over $800 million)

Summary of Changes to National Instrument from Proposed National Instrument

NOTE: 7.1 @ ... rst_fr.jsp

7.1 Deferred Sales Charge Commission Rebates

(1) A participating dealer or representative of a participating dealer may pay all or part of a fee or commission payable by a security holder on the redemption of securities of a mutual fund that occurs in connection with the purchase by the security holder of securities of a mutual fund in a different mutual fund family, only if

(a) the participating dealer, or a representative on behalf of the participating dealer, before taking any steps in connection with the redemption, provides the security holder with written disclosure of the matters described in subsection (2) and obtains the written consent of the security holder to the completion of the redemption; and

(b) The participating dealer is not a member of the organization of the mutual fund the securities of which are being acquired.

(2) The written disclosure referred to in subsection (1) shall include

(a) A reasonable estimate of the amount of the fee or commission being paid by the participating dealer on the redemption;

(b) a reasonable estimate of the amount of the redemption charges to which the security holder will be subject in connection with the securities of the mutual fund being acquired, expressed both as dollar amounts and as percentages of the value of the securities being redeemed, and the times at which those charges would be made; and

(c) The tax consequences of the redemption.

(3) No member of the organization of a mutual fund, other than a member that is also a participating dealer acting in compliance with subsection (1), shall pay to any person or company all or part of a fee or commission payable by a security holder on the redemption of securities of another mutual fund that is not in the same mutual fund family.
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Postby admin » Sun Jan 15, 2006 8:29 pm

in-house proprietary funds are flawed to subtly compromise and undermine the delivery of fiduciary advice.

HOW? -- advisors who are faced with the choice of recommeding a 3rd party fund versus their employer's own in-house proprietary fund are compromised because their employer's fund pays them a slightly higher trailer / service fee or commission, than the (possibly) more appropriate better performing 3rd party arm's length fund.

The very first item in the Code of Ethics and Conduct for Registered Representatives provides that the client's interest must be the foremost consideration in all business dealings.

Unfortunately this client protective rule is often trampled on in favor of rules that favor investment firms. That has been my experience while in the industry.
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Postby admin » Sat Jan 14, 2006 1:22 am

buried in this story is an interesting tale of how many investment salespersons are vulnerable to infuence peddling if given the right financial incentives..................when will they adjust the profession to live up to the "advisor" title claim?

Regulators Offer to Settle Claims Over Portus Fund's Fees
Jan. 13 (Bloomberg) -- Canadian regulators offered to end an investigation into questionable payments to investment funds by now-defunct Portus Alternative Asset Management Inc. if the funds repay investors C$12 million ($10.3 million).

Portus, founded in 2002 by Boaz Manor and Michael Mendelson, became one of the fastest-growing hedge funds in Canada. It attracted more than C$750 million as companies such as Manulife Financial Corp. referred investors to it.

Portus in return paid fees to the investment funds, a practice the Ontario Securities Commission said raised regulatory issues over ``the appropriateness of client referrals.'' The OSC wants the fees returned to investors. It said today that acceptance of its proposal will resolve regulatory issues ``regarding dealer due diligence and supervision.''

``Investigations will also continue regarding the sales practices of referring advisors,'' the OSC statement said.

Dealers who don't agree to the OSC proposal may be investigated, prosecuted and fined if rules on protecting clients' interests were violated, the OSC said in a statement.

Before its collapse in February, Portus got referrals of clients with 25,000 accounts from 64 dealers across Canada, the commission said. The agency said 28 dealers have indicated they are willing to accept the plan. Those dealers represent more than 80 percent of the money the OSC wants returned, it said.

After Portus collapsed, a court-appointed receiver recovered all but $17.6 million of investors' money. Manulife, the largest dealer, refunded its clients' full investments and is Portus's biggest creditor.

Manor left Canada for Israel after the OSC investigation began. He refused to cooperate with investigators, claiming he is suffering from depression.

The case is Ontario Securities Commission v. Portus Alternative Asset Management, 05-CL-5792, Ontario Superior Court (Toronto).

To contact the reporter on this story:
Joe Schneider in Toronto at

Last Updated: January 13, 2006 14:58 EST
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Postby admin » Tue Jan 03, 2006 9:16 am

Merrill Lynch, Wells Fargo, Linsco Private Ledger Fined for Improper Sales of Mutual Fund Shares
December 19, 2005 - 12:38:27

WASHINGTON (AP) - The NASD said Monday it fined Merrill Lynch, Wells Fargo and Linsco Private Ledger Corp. for improper sales of mutual fund shares.

The regulator fined Merrill Lynch, Pierce, Fenner & Smith $14 million for violations relating primarily to sales of Class B and some Class C mutual fund shares. Wells Fargo Investments was fined $3 million and Linsco, $2.4 million. None of the three admitted or denied the allegations as part of the settlement, NASD said.

The fines approximate the commissions the firms received by selling Class B shares, rather than Class A mutual fund shares. Class A shares generally carry a front-end sales charge and an asset-based sales charge, but the cost is typically lower than the charges that come with Class B and Class C shares.

In a statement, the regulators charged that the three firms recommended and sold Class B or Class C share mutual funds to customers "without considering or adequately disclosing on a consistent basis that an equal investment in Class A shares would generally have been more advantageous."

NASD also said the investment companies had inadequate supervisory and compliance procedures in place.

Under the settlement, the companies are each implementing a remediation plan to compensate customers _ some 29,000 households and roughly 140,000 transactions, NASD said. The firms are expected to contact affected clients within five months. Customers will be offered the chance to convert their Class B or Class C shares to Class A shares.

Shares of Wells Fargo & Co. rose 37 cents to $64.12, while Merrill Lynch & Co. shares slipped 10 cents to $68.71 in midday trading on the New York Stock Exchange.
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Postby admin » Tue Dec 13, 2005 7:10 pm

according to MFDA stats, 80% of mutual funds sold in the last decade were sold with the DSC sales charge.

According to my simple mind, that tells me that 80% of the "advisors" out there are simply product salespersons misrepresenting themselves as advisors. To me that is one of the key determining factors in understanding whether your advisor has your interests first.........or theirs.
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Postby admin » Tue Dec 13, 2005 7:09 pm

In a recent notice to members, the NASD warned that "it could be a violation of industry rules to put a customer in a fee-based account that costs more than an alternative".

"US brokers censured and fined for pushing DCS mutual funds"
By James Langton, Investment Executive, Thursday, April 19, 2001

"fines for improperly recommending deferred sales charge funds over front end load funds"
"which would have been more cost effective"
"The sales commissions would have been less than half this amount had they sold Class A shares"

NASD news release dated Wednesday, April 18, 2001, at

"unsuitable recommendations of class B shares to customers..............when it would have been more cost effective for those customers to purchase Class A shares"

NASD INVESTOR ALERT, "Class B Mutual fund Shares: Do They Make the Grade?"
Speaks to DSC mutual funds. "The only differences among these classes is how much you will pay in expenses and how much your broker will be paid for selling you the fund."
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Postby admin » Tue Dec 13, 2005 7:06 pm

Jacob Zamansky, a securities lawyer in New York, represented the Huffs in their case against Prudential Securities (NEW YORK TIMES April 18, 2004, A BROKERS EMPTY PROMISE, A RETIREE's SHATTERED DREAM", by Gretchen Morgenson,

"All the investors were placed in fee-based accounts, with annual charges of at least 1% going to the brokerage firm."

"Major Wall Street firms have targeted and preyed on unsophisticated 'buy and hold' Ohio investors, placing them in inapropriate fee-based accounts that generat huge annual revenue streams for the brokers," Mr. Zamansky said. "They put their own financial interest ahead of their customers'."
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Postby admin » Mon Dec 12, 2005 9:48 am

Managing away your money
Shift to annual fees no improvement over old commission model

Jonathan Chevreau
Financial Post

Thursday, June 23, 2005

Like many things in life, the fee-based investment account is a good idea that is rapidly becoming a bad one.

Some weeks back, this column featured the testimony of a white-hatted financial advisor we called Francis. This source provided an inside account of how black-hatted colleagues were double- or triple-dipping by collecting commissions from new issues on top of the flat annual fee applied to client accounts.

We'll hear more from Francis in an upcoming column, but the original one inspired other white hats to contact me and let me know Francis was "right on."

One was another bank-owned brokerage advisor we'll call Robin, based in a large Ontario city. He says the double-dipping reported by Francis is only one aspect of a culture of "unbelievable greed" that makes him "nauseous."

That culture is one that "creates a horse race out of who can make the most out of ma and pa's assets." He believes a similar environment exists at most rival firms.

After almost two decades in the business, Robin is convinced the best deal for clients is an honestly run traditional brokerage account. "The dirty little secret is that a ma and pa commission-based account is the lowest-cost option if run properly."

I agree, since that's the way I choose to run my own investments.

Anyone who does the math can soon figure this out. I know of a case where an elderly widow was talked into moving her portfolio of GICs and bank stocks to a "managed account" charging 2.75% a year on the value of the account (just shy of half a million dollars). This happened not at a big bank brokerage, but at one of the country's few remaining independents.

Let's say the bank stocks (how ironic!) paid an average dividend of 3% and the GICs paid 4%. For a balanced portfolio, that amounts to a 3.5% annual flow of investment income.

Therefore, this managed account diverts the lion's share (79% by my reckoning) of the GIC and dividend income that once flowed to the widow to the brokerage firm's pockets.

Oh sure, the firm will claim these calculations don't factor in capital gains from the brilliant stock-picking their fee supposedly buys you. But there's no guarantee they can even beat a low-cost portfolio of index funds. Odds are they'll do worse by the amount of their fees.

As with mutual fund management expense ratios (MERs), it's easy to dismiss 2.75% as a small number. After all, we pay $2.75 for a large Starbucks coffee these days so how bad can 2.75% be? On $500,000, 2.75% is $13,750. That's each and every year from your pocket to theirs, or more than what many try to save each year in their RRSPs.

Don't get me wrong. I can see how a more reasonable fee of 1%, layered on top of an honestly run portfolio of quality stocks or exchange-traded funds, might be a decent deal for those who'd rather delegate the process to others. Just be aware of how much that decision can cost you.

Robin's client recommendations tend to be more like the widow's portfolio before the fee-based crowd got to her. They also include insurance and utility stocks and ladders of Canadian government bonds with maturities staggered over 10 years.

The sales pitch for managed accounts is that they provide more reward for less risk. But that's horsefeathers, according to Robin. "It's not diversification. It's diworseification."

His annual portfolio turnover is a low 0.3%, which keeps both commissions and taxes low for clients. But that didn't satisfy his branch manager. He accused Robin of "underutilizing" client assets and demanded he quadruple his turnover rate to 1.25%.

But even as they demanded higher turnover rates, they imposed a double standard. To qualify for top sales awards, advisors could only go so far in "utilizing" client assets. They drew the line at 2%, beyond which advisors could not be admitted to the inner sanctum of top producers.

So while it chastised underutilizers like Robin, it was able to maintain a "holier than thou" stance that it discouraged excessive churning.

One top asset gatherer referred to his clients as "cattle to be herded." Over a quarter century, this person inflicted "unbelievable harm to people and the quality of their retirement," Robin says.

The acid test is to ask such advisors if they put their own money into fee-based accounts. Most don't, he says, but the worst ones are so unscrupulous they may claim they do.

© National Post 2005
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Postby admin » Mon Dec 12, 2005 9:47 am

the shift from fees to commissions is/was supposed to remove the incentive for brokers to churn or turn over client assets for profit. In some cases it did exactly that, and some brokers became true advisors, acting and advising in the client best interests. That is the ultimate relationship if you are lucky enough to have found an advisor professional enough to know this.

Unfortunately there are far too many still in the industry who have not figured this "responsibility" thing out yet. They are the ones who firmly believe that "he who dies with the most toys, wins". The sales guys, who in years past would be wearing white shoes. They dont wear white shoes anymore, but they exsist just the same.

If you get one of these types, they may be just as anxious to convert your assets over to a fee based relationship, but for reasons other than your best interests.

Fee based revenue, for the firm and the broker, will come in each and every year, good and bad, busy or not. They can place clients into fee based products and rest easy, knowing that they have an annual "annuity" stream of income coming in, before they even walk into the office and turn on the lights. Life gets pretty good if you can get all of your clients over to fees instead of commissions.
Some brokes make the switch, and then never have to bother advising the client any more. Just get them over to the fee side, and ignore them. Business is just that good. Nobody is going hungry. To the contrary brokers are very well compensated and eearning well into six figures and some into seven figures.

Fee based assets are like an auto dealer told me leasing of autos were to him. He said with auto leasing, each of his customers had to come back and buy new every two or three years, he had a guaranteed supply of good used lease returns that he could re-sell, and a guaranteed supply of new vehicle sales, to each expired lease. He was in love with leasing. IN a similar fashion, you will find some brokers in love with fees, but not in every case for your benefit.
The industry will find itself in better shape when they take steps to weed out those bad brokers, and keep the professionals.
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