Saturday, May 15, 2021

Fund Facts has a dirty little secret

The Fund Facts disclosure document is given to every investor in a mutual fund. Fund Facts provides key information about the fund. Some of the useful information provided includes the MER, top 10 holdings and past performance. Fund Facts however does not provide information on the fund’s investment strategy, the risks involved in owning the fund and the actual amount of trailing commission that the fund will be paying dealers (it merely discloses a range from 0-1%).While Fund Facts doesn’t provide all the information necessary to make an investment decision, at least the information provided is not untruthful - EXCEPT for the trailing commission payment with respect to owners of the fund with an account at a discount broker.


So why exactly do we say that fund facts is untruthful? Take the TD Canadian Equity Fund – Investor Series Fund Facts document for example
.  Extract from TDAM Fund Facts:

“More about the trailing commission: The trailing commission is an ongoing commission. It is paid for as long as you own the fund. It is for the services and advice that your representative and their firm provide to you. TDAM pays the trailing commission to your representative's firm, including a discount broker. It is paid from the fund's management fee and is based on the value of your investment. The rate is 0.00% to 1.00% of the value of your investment each year. This equals $0.00 to $10.00 each year for every $1,000 invested.”

A discount broker is registered as an Order Execution Only dealer which means that it cannot provide any personalized advice or services to investors. It cannot provide any service that could be perceived to be personalized advice or could influence an investor to make a purchase.

Who are the players that are involved with Fund Facts? They include the fund sponsor, trustees of the fund, the Independent Review Committee that is supposed to opine on conflicts-of-interest, the Portfolio Manager who is responsible for the diligent management of the assets of the fund and of course the securities regulator who approves the FF document for delivery to prospective investors in the fund.

Any client with an account Agreement with a discount broker is entitled to use the information and tools provided on the dealer’s website. If the client wishes to buy a stock, bond, exchange-traded fund or an actively managed fund ETF, they could use the information and purchase the fund for a nominal commission rate, typically about $9.95., a one-time payment.

Fund Facts however, asserts that the self-directed unitholder must pay up to 1% for advice and services, advice and services that any client with an account has access to. The assertion is simply untrue and is harmful to investors. Holding a mutual fund paying such a trailer does not give the unitholder any additional benefits that he or she does not already have as a result of being a client of the discount broker.

If a client owns a portfolio of say $50,000 of such funds, he/she will pay $500 per annum for the number of years they own the fund instead of a $9.95 commission charge at the time of purchase as is the case for other securities. If the DIY investor holds the funds for 5 years, the amount paid will be $2500, more if the fund has appreciated in value, instead of $9.95.  That’s 250X of overcharging!

The long-term impact of these falsely described, misleading commissions can devastate retirement income security.

This untruthful Fund Facts disclosure also harms all unitholders when fund assets are used to finance the commission payments to the discount brokers. Their returns will be reduced by the amount of commissions removed from the fund for no purpose that benefits the fund .The only winners are the fund companies who acquire more assets upon which to levy a management fee and the discount brokers who receive cash for no purpose. Main Street is left holding the bag. As John Bogle, the founder of Vanguard funds has remarked “The scandal isn’t what’s illegal, it’s what’s legal

Our question to the gatekeepers, including securities Commissions, charged with protecting investors is simple -Why are you allowing this broad daylight robbery?

The good news, such as it is, is that securities regulators will not allow mutual funds to make trailing commission payments to discount brokers after June 1, 2022. The bad news is that these payments can continue up to this date without any requirement to provide rebates to clients for the years of overcharging.

Fund Facts was designed to assist investors. Instead, the actors involved have turned it into an evil, destructive instrument that harms self-directed investors. All of them should be held to account for their negligence, greed, incompetence and breach of their lawful duties and mandates. Caveat Emptor.


Sunday, April 18, 2021

The real impact of retaining the DSC sold mutual fund


When the Ford government failed to go along with other provinces in banning the toxic DSC fund, it had a profound impact on confidence in financial markets and their regulation. Some of the unintended consequences include:

·         It showed how special interests can be brought to bear on the Government to the detriment of ordinary citizens

·         It alienated other provincial jurisdictions that had thought the OSC was on board with a ban

·         The intervention was the likely cause of Maureen Jensen’s early departure as OSC Chair. Ms. Jensen was regarded as   an outstanding thought leader in modern securities regulation 

·         It showed how government can ignore empirical evidence and research in making policy decisions

·         It showed how the government can blatantly ignore the voices of financial consumers in reaching decisions.

·         It placed an emotional strain on OSC staff who had worked for years on reaching a conclusion to ban the DSC

·         It placed the OSC in the uncomfortable position of having to develop restrictions on DSC to limit the damage of the government’s policy decision

·         It ignored a 2019, OSC Investor Advisory Panel (IAP) report that found evidence of potential  shortfalls  in the financial advice Canadians get,  particularly those with smaller accounts

·         It restrained fair comparisons of lower cost, high quality investment products and services, and discouraged  competition and innovation in the Canadian asset-management space 

·        Some of the proposed restrictions can only work to further marginalize small investors, especially minority investors and seniors. Investors with the least money and/or shorter time horizons have the most to lose


·         It exposes Ontarians of modest means to a very bad product that will impair their retirement income security

·         The value of academic research and researchers declined

·         Independent researchers were intimidated and bullied for supporting a ban  

·         The professionalism of advice suffered a setback

·         It caused the CSA to provide an exemption  for DSC on the implementation of  CFR conflict of interest rules that will come into effect at the end of June


·         It will have a chilling effect on OSC staff contemplating investor protection reforms

·         Funding and support for investor advocacy groups declined

·         Despite the Ontario government's mandate to reduce bureaucracy and red tape, this does the exact opposite. It creates an elaborate checklist that must be enforced when people purchase DSC mutual funds and one that must be applied by national firms on only a subset of a subset of a subset of Canadians

·         It harms the reputation of the entire Canadian mutual fund industry

·         Canada’s already low international investor protection stature took a hit.


The decision will also complicate fund disclosure and add to investor confusion. There will now need to be a Fund Facts for Ontario investors and a separate one for the rest of Canada that excludes the DSC material.

It must be very stressful for OSC staff  wrestling with the best way to satisfy their government overlord and still look like a normal regulator. 

Our message to the Government of Ontario  - reverse position and do the right thing for the people, instead of the financial services industry. This would stop wasting precious OSC staff resources on retention of a harmful product and let them focus on their prime objective - investor protection. That would be in the Public interest.



Saturday, October 24, 2020

Protecting seniors/vulnerable investors: some basics for CSA consideration


In addition to wreaking havoc on the Canadian economy at large, COVID-19 has had sudden and significant repercussions for how individuals, especially seniors, conduct their financial planning—specifically, how they approach investments and saving goals.

Many households have experienced income shocks and have burned through their cash reserves, illustrating the critical role that liquid assets play in the health of any financial plan. Other workers have experienced health challenges at the same time they’ve experienced income reductions or outright unemployment, highlighting the importance of emergency funds and factoring healthcare outlays into a total financial plan.

The pandemic’s economic side effects also have significant implications for when and how older adults relate to their investments. Not only have older workers experienced high rates of job loss , but based on previous recessions, it could take older unemployed workers a much longer time to become re-employed than younger ones. For those in or near retirement, the time for investment accounts to recover is limited. With increased longevity, savings will have to last much longer than ever before.

As for regulators, we believe the following actions would be very effective in protecting seniors/ vulnerable clients:


·         Redefine “vulnerable client” per U.K. FCA standard

·         Establish a Code for the fair treatment of vulnerable investors

·         Make researching Firm and individual registration and disciplinary history more investor-friendly and fulsome

·         Do not permit Dealing Reps to act as POA’s , executors or a beneficiary of a non-family member clients

·         Increase Representative proficiency standards re de-accumulation accounts such as RRIF’s

·         Require a KYC update period of one year for vulnerable clients

·         Introduce rules related to trusted contact persons/ temporary holds as proposed by NASAA

·         Hold Dealers accountable in cases of Off-book transactions and personal financial dealings  

·         Introduce best-in-class  dealer complaint handling rules that empathize with elderly, vulnerable clients

·         Provide objective suitability criteria for utilization of fee-based accounts

·         Add a requirement to document recommendations whenever a DSC mutual fund is recommended to an older or vulnerable client

·         Update constraints on “ Free lunch seminars” targeted at seniors/ retirees

·         Increase level of sanction if a vulnerable investor has been financially assaulted

·         Adjust sanctions based on whether or not harmed clients were fully compensated for undue losses

·         Make investor compensation a priority consideration

·         Give OBSI a binding decision mandate to eliminate low-ball settlements

·         Consider establishing a Senior’s Helpline based on the FINRA Model ( see their report  )

·         Increase cooperation with insurance regulators to reduce regulatory arbitrage

NOTE: In April 2017, FINRA (equivalent to a Canadian SRO) announced that the National Adjudicatory Council (NAC) revised FINRA’s Sanction Guidelines to include a new principal consideration titled “Consideration for Vulnerable Customers.” The NAC is FINRA’s appellate tribunal for disciplinary cases and is a 15-member committee composed of industry and non-industry members. The new principal consideration reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions. While FINRA’s decisions have acknowledged that exercising undue influence is an aggravating circumstance on a case-by- case basis, the new principal consideration makes clear that the Sanction Guidelines contemplate coverage for vulnerable individuals or individuals with diminished capacity. We encourage the CSA and SRO’s to take similar stands