fiduciary or not? a "Bait and Switch" game

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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Sun Jan 22, 2012 2:51 pm

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Broker fiduciary rule officially in limbo
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SEC calendar says issue date for controversial proposal 'to be determined'; year anniversary fast approaching

By Mark Schoeff Jr.
January 13, 2012 2:37 pm ET

Nearly a year after the Securities and Exchange Commission delivered a report to Congress recommending a regulation that would impose a universal fiduciary duty for retail investment advice, the agency has yet to propose a rule — and the road to that point soon may lengthen further.

Securities and Exchange Commission (SEC)
In a letter to Congress last week, the SEC said that it will gather information for an economic analysis of the impact of a standard-of-care regulation.

“SEC staff, including [Division of Risk, Strategy and Financial Innovation] economists, are drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives,” SEC Chairman Mary Schapiro wrote Jan. 12 to Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets Subcommittee.

“In this request, it is our hope commenters will provide information that will allow commission staff to continue to analyze the various components of the market for retail financial advice,” she wrote in the letter obtained by InvestmentNews.

The SEC intends to launch the public request next month, observers said.

After the SEC compiles the data, it will have to prepare the cost-benefit analysis.

The next steps will involve proposing a rule, gathering comments and writing a final rule — an effort that could consume all of 2012.

In its latest regulatory calendar, the SEC lists a fiduciary-duty proposal under “dates to be determined.” It designates specific time frames to issue 51 other rules and reports, many of which are required by the Dodd-Frank Act.

“If they were on the brink of proposing a rule, it would be on the calendar,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It seems increasingly unlikely that we'll get all the way to a final rule by the end of this year.”

In fact, Ms. Roper predicted that the fate of a fiduciary-duty rule may rest on the election.

“We won't get fiduciary duty finalized unless President Obama is re-elected,” she said.

If a Republican wins the White House, the SEC will flip from a 3-2 Democratic majority to a 3-2 Republican majority, putting any unfinished Dodd-Frank business in limbo.

Although it slows down the rule-making process, conducting a cost-benefit analysis is becoming central to the regulatory process.

Last week, the Labor Department issued a request for information to financial industry groups about their company members' individual retirement accounts. The agency will use the data to do a cost-benefit analysis of a rule that would expand the definition of a “fiduciary” under federal retirement law.

Mr. Garrett and his congressional GOP colleagues have been putting pressure on the SEC to do more-rigorous economic analysis to justify the hundreds of regulations emanating from the Dodd-Frank financial reform law.

The Dodd-Frank measure didn't mandate that the SEC promulgate a fiduciary-duty regulation, but it gave the commission the latitude to proceed after completing its fiduciary-duty study.

The SEC sent the report to Congress last Jan. 22.

It contained a dissent from the Republican SEC commissioners, Troy Paredes and Kathleen Casey, who did not explicitly oppose a universal-fiduciary-duty regulation but asserted that the study lacked a sufficient economic analysis to support its recommendation. Ms. Casey left the SEC last summer.

The battle over fiduciary duty intensified shortly after Dodd-Frank was enacted in July 2010. The SEC has received thousands of comments and conducted dozens of meetings with interest groups since then.

The National Association of Insurance and Financial Advisors is worried that a universal fiduciary duty would raise compliance and litigation costs for its members, and curtail their services to middle-market investors. It finds the slow walk toward a fiduciary regulation reassuring.

“It should take a long time to do this properly,” said NAIFA President Robert Miller.

“I can only take that as a sign that they understand the complexity [of the issue] they're working with. It doesn't look like they're trying to put anyone out of business,” Mr. Miller said.

The Securities Industry and Financial Markets Association supports universal fiduciary duty but has urged the SEC to create a new standard rather imposing on brokers the one contained in the law governing investment advisers. Brokers currently must meet a less stringent suitability standard when advising clients.

The SEC's measured pace on fiduciary duty is understandable, according to a SIFMA official, given the challenges of cost-benefit analysis.

“They recognize, while there are some quantitative metrics — and we have highlighted those in our early filings — there are some qualitative issues, as well,” said Kenneth Bentsen Jr., SIFMA's executive vice president for public policy and advocacy. “They're making a sincere effort to go through that.”

Although they would like to have seen the SEC get farther than it has on fiduciary duty, advocates understand that the commission invites a lawsuit if it does an insufficient cost-benefit analysis. Last summer, a federal court vacated an SEC rule on proxy access, ruling that the cost-benefit analysis was flawed.

“We are supportive of the SEC moving forward in a deliberative and appropriate process to lay the foundation for a rule,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.

She argues that universal fiduciary duty will help the millions of baby boomers who are nearing retirement and must protect their nest eggs.

“These are the people who desperately need financial advice at a fiduciary standard of care,” Ms. Mohrman-Gillis said. “It is even more necessary today than when Dodd-Frank was passed.” ... /120119957
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Sat Dec 24, 2011 10:39 am

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Part of the largest bait and switch in the world is this, "The industry/regulator complex has a registered category of "Adviser" (spelled with an 'e') that is qualified and registered to give advice. However the regulators allow dealers' representatives, or sales people, to use the title "Advisor"(spelled with an 'o') which misleads the public." source (Small Investor Protection Association December Sentinel Newsletter)

(advocate comment.......In Canada, your investment banker, the so called regulators, a few thousand lawyers, and even your politicians, have met behind closed doors and divided up the pie in a manner best suited to their financial interests. You are the pie. Sorry)
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Mon Nov 28, 2011 9:37 am

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Fooling people (or failing to properly inform them) is one of the basic tricks used to preform the investment "advisor" bait and switch. Do not be ashamed if you have become a victim. Be ashamed of the industry that plays this game and GET YOUR MONEY BACK!
Thanks to Ken Kevenko at for this post info.

(Advocate comments: anyone with an RRSP, or a basic garden variety investment account has what is called a "non discretionary" account. Here is good info on how the industry will use this to screw you if they need to)

Sponsored by The Hayes Law Firm
Non-discretionary Accounts
August 06, 2007
by Lawrence C. Melton, THE HAYES LAW FIRM,, 1-866-332-3567 (toll free)

There are two general types of investments accounts: non-discretionary and discretionary. A non-discretionary account requires the broker to obtain authorization before it makes any investment decisions. A discretionary account allows an investment broker to make account transactions without the client’s prior approval. The problem is twofold: (1) brokers often treat non-discretionary accounts as if they were discretionary, and (2) brokers do not adequately explain the difference between the two accounts to the customer.
Suppose you, the average investor, open an account with a brokerage firm. Chances are you will do so without knowing whether the account is discretionary or non-discretionary. Down the road, the broker messes up, defrauds you, and makes grossly unsuitable investments. You want to take legal action, but you are uncertain. What will be the broker’s defense? He will say the account was non-discretionary and deny responsibility. In other words, he will blame you. He will say you were in control of the account, not him. No doubt, this is news to you. After all, the broker acted like he was in control. There was implicit understanding that he was in control. The only basis the broker has for saying that he was not in control is the non-discretionary status of the account.
How do you overcome this defense? How do you prove that the broker was in control, even though the account was non-discretionary? Answer: You have to prove the broker “assumed” or “usurped” control of your account.

A broker is not insulated from a charge of unsuitable trading merely because the customer did not vest the broker with formal written discretionary authority. Rather, where it can be shown that the customer-broker relationship is such that the broker in fact manages the trading in the account, control will be found. (In re Thomas McKinnon Secs., CCH Fed Secur L Rep ¶ 99104 (1996, SDNY)).
Typically, this occurs when the customer evinces such trust and confidence in his or her broker that the customer invariably follows the broker's advice and recommendations. (See Newburger, Loeb & Co. v. Gross, 563 F.2d 1057 (2nd Cir. 1977); Mihara v. Dean Witter & Co., 619 F.2d 814 (9th Cir. 1980)).
The question is whether the customer has sufficient understanding and financial acumen to evaluate the broker's recommendations and reject them when the customer thinks it inappropriate. (See Newburger, Loeb & Co. v. Gross, 563 F.2d 1057 (2nd Cir. 1977); Carras v. Burns, 516 F.2d 251 (4th Cir. 1975); Newburger, Loeb & Co. v. Gross, 563 F.2d 1057 (2nd Cir. 1977)). ... _accounts/ 11/25/2011
ABOUT BROKER FRAUD BLOG: Non-discretionary Accounts Page 2 of 3
Where the customer is relatively naive and unsophisticated, and the customer routinely follows the broker's advice, control will generally be found. (Mihara v. Dean Witter & Co., 619 F.2d 814 (9th Cir. 1980); Hecht v. Harris, Upham & Co., 283 F.Supp. 417 (9th Cir. 1980)).
While an otherwise intelligent customer will not be allowed to hide behind a mask of ignorance, the customer's sophistication and success in one area of life will not necessarily mean that he or she will be found sophisticated enough to understand all the risks of a particular investment or trading strategy, so as to protect the broker from a finding that the broker controlled an account. Clark v. John Lamula Investors, Inc., 583 F.2d 594 (2nd Cir. 1978); Cruse v. Equitable Sec. of New York, Inc. 678 F.Supp.1023 (SDNY 1987).
Whether or not a broker controls the trading in his or her customer's account is a question of fact. Control may exist as a result of an express written agreement between the broker and the customer, or may be inferred from their particular relationship. (Fey v Walston & Co. 493 F2d 1036, CCH Fed Secur L Rep ¶94437, 18 FR Serv 2d 835 (7th Cir. 1974); Newburger, Loeb & Co. v Gross (1977, CA2 NY) 563 F2d 1057, CCH Fed Secur L Rep ¶96148, 1977-2 CCH Trade Cases ¶61604, 24 FR Serv 2d 42 (2nd Cir. 1977), cert denied 434 US 1035, 54 L Ed 2d 782, 98 S Ct 769, appeal after remand (CA2 NY) 611 F2d 423, 28 FR Serv 2d 602).
To determine whether a broker exercised de facto control over trading in a non-discretionary account, courts look to several factors. Zaretsky v. E.F. Hutton & Co., 509 F.Supp. 68 (SDNY 1981); In re Thomas McKinnon Secs., CCH Fed Secur L Rep 99104 (SDNY 1996).
Of critical importance are the personal characteristics of the customer, such as his or her age, education, general intelligence, and business and investment experience. Control is likely to be found where the customer is particularly old, young, lacking in education, or was inexperienced in the stock market or lacked financial sophistication. Hecht v. Harris, Upham & Co., 283 F.Supp. 417 (9th Cir. 1980) (finding control when customer was particularly old); Kravitz v Pressman, Frohlich & Frost, Inc., 447 F.Supp.203 (Mass. Dist. Ct. 1978) (finding control when customer was particularly young); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (E.D. Mich. 1978) (finding control when customer lacks education); Carras v. Burns, 516 F.2d. 251 (4th Cir. 1975) (finding control when customer lacks education or is inexperienced in the stock market or is lacking financial sophistication).
Another factor closely examined by the courts is the relationship between the broker and customer, whether it was an arm's length business relationship or a combination of business and friendship.
Also significant are the reliance placed on the broker by the customer. Fey v. Walston & Co., 493 F.2d 1036 (7th Cir. 1974); Petrites v. J.C. Bradford & Co., 646 F.2d 1033 (Fla. 5th DCA); Marshak v. Blyth Eastman Dillon & Co., 413 F.Supp. 377 (ND Okla 1975). If a broker has acted as an investment adviser, and particularly if the customer has almost invariably followed the broker's advice, the fact finder may consider this as evidence that the relationship is discretionary and that the broker owes a fiduciary duty to the customer. Patsos v. First Albany Corp., 433 Mass. 323, 741 N.E.2d 841 (Mass. 2001).
A course of dealing in which a broker executes trades without client's prior approval suggests that the account is discretionary for purposes of broker's fiduciary duties; similarly, if a broker has acted as an investment adviser and client has frequently relied on that advice, there is a strong indication that the account is discretionary. In re Murphy, 297 B.R. 332, 41 Bankr. Ct. Dec. (CRR) 226 (Bankr. D. Mass. 2003). ... _accounts/ 11/25/2011
ABOUT BROKER FRAUD BLOG: Non-discretionary Accounts Page 3 of 3
Past evidence of following broker's advice will establish control. If a broker has acted as an investment adviser, and particularly if the customer has almost invariably followed the broker's advice, the fact finder may consider this as evidence that the relationship is discretionary and that the broker owes a fiduciary duty to the customer. Patsos v. First Albany Corp., 433 Mass. 323, 741 N.E.2d 841 (Mass. 2001).
As noted by the Second Circuit, a broader duty may be recognized in a non-discretionary account in the following circumstances:
(1) if the broker has engaged in unauthorized transactions or has otherwise effectively taken over the handling of an account even though it is labeled as a self-directed account;
(2) if the client is prevented by "impaired faculties" or extreme lack of sophistication from understanding the basics of trading and thus simply lacks the capacity to handle such an account;
(3) if the broker "has a closer than arm's length relationship" with the client;
(4) if the broker violates legal or industry requirements concerning risk disclosure when opening an account; or
(5) if the broker offers advice on a specific transaction that was "unsound, reckless, ill-formed, or otherwise defective."
Stewert v. J.P. Morgan Chase & Co., 2004 WL 1823902, 2004 U.S. LEXIS 16114 (NYSD 2004) (citing Kwiatkowski v. Bear Stearns & Co., 306 F.3d 1293, 1302-03, 1307-08 (2d Cir. 2002)).
If you can establish the above elements, the broker will not be able to hide behind the non-discretionary account defense. THE HAYES LAW FIRM,, 1-866-332-3567

(although this is from a US law firm, my expertise in Canada covers 30 years and I maintain that the argument applies equally to Canadian investment selling malpractices, Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired)
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Thu Nov 24, 2011 2:04 am

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Fiduciary duty--the legal obligation to put clients' interests first--is required in Canada for portfolio managers who have discretionary authority over their clients' accounts; but it is not required for financial advisers in Canada.

(find yourself a portfolio manager and avoid commission salespeople who call themselves "advisors" ... bs=article
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Thu Oct 13, 2011 10:10 pm

Regulators considering fiduciary duty standard for advisers and dealers
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Jonathan Chevreau Sep 26, 2011 – 4:39 PM ET | Last Updated: Sep 26, 2011 4:43 PM ET

Prompted by developments in Australia, the U.S. and the U.K., Ontario regulators are seriously considering making financial advisers and securities dealers subject to a tougher standard of fiduciary care for retail clients.

The Ontario Securities Commission says it “considering whether an explicit legislative fiduciary duty standard” should apply to dealers and advisers in Ontario.

It defines a fiduciary duty as “essentially a duty to act in a client’s best interest.” While section 116 of the Ontario Securities Act applies a fiduciary duty to investment fund managers in their dealing with the funds they manage, the OSC says “there is no equivalent duty under the Act that explicitly applies a fiduciary duty to dealers and advisers in their dealings with their clients.” It adds however that “there is legislation that requires them to deal fairly, honestly and in good faith with their clients.”

The statement was made in section 2.3 of the OSC’s 2011 Annual Summary Report released Friday and available here. [Click on the second Sept. 23 item under Regulatory Highlights.]

The passage, contained in a section entitled “Responding to global financial developments,” says that while there is no fiduciary legislation in Ontario, “Canadian courts can find that a given dealer or adviser owes a fiduciary duty to his or her client.”

When courts consider fiduciary obligation exists

That can occur if:

a) the client places significant trust and reliance on the dealer/adviser and the latter accept this responsibility

b) if the dealer or adviser has explicit (i.e. managed accounts) or implicit power over the client (non-managed accounts where clients usually follow whatever advice is provided)

The section closes by noting “important” international duties concerning fiduciary duty. It says the SEC (Securities and Exchange Commission) in the U.S. is expected to introduce rules in 2012 that would create a “common statutory fiduciary duty” for investment advisers and broker-dealers when they are providing personalized advice to retail clients.

The Australian government is also expected to introduce legislation next year that will make advisers subject to a fiduciary duty when dealing with retail clients. In the UK, authorized firms are already required to “act honestly, fairly and professionally in accordance with the best interests of their retail clients.”

Investment Executive reports here that the OSC promised to study the issue earlier this year in response to calls from FAIR Canada (the Canadian Foundation for Advancement of Investor Rights) and the OSC’s Investor Advisory Panel.

The OSC plans to publish a full discussion paper on fiduciary duty this fall.
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Tue Oct 11, 2011 8:44 am

Update Oct 13, 2011, at very least I owe Alan Acton some slack, and perhaps an apology. I am so used to the typical Canadian "bait and swtich" where a commissioned salesperson with a correspondence course and no fiduciary duty to the customer......where a person like this gets to call themselves anything they wish ("advisor?") EXCEPT the name by which they are after misreading his title myself I woke up last night thing "Alan is not a "dealing representative" which is the term the Securities Commission brought in to replace the word "salesperson" in Sept 2009, but rather his license says "associate advising representative". So it seems that this person is on a different path, a path where in fact he "may" owe a duty of care and a fiduciary duty to the customer. He may be in the process of becoming licensed as a professional "advisor" with the real honest to goodness license and training to back it up. Go see if you would like to learn where to find a real, honest to god advisor. Not a salesperson lying to you about his job, his license and his motivations. If this is the case, then he may be right about the fiduciary duty. Problem is, Canadians do not know the difference between a licensed, trained and professionally compensated "advisor", and the 99.9% who are commission salespeople who call themselves "advisor". See more in another topic in these posts.

Sorry Alan if I got it wrong in this post. I look forward to finding out.

Now the million dollar question is: If truly licensed and paid "advisors" in Canada allow commissioned salespeople to step into their profession without any of the training and without the license to call themselves advisor (which covers 99.9% of "advisors" in Canada), then why is this professional group not screaming bloody murder. I would if a bunch of product pushing sales geeks were using my license without any qualifications. It would be a bit like Doctors remaining silent while each pharmaceutical salesperson in Canada started calling themselves "doctor" simply to build up more credibility..............
now on to what got me started..

It’s not all high-level securities fraud
Financial Adviser
Written by Alan Acton
Posted Date: October 10, 2011
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High-profile securities fraud cases like Bernie Madoff often get a lot of media attention, while the examination of financial adviser negligence gets overlooked. According to the Investment Industry Regulatory Organization of Canada, there were a total of 99 enforcement actions against financial advisers in 2010. Twenty-seven per cent of decisions against advisers were classified as due diligence/suitability and misrepresentation violations. In addition, a considerable amount was won in civil suits against advisers in 2010.

Financial advisers in Canada owe a fiduciary duty to their clients to deal fairly, honestly, and in good faith with their clients. They also have to do their homework; not only on the investments they recommend, but also knowing their client’s risk tolerance level and financial situation. These are the know-your-client (KYC) rules that advisers are obligated to follow. Investment recommendations must match up with the client’s financial situation and knowledge level. Obviously, an adviser betting an elderly person’s life savings on a risky and complex option strategy is a gross violation of KYC regulations.

The KYC information must be updated any time there is a material change in a client’s circumstances. According to IIROC, the financial adviser should meet with the client at least annually to conduct suitability reviews. Or, if an adviser leaves the firm, the new adviser assigned to the account should meet with the client immediately to update KYC information.

If proper KYC documentation is not done, the financial adviser may be negligent, even when no transactions were made. This is a failure to consistently monitor the client’s situation and investment account, and act accordingly.

Another area of enforcement action is misrepresentation. This happens when an adviser misleads a client by making false statements or withholding important information, specifically if it applies to details that may impact a client’s investment decision. For example, an adviser may not disclose all the risks related to a particular security in an attempt to convince the client to buy it.

According to securities litigation specialist John Hollander (who partners with Harold Geller) of Doucet McBride LLP in Ottawa, many times there is an absence of informed consent. “The fact is that what goes up can come down. The potential for gain coincides with the potential for loss. This means both the size of the gain or loss and how often the gain or loss may occur must be fully explained to the client. To reach for a higher profit, the client must face a higher risk of loss,” says Hollander.

He goes on to say, “If an adviser fails to fully explain both the likelihood and the size of the potential loss an individual might incur, the client may have cause to sue.”

Many more cases come to light when the stock markets drop. As Warren Buffett says, “Only when the tide goes out do you discover who’s been swimming naked.” When the markets decline and volatility increases, many risky strategies go south quickly. Oftentimes clients do not even realize their investment portfolios were at risk.

With approximately 29,000 registered advisers in Canada, the incidence of enforcement actions is minimal. However, suitability and misrepresentations violations represent the largest enforcement actions of last year. Advisers have to do a better job of keeping their KYC information up to date, and explaining all of the investment risks clients face, or face disciplinary penalties and the possibility of civil litigation.
Additional Info

Alan Acton

Alan Acton is a financial adviser in Ottawa and can be reached at

Column: Financial Adviser

Advocate comment: There are two things I cannot agree with in this article. First I don't think this person is aware that 99.9% of "advisors" in Canada are using that name as a marketing gimmick and actually do not possess anything close to an advisor license. I would like to hear his thoughts on that after some research. Perhaps he can look up his own registration category at the province and let us know what it says.

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

click to enlarge

Second, is his article referring to the "wishful" marketing of industry training manuals, and conduct and ethics guidelines, or to the actual reality of how these principles have been sold out in back room by an old boys club of regulators, self regulators etc? In other words, is he speaking from an informed perspective of what is actually possible (ie, to hold your so called advisor to a fiduciary standard, based on his promises to you), or is he simply repeating industry marketing bullshit without being aware that the industry has pulled that carpet out from under the public? SOrry for the bluntness Alan, but a few million people are hurting by some billions of dollars based on the lies that the industry uses. Professionals like yourself are depended upon to tell it right.
Screen shot 2011-10-11 at 9.51.02 AM.png
click to enlarge (dealing representative is the license category that all registrants were changed to who were formerly (pre sept 2009) registered as SALESPERSON)

(It is ironic to read an article about legal actions and misrepresentations which contains misrepresentations)

PS. I read the qualifications of Alan now, and I see he has the CFP, CIM, CFA, the CIM and the CFA being the serious of the bunch, so his qualifications are up to that needed to carry the "advisor" license. My apologies for earlier questions or inferences. Now I am trying to understand what it is that Polaris or his company does. If it is fee only, or portfolio management (with a fiduciary duty included) then I truly owe him an apology for my misunderstanding.

I hope Alan will send me a note to set me straight on anything I need correction about herein. The public needs to know just who is an "advisor" to be trusted and who is just a salesperson in "advisor's" clothing.
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Thu Sep 29, 2011 6:31 pm

(more "salesman selling securities" games)

CSA extends exemption to dealers from new relationship disclosure requirements

Both the MFDA and IIROC allow a two-year transition period for firms to get in compliance

Wednesday, September 28, 2011

By James Langton

Regulators are extending the exemption from new relationship disclosure requirements for fund dealers and investment dealers until the end of 2013, the Canadian Securities Administrators said Wednesday.

Firms that belong to the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada had been granted an exemption from the new relationship disclosure requirements that are to be imposed under the provincial securities commissions’ registration reform rule, on the basis that the self-regulatory organizations are bringing in their own similar requirements as part of the Client Relationship Model reforms. That exemption is due to expire on Sept. 28.

The CSA published a notice Wednesday indicating that it is extending those exemptions until the end of 2013. It notes that the MFDA has already approved its new disclosure rules, and it says that IIROC is expected to finalize its rules by the end of this year. Both SROs would then allow a two-year transition period for firms to get in compliance, which would run to the end of 2013. So, the regulators are exempting firms from their requirements in this area while the SRO rules are implemented.

Additionally, the are also extending interim relief exempting certain companies, such as banks and credit unions, from the requirement to register when trading in short-term debt instruments. That relief was also slated to expire on Sept. 28, it is now being extended until Sept. 28, 2014. And, they are also offering relief from the new restrictions on registration exemptions for international dealers and international advisers that were introduced earlier this year. ... BImageCI=1
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Mon Sep 26, 2011 8:53 am

Screen shot 2011-09-26 at 9.52.45 AM.png

SEC must forge ahead in fiduciary battle

September 25, 2011 6:01 am ET
While we applaud the Labor Department's decision last week to rethink a proposed rule change that would have expanded the definition of a fiduciary under federal retirement law, we urge the Obama administration, Congress and the SEC to continue to press forward with their efforts to ensure that brokers are required to act in their clients' undivided best interests at all times.

In the wake of the recent court defeat of the Securities and Exchange Commission's proxy- access rule, Republican lawmakers are making a full-court press to sink efforts to require brokers and advisers to adhere to a rigorous, uniform fiduciary standard of care.

The SEC, the Republicans say, has failed to perform a thorough, quantitative analysis of the costs and benefits of switching to a single standard. Also, they say the commission has failed to prove that investors are better protected from fraud or abusive sales practices when they deal with advisers who are required to put their interests first.

For that, leading Republicans say the push for a uniform standard deserves to be banished to regulatory purgatory — never to see the light of day again.

“Until the SEC comes forward with a reason, backed by real data, that a fiduciary standard is necessary to address an actual problem ... I'm not sure why such a rule making would be under consideration at this point in time,” Rep. Scott Garrett, R-N.J., chairman of the House Financial Services capital markets subcommittee, said two weeks ago.

We beg to differ.

True, the SEC has done an inadequate job of documenting the harm that investors face when brokers and advisers are held to differing standards. Nor has the agency offered any significant analysis of the potential impact of switching to a single standard.

That said, we disagree with Mr. Garrett's suggestion that there is no reason to move forward with fiduciary rule making. We see no reason why the SEC cannot move forward with the rule-making process while also gathering data specific to what it hopes to accomplish.


What is well-documented — and what Mr. Garrett and many other Republican leaders choose to forget — is that the vast majority of investors believe that brokers and advisers alike already are required by law to act in their best interests when giving advice.

Therefore, it is imperative the SEC move quickly to reconcile investor expectations with reality by raising the standard of care applied to brokers dispensing financial advice.

At a time when many public companies are scrapping defined-benefit pension plans — thereby forcing individual investors to shoulder the responsibility for funding their own retirements — it is incumbent on the SEC to make sure that investors receive the same high level of protection, regardless of whether the adviser sitting across from them is a registered representative of a broker-dealer or an investment adviser.

A single standard would eradicate confusion among investors about advisers' titles, obligations and legal responsibilities to their clients.

The DOL was right to bow to bipartisan pressure to withdraw a proposed rule that would have subjected more advisers providing advice to a retirement plan or its participants to a fiduciary standard. Though well-intended, the proposed rule was too broad and would have discouraged advisers and broker-dealers from offering general investment-oriented advice or education.

It is our hope that the DOL will not abandon its efforts to ensure that people who provide personalized investment advice to plan sponsors and participants are held to a rigorous fiduciary standard.


The same goes for the SEC. While the commission likely will miss its self-imposed fall deadline for issuing a new standard of care for broker-dealers (as first reported last week on, we urge the SEC to remain resolute in its efforts to improve investor protection by moving toward a uniform fiduciary standard of care.
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Mon Sep 19, 2011 9:34 am

From Investment Executive Mag in Canada ... BImageCI=1

Action needed to rebuild public trust, investment industry leaders say

Integrity, honesty and ethical behaviour are key to repairing the damage caused by high profile scandals during the financial crisis

Sunday, September 18, 2011

By Megan Harman

In order to rebuild the public’s trust, the investment industry should take steps to improve enforcement, better educate its professionals, and foster a culture of integrity and honesty, industry leaders suggested on Thursday.

At the Investment Industry Association of Canada’s annual conference in Toronto, speakers discussed steps that the industry needs to take to rebuild trust that was damaged by high profile scandals and ethical breaches during the financial crisis.

“I think we are still in the stages of restoring trust,” said Margaret Franklin, chairwoman of the CFA Institute. “[Clients] are reading about, in mainstream publications, the egregious breaches of ethics, the complete disintegration of trust. And it was not just in ‘08 and ‘09. It is still happening, and they are still reading it.”

Integrity, honesty and ethical behaviour are key to repairing this damage, the speakers said.

“The investment business is not a business of honesty; it is a business of rigorous honesty,” said Thomas Caldwell, founder and chairman of Caldwell Securities Ltd.

He urged industry professionals to remember to always act with integrity – even in tough times, when it can be challenging.

“If you lack integrity, it doesn’t matter how smart you are,” he said. “People are going to deal with people they trust.”

For financial advisors, integrity involves being completely honest with clients about their investment options and the risks they hold, Caldwell said. He finds that prospectuses and other disclosure documents are filled with “legal clutter” that doesn’t help investors understand the products.

“There’s very little clarity for investors,” he said. “It is very incumbent on the point-of-sale person or group to simplify and clarify what is critical in making a good decision.”

Franklin agreed that product disclosure is inadequate, especially at a time when products are becoming increasingly complex.

“How clients are supposed to be able to understand some of the documents they’ve got, it’s impossible,” she said. “We have to communicate with clients in a language they can understand.”

She added that clients are eager and willing to have honest conversations. But communication is not the only answer. She said the industry needs to go further by addressing the issue of overly complicated investment products.

“I think we do, as an industry, have the ability to deal with this complexity,” she said. “I don’t think we should be profiting from our clients’ ignorance.”

Franklin also suggested that the industry take steps to better educate its professionals. High standards of education and training will help to improve the image of the industry, she said.

In addition, she believes certain regulatory reforms could help restore public trust in the industry. Specifically, she calls for better enforcement, and for the government to move forward with its plans to establish a single national securities regulator.

“Even with a single national regulator, they are going to have a difficult time keeping up with complex instruments, with the way the world is changing,” she said. “How you can effectively do it in a fractured environment is beyond me.”


Advocate comments: If, as Tom Caldwell says, "“The investment business is not a business of honesty; it is a business of rigorous honesty,”, then re-read the image below from our financial regulators and stakeholders, and ask them why they will not be honest with consumers and publish widely the following paragraph (in blue highlight), rather than spewing trust and delivering "buyer beware". (PS. I have found Caldwell Securities to be a leader in Canada at best practices, but they are drowned out by larger players)

Screen shot 2011-08-11 at 12.10.02 PM.png
click to enlarge, then click again to zoom in
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Re: fiduciary: a financial "Bait and Switch" game

Postby admin » Mon Sep 19, 2011 9:22 am

images.jpeg (11.87 KiB) Viewed 20674 times
Today, Sept 19th, 2011, I changed the name of this flogg topic to fiduciary: a financial "Bait and Switch" game, here is why.

If you pay close attention to the promises, the training manuals, the advertising of anyone in the business of selling investments, you will see them avoid like the plague anything that refers to "selling". What they focus on is anything to do with earning the trust of consumers.

Then, when the money changes hands, they get to perform the switch, and deliver something altogether different from what they promised, a salesperson selling commission or percentage fee based products. When push comes to shove, it is "tough luck" for the consumer.

This, as was stated in a recent Financial Post article by former OSC chair Ed Waitzer is a fraud, and I refer to it as a bait and switch so that consumers can better picture just what is being done to them. I hope you and yours will not fall for the fraud, and that you will pass this to those you care about so they may not end up as "fish food" for large investment concerns.

From the FInancial Post:
"Why is it that Canadian regulators have shied away from proposing a "best-interest" standard? As one commentator to the SEC staff's study noted, "If the product sold is that of advice, then that advice should be in the best interest of the client. Anything else is fraud, because the seller is delivering a service different from what the consumer thinks he or she is buying." Many argue that it's the buyer's responsibility to do due diligence and shop around for the best price. But should caveat emptor apply when buyers think they are hiring a professional to do the shopping?"
source document: ... t?hl=en_US
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Re: fiduciary: lets play it both ways

Postby admin » Mon Sep 19, 2011 8:53 am

Lack of facts could hurt fight for fiduciary standard

By Liz Skinner
September 18, 2011 6:01 am ET
The lack of empirical evidence showing that brokers lead investors into bad investments because they want the commissions from those products is making it a challenge for supporters of a uniform fiduciary duty to convince lawmakers that there is a problem.

(advocate asks: could it be that the lawmakers are in the pockets of large financial selling organizations?)

Financial Industry Regulatory Authority (FINRA), Securities and Exchange Commission (SEC)
“Do you have anything other than anecdotal examples — hard factual data — to show that the suitability standards have been dis-serving to those served by broker-dealers?” asked Rep. Scott Garrett, R-N.J., chairman of the House Financial Services subcommittee that held a hearing last week on financial adviser regulation.

Witnesses who support requiring brokers to meet a tougher fiduciary standard, one that requires they act in the best interests of their client, had little to offer.

Brokers follow a less stringent suitability standard that requires them to recommend only those financial products that satisfy a client's investment needs.

“There [are] survey data that clearly show investors are satisfied,” but consumers don't know what they need to know, said Barbara Roper, investor protection director for the CFA. “If they don't know that another product offers much better benefits than the one they were sold, why should they be dissatisfied?”

Ms. Roper said she encouraged the Securities and Exchange Commission to pursue such data in the report it issued in January that recommended a regulation to improve protection of investors confused by differing standards of care between advisers and brokers.

“It's not that you can't get it, but it's not there,” Ms. Roper said. “There is evidence that could be collected and should be collected.”

Studies show that the single factor that most determines an investor's long-term performance is cost, which is considered under a fiduciary standard and is not under a suitability standard, she told the panel.

Email Liz Skinner at
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Re: fiduciary: lets play it both ways

Postby admin » Fri Sep 09, 2011 1:36 pm

Screen shot 2011-08-08 at 4.17.21 PM.png
GOP throws more tacks in path of fiduciary rule

Republican lawmakers say SEC must show universal standard is necessary — before it submits cost-benefit analysis
By Mark Schoeff Jr.
September 9, 2011 3:50 pm ET
House Republicans have targeted a potential investment advice regulation in their effort to pull the reins in on the Dodd-Frank financial reform law.

House draft would establish adviser SRO
FIDUCIARY DUTY: Fiduciary duty, potential adviser SRO get their day in the sun
Fiduciary foes: Don't count your chickens
Fiduciary standard gets powerful advocate

Securities and Exchange Commission (SEC)
The GOP's opposition likely will surface at a House Financial Services subcommittee hearing Tuesday covering two aspects of Dodd-Frank that directly effects advisers – fiduciary duty and adviser oversight.

The panel will explore Securities and Exchange Commission reports recommending that the commission impose a universal fiduciary duty on anyone providing retail investment advice and harmonize regulations governing investment advisers and broker-dealers. The two Republican SEC commissioners dissented from the reports, however, arguing that the SEC staff had done an insufficient cost-benefit analysis to justify its conclusion. House Republicans have echoed that skepticism over the past several months.

Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets subcommittee, went a step further yesterday.

During a Capitol Hill press conference, at which he appeared with GOP colleagues to criticize what they called the negative impact of Dodd-Frank regulations, Mr. Garrett suggested that the SEC step back and consider whether a fiduciary duty rule is even necessary.

“The SEC must produce data to show what problems would be solved in this area,” said Mr. Garrett, who will chair the Sept. 13 hearing.

He was unsympathetic toward SEC pleas for more funding to carry out its investor protection and market-monitoring mandates, which will be increased substantially by Dodd-Frank, stating: “Perhaps the solution is to first do an assessment of whether they should pursue the areas they're currently pursuing.”

What's more, the SEC will not have a chance to speak for itself at the hearing. The Financial Industry Regulatory Authority Inc. will appear.

Finra will respond to draft legislation proposed by full committee chairman Spencer Bachus, R-Ala., that would allow for multiple self-regulatory organizations to oversee investment advisers.

A committee aide said that the SEC was not invited to testify because the agency has not yet proposed a fiduciary duty rule.

“Therefore, a SEC witness would be unable to make comments about what the commission might do because those statements would run afoul of the Administrative Procedure Act,” committee spokesman Jeff Emerson wrote in an e-mail.

Dan Barry, chief lobbyist for the Financial Planning Association, said that the SEC's absence was odd.

“It doesn't seem to make sense to accept the reports without explanation or inquiry,” Mr. Barry said.

The witnesses that will testify are expected to express familiar sentiments about fiduciary duty. This is the first time, though, that Congress will devote an entire hearing to the issue since Dodd-Frank was enacted in July 2010.

“We don't think the SEC should weaken or water down the [1940] Adviser Act fiduciary standard,” said David Tittsworth, executive director of the Investment Adviser Association, who is scheduled to testify. “We think that a rules-based approach would negate one of the greatest strengths of the fiduciary standard, which is its breadth.”

Even though the Securities Industry and Financial Markets Association supports a universal fiduciary duty, Mr. Tittsworth said that the fiduciary framework it proposed in July, calling for applying fiduciary duty on an account-by-account basis, is rules-oriented.

“Rules-based, principles-based, I think that's a red herring,” SIFMA general counsel Ira Hammerman said at a Washington event today sponsored by the Institute for the Fiduciary Standard. “When a comparable level of services is being provided to individual investors, then the same standard of care — a universal fiduciary standard of care — should be applied.”

The adviser association and SIFMA can continue this debate on Sept. 13, when representatives of both will testify.

(advocate comments.......this is just more political and regulatory masturbation under the guise of "protecting" the public interest, while politicians and regulators allow the financial gang rape of the public) Officials should be prosecuted and jailed for such failure to protect the public. Until that occurs, give me the name of even two persons in North America who are looking out for the interests of you, your children and your grandchildren........come on America, you would not let authorities molest your children, so why do you stand by and allow them to financially molest you and yours? Is football (hockey for us Canucks) really that much more important?
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Re: fiduciary: lets play it both ways

Postby admin » Tue Sep 06, 2011 8:42 am

Investment Advice Is One Of The Greatest Scams Of Our Time
Andrew Haigney, El CAP | Sep. 1, 2011, 2:43 PM
Andrew Haigney

Andrew Haigney is Managing Director of El CAP, a Registered Investment Advisor in the state of Vermont that provides investment-consulting services to individual investors, corporations, foundations, trustees, and endowments

David Swensen, Yale University’s Chief Investment Officer, published on August 13, 2011 an op-ed in the New York Times in which he shines a spotlight on one of the mutual fund industry’s dirty little secrets – the punitive nature of investment management fees.

In the article, “The Mutual Fund Merry-Go-Round,” Mr. Swensen, who oversees Yale’s colossal $16 billion endowment, calls for improved investor education (particularly with respect to the benefits of low cost index funds) and calls for retail brokers to be held to a fiduciary standard.
We applaud Mr. Swensen for taking a stand on these important issues and we agree with most of his points.
However, we believe that the scope of the problem goes well beyond mutual funds, and more can be done to protect investors.
Scope of the Problem
The underlying problem is that investment advice has become a “product,” and investment advisers steer prospective clients right into their own products.
Today’s investors looking for investment advice end up seeking it directly from the point of sale of these products.
Beyond mutual fund companies, the point of sale runs the gamut, from large brokerage firms and registered investment advisers to hedge funds and bank trust departments.
A 2008 SEC study found that nearly 95 percent of investment advisory firms with individual clients also provide proprietary portfolio management services for individuals. These firms make their money through portfolio management services, not by dispensing investment advice. Many of these firms claim that they have no products to sell, instead they say that they provide a service – make no mistake, portfolio management services is a product.
How often at the end of a sales presentation do you think investment advisers (who are held to a fiduciary standard) sit back and tell a potential new client that they may be better off going to a larger firm with more experience or better resources? Or, as Mr. Swensen suggests, explain to a prospective lucrative client that their investment objectives can be better met by investing in a low cost index fund? They don’t. With sales quotas to fill and fierce competition for new business, the name of the game in asset management is to get the money in the door and start generating fees.
Mr. Swensen argues in his article that actively managed mutual funds should be required to show prospective clients a side-by-side comparison of low cost index funds as an alternative to the actively managed fund being sold. We agree with Mr. Swensen, but we fail to see why this should be limited only to mutual funds. Why not also require registered investment advisers that offer proprietary portfolio management services to do the same thing?
Fiduciary Standard 101
We differ from Mr. Swensen with respect to his call for expanding the fiduciary standard. There is a common misperception that the fiduciary standard (which generally applies to mutual funds and registered investment advisers) provides a greater level of protection to investors than does the suitability standard (which applies to traditional brokers). In theory, the fiduciary standard offers investors a high level of protection, but in practice this is not always the case.
The fiduciary standard as applied to the investment industry is not uniformly defined by regulators, in fact the word “fiduciary” doesn’t even appear in the Investment Advisers Act of 1940. It wasn’t until a 1963 United States Supreme Court decision that investment advisers were deemed to be fiduciaries. The Court held that investment advisers were required to “…eliminate, or at least [to] expose, all conflicts of interest…”
In the financial services industry, investment managers are inextricably trapped in a fiduciary conflict between shepherding their clients’ interests and marketing their products. The fiduciary standard has become an exercise of “disclosing” these conflicts of interest in the fine print, and as such the essence of fiduciary duty also gets disclosed away.
Many investment managers tout their fiduciary standing in marketing materials, as a kind of seal of approval. But the devil can still be found in the details – conflicts of interest are everywhere.
Notwithstanding the Dodd-Frank Act mandate that these disclosures should be expressed in plain, easy to understand English, the disclosure statements remain difficult for most investors to fully understand. Regulators routinely uncover serious deficiencies in disclosure statements that would be nearly impossible for the untrained eye to detect. Additionally, the fiduciary standard is subject to human failure, fraud and deception (remember Bernard Madoff had a fiduciary duty to his clients).
Expanding the fiduciary standard, absent a clear and uniform definition, will only further confuse investors. To better understand the practical side of fiduciary duty as it relates to the investment industry, see our in-depth report “Fiduciary Duty: What Does It Really Mean?” (available upon request).
What Can be Done?
Securities regulators need to take a page out of the Federal Employee Retirement Income and Security Act (ERISA) rulebook. Investors covered by ERISA rules (usually pension plans or other retirement programs) enjoy far greater protection than does the general public. Many of the investment vehicles commonly pushed on non-ERISA investors would be prohibited under ERISA rules as they’d be deemed to carry excessive, redundant or otherwise unnecessary fees. Under ERISA rules, investment advisers who provide investment advice to qualified plans are generally prohibited from receiving compensation tied to the investments the plan makes
Among many other things, ERISA rules assume that once someone has a product to sell, they can no longer be truly objective. With fewer and fewer workers getting traditional pension retirement benefits, shortfalls in 401k plans will come from individuals’ non-ERISA protected investment accounts. Why aren’t these assets entitled to the same protection?
The bottom line is that the investment advice business is perhaps one of the greatest consumer scams of our time. Rather than attempting to educate investors on the ills of Wall Street, regulators need to get serious about investor protection. Again, we applaud Mr. Swensen, who clearly has no dog in this fight, for bringing attention to these important issues. Investors should pay attention.
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Re: fiduciary: lets play it both ways

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

In a nutshell

In the simplest terms, a fiduciary duty requires the fiduciary to place the interests of the client ahead his own (or his employer’s or shareholder’s or anyone else’s). There are no shades of grey here: this is not about moral but legal obligation, it’s not about disclosing that you have a conflict of interest but about not having one, it is not about disclosure of fees/commission but about finding the best and most cost-effective product that meets the customer’s needs. It is ultimately about providing untainted advice from a position of power with the benefit of asymmetric information. The investor must be prepared to pay explicitly for the advice rather than continue the ostrich policy of thinking/assuming that the advice is free if it’s buried in a transaction fee or mutual fund trailer fees or other opaque mechanisms. John Bogle thinks of the fiduciary principle as: “No man can serve two masters”.

The details

Last week the SEC tabled its recommendations to Congress to create a “common fiduciary standard of care for brokers and investment advisers”. This would “hold brokers to a higher “fiduciary duty” standard (than the current “suitability” requirement) by legally requiring them to put the interests of clients before their own. (RIAs or Registered) Investment Advisers (in the US) are already held to that standard…” (see “SEC study lifts bar for brokers”). “The common standard is needed because many retail investors don’t understand and are confused by the roles played by investment advisers and broker-dealers...” (see “SEC recommends common fiduciary standard for brokers, investment advisers”). (Unlike in the U.S., where registered investment advisers (typically financial planners) already have a fiduciary duty toward the client, there is no class of adviser in Canada which has that explicit requirement, though some individual advisors are prepared to offer advisory services on a fiduciary basis.)

The need and the desired outcome are clear, but there will likely be lots of problems on the way. You can be sure that if Congress accepts the SEC recommendations, the next battle will be around trying to de-claw the definition of fiduciary. The other question that needs to be answered is the need to include under the fiduciary umbrella insurance agents (especially those selling annuities in general and variable annuities with guarantees in particular)…the answer is unequivocally yes. Given the information asymmetry between the financial industry and investors, nothing but a fiduciary standard can insure that investors get their fair share of the available market returns; this information asymmetry surprisingly not only applies to the (manufactured) ‘products’ and ‘services’ by the industry, but also to the ‘roles’ (adviser vs. salesperson vs. counterparty) played by those working in the financial industry.

To be effective, a fiduciary standard must be based on clear laws, a muscular regulatory infrastructure and must be accompanied by credible enforcement to insure compliance. So there will be difficulties with the definition, the scope of its applicability (which roles-adviser/ broker, mutual fund salesman, counterparty, financial planner- and/or products- investment, insurance, etc-), and educating the investors about the importance of working with an adviser who embraces the fiduciary responsibility. But it’s not enough for the adviser to be a fiduciary; she must also have the necessary skills and expertise to carry out the adviser duties.

Can a commissioned salesperson act as a fiduciary? Is the expectation that humans place self-interest below client interest unreasonable? Can an advisor restricted by his employer to offer only in-house products truly act as a fiduciary? Can financial advisers make a decent living and receive fair compensation for their training, expertise, skill and due diligence? The answers to these questions are probably: No, no, no, and hopefully yes. (One could also ask if a wrap account might be a way for the brokerage industry fiduciary responsibility in the context of the brokerage industry. The answer is maybe with an all-in fee of 1%, but not at with a 2.5% fee typically associated with such accounts. Depending on the investor’s asset mix the 2.5% represents 30-50% of the available market returns, which by definition does not feel like the best interest of the client. Whatever relationship you might have with your 'adviser', in addition to the cost you better understand if you are getting value for your money: you don't want to trade off an IPS, a strategic asset allocation and a low cost portfolio implementation, for promises of market timing, alpha vs. beta (stock selection), tactical asset allocation. If you are not getting an IPS, what are you getting for your money?)

As we begin to understand the scope of the changes required to move the retail financial industry to a fiduciary model, we see that it might be perceived by some as an attack on the industry’s business model (already one of the objections tabled is that government has no right to specify or favour one business model over another one). Whatever the outcome, and clearly I am counting on a meaningful implementation of “fiduciary duty”, no fiduciary standard will solve the problem associated with crooks. Note that in Canada you hear nothing about the need for fiduciary financial services; nothing from the industry of course, but nothing from legislators or regulators.

Can you think of a reason why you would not want to work with a fiduciary adviser? And if you can’t, then why you don’t ask you adviser if he is a fiduciary and if he is not then ask him to at least sign a fiduciary pledge such as the one suggested by Tara Siegel Bernard in NYT’s “Will you be my fiduciary”. Otherwise perhaps you should go and find another adviser.

In summary

So the issue is complex, and the vast majority in the industry do not conduct themselves in a fiduciary manner and will go to great lengths to avoid having to comply with such level of care toward the client because the model today is primarily commissioned sales or counterparty in a transaction. The biggest problem is that vast majority of clients in the financial industry naively think that they already have a relationship of trust (when they in fact have a sales interface) and the clients are also handicapped by asymmetric information. The advisors' problem is that potentially the business model has to change to a fee for service approach. While clients are perfectly content to pay $10-15K/yr in MERs for a mutual fund portfolio of $500K at 2.5% MER (for which typically the client doesn’t even get a Investment Policy Statement- the foundation of any credible financial plan), yet many/most clients would probably be unwilling to pay anything close to that in transparent/explicit fees to get an IPS and a low-cost indexed ETF portfolio whose ongoing annual cost would be <0.5%.( In the UK, effective 2012 product cannot have embedded fees in them, thus legally forcing the separation of the cost of advice.)

Of course no law (or pledge) can replace the high integrity of an individual, but the legal requirement can set expectations correctly, which is not the case today (especially not in Canada where no class of advisor/broker is required to have a fiduciary duty like the RIAs in the U.S. or CFPs who have taken on the duty as a professional pledge.)


Here is some additional background reading material which those of you who are gluttons for punishment might find very interesting.

Vanguard’s “Why invest with us” webpage it includes the following:

“Your interests are the only interests we serve: Most investment firms are either publicly traded or privately owned. Vanguard is different: We're client-owned. Helping our investors achieve their goals is literally our sole reason for existence. With no other parties to answer to and therefore no conflicting loyalties, we make every decision—like keeping investing costs as low as possible—with only your needs in mind.” (Now this is the type of firm that I prefer to do business with. By the way this rare type of corporate setup us the optimum corporate structure, from a client’s perspective, for the financial industry.)

In Investment News’ “Why disclosure is insufficient to ensure a fiduciary standard” Knut Rostad writes that:

“… disclosure shouldn't be presumed to have the same role in a healthy fiduciary relationship as it does in other economic realms. In a healthy fiduciary relationship that involves personalized investment advice, disclosures shouldn't be viewed as a presumptively effective investor protection tool. They are an aid to the fiduciary relationship, not a substitute for fiduciary responsibility. Fiduciary status isn't for the faint of heart. Consistent with the record on which the Investment Advisers Act of 1940 was written, it is far more demanding than the commercial standard.

This difference is nowhere more evident than in the responsibility of the fiduciary, as opposed to the responsibility of the salesman, for his or her advice and conduct. In the latter case, the responsibility is shared between the salesman and the consumer. In cases with such significant disparities of knowledge, the responsibility isn't shared with the investor; it is held by the fiduciary alone. That an investment fiduciary alone should be held accountable for his or her conduct and advice shouldn't be controversial. After all, no one suggests that either a surgeon or an attorney be relieved of their fiduciary responsibility to put our interests first, merely by virtue of a “disclosure.” “

In an address entitled “Building a fiduciary society” John Bogle says that:

“…enormous costs seriously undermine the odds in favor of success for investors. For the investor feeds at the bottom of the costly food chain of investing, paid only after all the agency costs of investing are deducted from the market’s returns.”

“…what we mean by fiduciary duty, a concept that goes back some eight centuries in British common law. Fiduciary duty is essentially a legal relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary, who justifiably reposes confidence, good faith, and reliance in his trustee. The fiduciary acts at all times for the sole benefit and interests of another, with loyalty to those interests. A fiduciary must not put personal interests before that duty, and must not be in a situation where his fiduciary duty to clients conflicts with a fiduciary duty to any other entity.” And

“Surely it should be made clear to clients whether they are relying on (1) trained investment professionals, paid solely through fully-disclosed fees to oversee their investments; or (2) sales representatives who sell the products and services of the companies that they represent, whether life insurance, annuities, mutual funds, or anything else. Simply put, the first group is representing its clients; the second group is representing its employers. And each firm’s advertising and promotion should make this distinction clear.”

In Fortune’s “What Goldman owes its clients” Ben Stein writes (in the context of Goldman Sachs with whom typically only sophisticated individual or institutional clients would deal with):

“The story coming out from the friends of Goldman Sachs and of Wall Street generally is that Goldman Sachs is a trading house, that any client should know that, and that the client buys from Goldman Sachs knowing that it might trade against him and screw him up any possible way so as to make a buck. This is a nice fantasy and a tough guy version of how the world works. The problem is that it is contrary to law and common decency….But as underwriters, it has a duty to deal fairly and honestly with its buyers, and to deal as a fiduciary, putting clients' interests first, if the buyer is a client of the firm. It holds itself out to the world that way, too. It holds itself as "adding value" when its works for a pension fund or any buyer by selling him securities. Read the annual report.”

In the journal of Portfolio Management’s “The Fiduciary Principle: No Man Can Serve Two Masters” John Bogle writes:

“We have moved from a society in which there are some things that one simply does not do, to one in which if everyone else is doing it, I can do it too. I’ve described this change as a shift from moral absolutism to moral relativism. Business ethics, it seems to me, has been a major casualty of that shift in our traditional societal values.”

In Forbes’s “Investors misled by brokers masquerading as fiduciaries” Edward Siedle writes that there are sometimes circumstances when even CFA charter holders (and their clients) have to deal with conflict between the requirement by the CFA Institute who holds the members to the “highest fiduciary standards” and their employers as in the case of “brokers employed by the major Wall Street firms, do not acknowledge a fiduciary duty, which requires them to make their clients' best interests their top priority.” The author then quotes the following explanation from the CFA Institute "You've hit upon a dilemma for some of our members, who are bound by our Code of Ethics and Standards of Practice as charter holders and/or members of CFA Institute, but who are employed by firms with business models that apply suitability standards rather than fiduciary standards in their dealings with clients. Our understanding is that in many such instances, the firms do not allow CFA charterholders to display the CFA designation after their name on business cards or other publicly available material, so that clients do not perceive any different standard than what the firm has adopted for all of its employees.” Clearly a very complex subject that is difficult to separate from the business model of one’s employer and the contractual relationship with the client.

Further clarification is provided in CFA Institute Magazine’s “What’s a broker to do?” where Jonathan Stokes (Head of Standards of Practice) addresses the matter as follows. The CFA Institute Code and Standards explicitly states in Standard III (A) Loyalty, Prudence and Care that: “Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their client’s interests before their employer’s or their own interest.” Stokes writes that “The requirement to act in the client’s best interest, with loyalty, prudence and care, and for disclosure of conflicts of interest apply to all when engaging in their professional activities. What specific conduct is required of members to fulfill these duties will depend on the member’s relationship to the client and the nature of the member’s job functions (e.g. execution only brokers, retail brokers, institutional broker). Although members and candidates must comply with any legally imposed fiduciary duty, the Code and Standards neither imposes such a legal responsibility nor requires all members to act as fiduciaries. In particular, the conduct of CFA charterholders who are broker/dealers may or may not rise to the level of being a fiduciary, depending on the type of client, whether the broker is giving investment advice, and the many facts and circumstances of a particular transaction or client relationship. The specific actions required may vary by job function, but CFA charterholders…must comply with one of the most rigorous and comprehensive codes of conduct anywhere”.

You can read much more on the F-word in the Investment News’ “From the Fiduciary (FI360)” by Bennett Aikin. Also Blain Aikin who heads FI360 has “coined the term “Global Fiduciary Precepts” to denote these seven practices. They are:
1. Know standards, laws, and trust provisions.
2. Diversify assets to specific risk/return profile of client.
3. Prepare investment policy statement.
4. Use “prudent experts” (for example, an Investment Manager) and document due diligence.
5. Control and account for investment expenses.
6. Monitor the activities of “prudent experts.”
7. Avoid conflicts of interest and prohibited transactions.”

In TD Ameritrade’s “The Standard of Care for Investment Advice” contains a good table explaining the differences (in the US context) between an RIA (Registered Investment Advisor) and a “registered representative” (likely a broker). Well worth a read for those interested in the subject.

In SmartMoney’s “Bogle: American Capitalism is Doomed” John Bogle is quoted as:

“For years, says Bogle, the U.S. had a system in which capital was the property of owners. Those who bore the risk reaped the rewards. That system, which he calls the ownership society, has been transformed in the past 50 years into the so-called agency society. Now investors swallow the risk while managers collect more than their fair share of the rewards. Along with that has come the era of phony accounting, stock-option mania and inflated executive compensation.” (Bogle’s book “The battle for the soul of capitalism’)

MSN Money’s “Can you trust your financial adviser?” explains the cost of being too trusting and looks at job titles which may or may not come with fiduciary responsibility.

An finally (while not perfect, since it implies that disclosure of conflicts might provide dispensation for doing the inappropriate thing,, in the NYT’s “Will you be my fiduciary” Tara Siegel Bernard suggests that “the next time you’re shopping — whether it’s for a broker, a mortgage, an annuity or a full-fledged financial plan — ask your provider to sign it. Here it is:
The Fiduciary Pledge
I, the undersigned, pledge to exercise my best efforts to always act in good faith and in the best interests of my client, _______, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interest, which could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all fees I will receive as a result of this transaction and I will disclose any and all fees I pay to others for referring this client transaction to me. This pledge covers all services provided.
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Re: fiduciary: lets play it both ways

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

images.jpeg (4.67 KiB) Viewed 21295 times
Report: Clients confused about standards and don't care ... /306199968
By Lavonne Kuykendall
June 19, 2011 6:01 am ET
While the financial advice industry wrangles with regulators and lawmakers over a universal fiduciary standard, most investors are far more concerned about getting their phone calls returned.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E-mail Lavonne Kuykendall at
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