Monday, April 3, 2017

Phase 2 of the Banking Upselling Scandal

                                                                                                       April 4, 2017

By now we've all read about the scandal involving upselling by Canadian banks especially TD Bank. It is truly disturbing that such a horrible client- abusing culture has been allowed to develop in front of the eyes of Federal regulator, the Financial Consumer Agency of Canada (FCAC)

Back in Oct. 2016 FCAC told us that for the most part, financial services institutions are behaving themselves in how they treat their clients, according to its 2015-16 Annual report. The FCAC's report indicated that the agency has observed, "strong market conduct" among federally regulated financial services firms, such as banks and insurers. Specifically, the FCAC's uncovered "no major or systemic concerns."  During that fiscal year, the FCAC investigated 708 potential breaches of federal legislation, regulations, voluntary codes of conduct and public commitments, the report states, noting that any compliance issues that were uncovered, "were addressed in a timely and effective manner." In 2015-2016 no fines were imposed . Well, here we are a few months later with a huge banking misconduct scandal on our hands.


The reaction of the FCAC to the scandal has demonstrated no sense of urgency to investigate and protect financial consumers. Asked to comment on the CBC’s GoPublic reporting, the FCAC’s deputy commissioner Brigitte Goulard appeared on TV to say that the agency had been interested in looking at these sales practices “for a while” but had decided it was going to launch a special investigation in April. A report can be expected by the end of the year, but how deep will it go? 

Asked by Radio Canada what would happen if a bank is found guilty of illegal actions in its sales practices, Goulard warned that her agency could impose a fine of up to $500,000. In 2015-16, Toronto-Dominion Bank CEO Bharat Masrani was paid $9.38 million in his first year as top executive so a fine of $500K would equal only a few weeks compensation or a minute fraction of TD’s quarterly profit. Not exactly a huge deterrent for a bank like TD. And she added, “If it’s a serious violation, we could name the institution.”. This is neither the transparency Canadians deserve nor the financial consumer protection they need.

In a statement, FCAC commissioner Lucie Tedesco expressed concern with recent allegations related to the sale of products and services by financial institutions to consumers without properly obtaining their prior express consent. “The law requires that, in order to provide consumers with new or expanded products or increase their credit limits, financial institutions obtain their customers’ prior consent and disclose key information about the costs and charges of the products they are purchasing,” she said. The real issue is not consent /cost disclosure but rather an unbridled sales culture where client needs are subordinated to sales quotas placed on employees under threat of termination. Clients provide personal and confidential information that is harvested to upsell them based on quotas rather than need. That is exactly the opposite of the type of trust relationship that should exist between a bank and its clients.

Contrast this with the U.S. Consumer Financial Protection Bureau .Its motto We’re on your side is right there on the first page of their website. ”We are the Consumer Financial Protection Bureau, a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly.”  The site makes it easy to submit complaints, includes a searchable database of public complaints against companies and invites whistleblowers from within the industry to spill the beans.

In  September 2016 , the Bureau announced that Wells Fargo had been slapped with fines totalling US$185-million after an investigation found that bank staff had opened more than two million fake chequing, credit card and other accounts for unknowing customers as part of a company-wide effort to meet sales targets. The announcement set off a series of investigations into Wells Fargo, including a congressional hearing .The bank’s CEO, John Strumpf was forced out a short time later. In January, 2017, it ordered subsidiaries of Citibank to pay US$28.8-million for failing to provide borrowers with adequate options and giving them a bureaucratic runaround as they attempted to avoid foreclosure on their homes. These actions send a strong message to the banks.

Phase 2 of the scandal will unfold when abused clients file their complaints with the bank. They will likely end up with the bank’s “ombudsman” which in reality is neither independent nor a true Ombudsman. You likely won't be warned that, unlike OBSI, your complaint will not stop the statute of limitations time clock. If you don't accept their response , you'll be referred to their own fully paid for " independent' for -profit firm ,ADR Chambers banking  ombudsman ( ADRBO) which clearly is not independent of the bank ( applies only to TD and RBC) and is not a true Ombudsman. See this report from the Consumers Council of Canada of what they think of this type of conflicted dispute resolution service. Canada's banking dispute resolution system

Will the FCAC come down hard on the banks involved? Will abused clients obtain restitution or have improper contracts unwound? Or will employees who behaved badly or broke the law under intense pressure be turned into scapegoats for management actions?

With an increasing number of vulnerable consumers and more complex banking products/services, the need has never been greater for robust consumer protection. A Financial Consumer Code is required. Kenmar support such a code and a strong enforcement agency (FCAC) to make it real. OBSI should be the sole Ombudsman for ALL banks and internal bank “ombudsman " abolished as has occurred in the UK. For- profit Ombudsman services should be prohibited .

We call on the Government of Canada to use this scandal as an opportunity to introduce a robust Financial Consumer Code, give the FCAC the mandate and resources to act as a consumer's advocate for Canadian financial consumers and make OBSI the sole Ombuds service for all Canadian banks under Federal jurisdiction. Such actions are well past due.

Wednesday, January 18, 2017

Investor ALERT : Online brokers may be overcharging you

This ALERT is for investors who buy mutual funds via a discount broker. Discount brokers shouldn’t be collecting opaquely disclosed trailer commissions intended to provide you with investment advice. The obligation to provide investment advice is contained in Fund Facts , the document you were given before you bought the fund . A recent report provided by securities regulators tells us that only $12 Billion of the $30 billion in mutual funds at discount brokers are D class ( a class of fund with the portion of cost intended for advice stripped out) which means that $18 billion is invested in trailer commission paying funds, referred to as A class. Since discount brokers cannot and do not provide investment advice, clients of A class funds are being overcharged. Clients are not being treated fairly, honestly and in good faith as required by securities laws. We've been asking Regulators for years to enforce the law; we're still waiting for an answer.

By the way, at 1% trailing commission, that amounts to an astounding $180,000,000 each year that isn't going towards the retirement funds of Canadians! Shameful, no?

So, ask your discount broker what fee you are being charged to buy and own mutual funds. If it’s D class or involves a small one time upfront charge , that’s OK. But if you are being charged an ongoing trailer commission for advice, you are being charged for a service not that is being provided. Ideally, the charge would be equivalent to what you’d pay to buy an ETF, around $9.95  

Monday, December 26, 2016

Registration Check is necessary but not sufficient

Several times a year our securities regulators/ CSA routinely promote the importance of checking to see if your advice giver is registered. We believe this can actually be a disservice to investors, giving them a false sense of security that if their person is listed that they can then breathe a sigh of relief that all is well. The CSA says “Although most investment advisers are honest and work in your best interest, you still need to carefully choose who you deal with. Before investing follow these simple steps: …” This is not accurate- there is NO regulatory requirement that “advisors” act in your best interests .In fact, the industry works on the basis of suitability which is a very low standard.

ANOTHER EXAMPLE "To prevent fraud [emphasis ours], use the National Registration Search to check if your dealer or adviser is registered. Such registered dealers and “advisors” can cause and have caused a lot more damage through mis-selling and overcharging ( and sometimes fraud) than an outright fraudster and there are many more of them. Still, it is important to ensure your advisor and their dealer is registered because if they are not, this is a clear red flag.

Perhaps most importantly of all ,the CSA says “The CSA furnishes all data and information products on this site with the understanding that neither the CSA, nor its contractors and employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information on the site.” ( ) Now isn’t that reassuring? This is precisely the kind of fine-print liability-dodging the regulators rightly give the industry a hard time for. An investigative report by found that as of May 2016, there were 51 instances of MFDA or IIROC reps whose full disciplinary records from 2013 to 2015 do not appear on their CSA profile pages ( ).

Information regarding registrants who were registered prior to September 2009 is not available on National Registration Search (NRS). You will need to access this information from your local regulator. This historical information is not available through NRS as the system was updated to summarize registration categories across jurisdictions (precipitated by September 2009 Registration Reform).

The current system is very complicated and necessitates the search of several databases. It also requires the consumer to know the registered name of the firm, although this may not be the business name the investor knows. It certainly can’t be done in 10 seconds as the CSA implies.

The CSA website is difficult to navigate to get any relevant information like registration category. If by chance an investor does stumble across the registration category unless they pursue it further they would have no idea what it actually means. But if they do, it makes it clear what a dealing representative really is – A Salesperson ( ) So ignore all the fancy titles, this descriptor tells it all.

Another issue involves names. Unless you use the exact name in NRD, you may get a No name found result. Duplicate names are another challenge. They can arise when researching SRO disciplinary actions in the CSA and insurance databases. While the uncertainty this causes could be remedied by cross-checking other identifiers, lingering ambiguity in some cases can force you to exclude the data point altogether. Financial consumers working with someone registered across multiple jurisdictions could have a hard time doing research on their prospective advisor. Investor advocates have proposed a national identification number for each registered or licensed person in the financial industry that will be the same across each regulator. Maybe one day that will happen.

The CSA’s Check Registration site only deals with securities registrants, does not include criminal sanctions as part of the person’s disciplinary history, and appears not to be consistent with respect to terms and conditions (for example, historical terms and conditions that are imposed as a result of a Director’s decision or a Commission order in Ontario are included in the database, but you have to contact the British Columbia Securities Commission for this information in BC).

This is a major problem when it comes to what investors are relying on for information about their financial “advisors”. The CSA suggests the registration reports as being complete and helpful to investors but, in reality, these often omit information about “advisors” that is highly relevant and necessary for investors to make informed decisions about who they may want to engage. In general, “advisor” profiles are thin on information that would be relevant to a consumer doing due diligence. For instance, the professional qualifications (e.g. Certified Financial Planner) are not provided. You can validate these by contacting the applicable professional society. If the individual has received a warning or caution letter, it will not show up on the system.

No information is provided that a registrant may also be registered as a life insurance agent with an insurance industry regulator. Securities regulators should consider including a disclaimer on their lookup pages indicating registered persons may have multiple registrations, and that consumers should consider searching the applicable insurance database, among others, for disciplinary actions.

We do not believe that the average investor is sufficiently familiar with registration categories to know whether a firm or individual is selling investments that they are qualified to sell or provide advice on once they are aware of the person’s registration category.

The advantages of dealing with a registered dealer is that they are under a regulatory regime, participants must meet minimum qualifications and the dealer is responsible for the recommendations made to you. You also have access to the Ombudsman for Banking Services and Investments in the event of a complaint (although they unfortunately cannot make binding recommendations) that can’t be settled with the dealer.

The major issue with a non-registrant is that they are likely selling products with no prospectus that are either high risk or outright fraudulent swamp land. When things go wrong (and they will) the person will be long gone and you will be unlikely to get your money back. The non-registered firm and/or individual may have administrative sanctions against them, but that won’t result in money back to you, the investor.

Unless an investor is employed in, or otherwise familiar with the securities industry, the chances are not high that the CSA website Are They Registered will provide them sufficient relevant meaningful information necessary to make informed decisions about who they may want to engage. There is nothing wrong with getting people to check the registration as one of the steps, but there also needs to be a robust warning about the limitations of the registration information with respect to the details provided.

We strongly recommend you read a companion article ABOVE the LAW- Checking an advisor’s registration available at

Tuesday, September 20, 2016

Did you ever wonder what regulators mean when they say a broker has been placed under “ Strict supervision”?

Brokers aka " advisors" are put under Strict supervision when they have been found by regulators to have broken the rules, thereby putting clients at risk. If after some defined period ,it is concluded that they can be allowed to work with clients with just the normal level of supervision, they are removed from the strict supervision status. For major breaches of the rules, brokers can lose their registration and not be employed by any member firm as determined by the applicable Self- regulator ( MFDA or IIROC). If your dealer Rep is under Strict Supervision be ultra cautious with any recommendations made.

The Eight Traditional Elements of Strict Supervision are:

i.     All  orders, both buy and sell, would be initialed by an assigned supervisor or a senior officer before entry;

ii.    ii. All client accounts would be reviewed on a daily and monthly basis based on the standards established by the Minimum Industry Standards for Account Supervision;

iii.   A review of trading activity in the Respondents own accounts would be conducted on a daily basis;

iv.     No transactions would be made in any of the respondents  new client accounts until full and correct documentation was in place;

v.    All documents signed by the Respondents clients would be reviewed by the Branch Manager and compared to the signature on the client’s photo ID. Evidence of such review would also be retained by the Branch Manager;

vi.   For all documents signed by one of the Respondents clients, a Branch Manager would send a copy of the document back to the client with a request for them to inform Dealer of any discrepancies.

vii. Any of the respondents client complaints received would be reported to the Registration Department of IIROC;

viii.                Any of the Respondent's client account generating in excess of $1,500 per month in commissions would be reviewed;

Ohers can be added to this traditional list of eight depending on the circumstances and tailored to the specific situation such as, but not limited to:

ix.  There would be no handling by the Respondent of any of his clients’ securities and no payment by the respondent  or issuance of cheques by the respondent to his clients without management approval;

x.    x. Any transfer of securities between the respondent's client accounts would be authorized by the client and reviewed and approved by an assigned supervisor or a senior officer of the Dealer Member

You can check advisor registration at  

Wednesday, August 17, 2016

Bay Street , Investor Vulnerability and Canadian Society ( Why a Best interests Standard is needed)

Regulators portray retail investors as diligent, fairly sophisticated and logical. The academic literature, produced primarily by finance professors, finds that investors are generally uninformed and financially unsophisticated. Most investors are unaware of the basic characteristics of their investments, pay little attention to costs (especially ongoing costs), and chase past performance despite little evidence that high past returns predict future returns. The CSA's belief that retail investors can fend for themselves, once armed with adequate disclosure, fails to appreciate the extent of investors' limitations and vulnerabilities. Instead, the findings of the academic literature as summarized in this paper suggest that policymakers should rethink current securities regulatory policy. This paper provides detailed rationale why a fiduciary Best interests standard is required to protect Canadian investors, the vast majority of which are in fact vulnerable to mis-selling. While disclosure may be necessary, it is not enough to protect the typical retail investor. There is an urgent need to tackle investor vulnerability in the Canadian financial industry as a pressing socio-economic issue.

Monday, August 8, 2016

Call for Action Protection of Vulnerable Investors

Kenmar have been recommending changes in SRO rules that would protect seniors and vulnerable investors for the past 4 years. The vulnerability of seniors is a well documented  issue.. We have requested changes to the NAAF that would include a trusted contact person to be named .We also want a rule that would allow dealers and dealing representatives (" advisors ") to take immediate, short-term protective action for the benefit of vulnerable clients who may have diminished capacity to give coherent instructions due to Alzheimer's/dementia, or other causes, or who may be facing improper influence, including elder financial abuse. A model protocol for taking protective action has already been accepted by FINRA in the U.S. in 2015 ( see link below).  Currently in Canada, investment dealers and dealing  Reps do not have the legal authority to refuse or delay carrying out instructions from clients even when there is good and just reason to believe the client exhibit diminished capacity or is being  exploited financially by others.

There is a crying need to provide a legal safe harbour to protect dealers and dealing representatives who take protective action in good faith . Kenmar believe such an initiative is entirely congruent with acting in the Best interests of clients. We urge regulatory action without further delay. Kenmar continues to oppose any regulatory actions that would permit stockbrokers to act as executors or trustees except for immediate family.

On January 22, 2016, the North American Securities Administrators Association (“NASAA”) adopted a model act, entitled “An Act to Protect Vulnerable Adults from Financial Exploitation.” This act seeks to facilitate coordination among securities regulators, broker-dealers, and adult protective services agencies in dealing with the financial exploitation of seniors and other vulnerable adults. The model act reflects the collective views of the NASAA membership, which consists of 67 state, provincial, and territorial securities administrators from the 50 states, D.C., Puerto Rico, the U.S. Virgin Islands, Canada and Mexico; however, it has no legal authority and is only meant to serve as a guidepost to individual jurisdictions. The model act may be adopted by state legislatures or regulators (with or without modifications) and has both permissive and mandatory components. The full text of the model act, along with background information is available on the Policymakers section of NASAA’s new website,, which launched in December 2015 and is designed to provide senior-focused resources to investors, caregivers, industry and policymakers.

Sunday, July 17, 2016

My advisor says all my investments are suuitable

Your investment advisor could be a straight shooter, scouring the financial world for the very best products, but it’s more likely than not they aren’t. They could just as easily push you into “in house” products that help them reap better commissions. The sad fact is, the latter situation is far from uncommon as advisors are typically not legally bound to find the “best” products for you, merely ones that are considered “suitable.” Most Canadians are not aware of this. In fact most financial advisors are registered as "dealing representatives", which according to our national regulators is a salesperson. Dealing representatives only have to fulfill the suitability obligation.

The National Smarter Investor Study, which was published on November 3, 2015 by the BCSC,examined client-registrant relationships in Canada. The study found that, among other things, 90% of respondents described their existing level of trust in their investment representative as strong or very strong. This trust led some clients to ask fewer questions about how their representatives were compensated and to place less importance on reading their account statements because they were confident that their representative was taking care of their money. That's because they wrongly believe their advisor has put their interests first ,not realizing the suitability regime is in play.

One of the supposed cornerstones of the financial services industry is the rule that stipulates the sanctity of the so-called “suitability” of the transaction, the product and the portfolio recommendation.

You would have thought that something as important as a recommendation suiting the client’s financial needs and risk preferences, as well as the current risks in the market place, would be well defined. You would have thought that suitability would be etched in statute, in the courts, in common law, in financial services rules and regulations, in compliance departments rule books, in corporate quality control procedures, in the minds of everyone in the industry.

In fact , it is not explicitly or specifically etched anywhere. There are no rules that say what is and what is not suitable, there are no principles that must be followed. The closest the Canadian financial services industry has got to putting principles of suitability into stone is the common garden “Know Your Client” (KYC) form. The KYC form cannot safeguard the suitability of a transaction because it cannot effectively relate the transaction to financial needs, existing investments, risk preferences or current risk/return relationships. All that really exists is the word itself amidst vaguely worded paragraphs on the subject. Indeed, because current thinking limits justification of suitability to the transaction there is in reality no substance to what is and is not “suitable”. More often, it really just boils down to not providing unsuitable recommendations. Indeed ,the weak suitability criteria induce bad advisor behaviours by contaminating the KYC process itself. KYC's are modified to fit what the advisor wants to sell. See The Know Your Client Process Needs an Overhaul

The so-called “suitability” regime does offer some legal protections for investors, but it’s certainly not the gold standard. Strangely, it doesn't include product cost, a key parameter in determining portfolio performance. If you want the gold standard you need to ensure that your investment advisor, or certified financial planner, is considered a fiduciary or at least works to a Best interests standard. What’s the difference, and why is it important?

First let’s start with what goes into the suitability regime. It is typically a regime that requires that whoever is handling your investments puts you in products that are “suitable” for your objectives, financial situation , risk tolerance/capacity and even age. Of course, this doesn’t always happen. The classic example is of a advisor who shuffles conservative clients into resource stocks. This would be considered an unsuitable investment . We've seen people in their eighties sold 6-year DSC mutual funds .Older people typically need more fixed income, and less in the way of speculative securities.
Much research exists that shows that incentives skew advisor recommendations. The out of sight trailing commissions in mutual funds for example have been shown to cause advisors to recommend funds that are more expensive and end up being performance laggards. Investor advocates attribute the relatively slow growth of low cost index funds and ETF's in Canada to the suitability regime and the conflicts it permits. The suitability regime is the soil in which conflicts-of-interests grow like weeds .

The suitability regime breeds a culture that causes advisors to cross the foggy suitability line. The self-regulatory and industry organization investor complaint experience shows there is consistent and ongoing non-compliance with many of the current key regulatory requirements, with the unsuitability of investment recommendations being the primary basis for complaints to OBSI for the past five years, case assessment files for IIROC for the past three years and allegations in MFDA enforcement cases for the past three years. A large number of unsuitable investments remain undetected or ignored by regulators leaving investors with sub par return performance or even huge losses. For some investors those losses can be life altering.

While suitability offers investors some sort of protection, it falls short in some important ways. For starters, it doesn’t require brokers to find the best products, only ones that are ostensibly suitable for you. If an underwhelming house brand security lines up with the vague outlines of what is considered suitable they can still push it, even if it costs more to own, or underperforms peer securities. It doesn't even require selecting the lowest cost product that will meet your needs. Suitability is focused on the product and transaction while Best interests is focused on you.

In other words, mere suitability alone falls short of what the Best interests or fiduciary standard brings to the table. When your financial advisor works to the Best interests standard they have the obligation to put you in only the very best products they can, and to act in your own best interest, not their own. Advising under a Best interests standard takes a lot more work than becoming your typical “advisor”. They have to fulfill a certification process that requires them to uphold prudent investment guidelines and practices as delineated by regulators. The majority of most mainstream “advisors” do not meet this higher standard.

We believe when it comes to advising retail investors and their life savings, the individuals advising them should be held to the highest standard. The standard that meets this is the fiduciary one. What separates professionals in this business from sales people is standard that puts client interests first.

The retail investor has to have a clear understanding between the difference of a financial Professional and a salesperson posing as an advisor .If the mutual fund and investment dealers want to be viewed as trusted advisors then they must be held to a Best interests/ fiduciary standard ,the same standard as other professions such as an accountant or a lawyer. These firms should not be able to use disclosure and made up titles to acquire your trust. “Suitable investments “ may be causing you real harm via account churning , unduly high fee products , excessive leveraging and other tricks and deceptions.

For example , say you want to buy an automobile. You want something that gets at least 25 mph and costs no more than $20,000. OK, there are likely many models from many manufacturers that will fit those two requirements and, as such, are “suitable” for you. However, most consumers would want to drill down beyond those two attributes.
Which model has the best safety record? What is the fuel consumption ? Which has the best maintenance/repair performance? How does it stack up on emissions? Which holds its value best after three years? Do you live near a qualified mechanic who can repair your car when necessary and are parts readily available? These questions go beyond whether something merely satisfies your wants or desires–they go beyond the mere suitability of the initial results to your broad query–these additional questions will likely begin to determine what’s the “best” model for you to buy.

Now, it’s possible that there may not be a clear-cut winner. Maybe three models are all great choices and no one emerges as better than the others. Nonetheless, there is a huge difference between narrowing down the choices to among the best vs. what merely is suitable.

Financial Advisors are typically only required to find stocks, bonds, funds, etc. for retail investors that are merely “suitable”; whereas other financial professionals are required to undertake more diligent searches to consider what’s “best” for you. They must assess how it fits into your portfolio ,consistent with your KYC parameters. They need to consider product cost , tax implications ,features like liquidity and your loss capacity.

The wide spectrum of “suitable “choices complicates disputes for investors. Shrewd dealers are able to deflect liability in all but the most obvious cases of unsuitable advice. That is why they fear the Best interests standard.

A key problem here for the average investor is -- Conflict-of-interest. If an advisor finds a dozen or so stocks or funds that are merely “suitable” for you, that registered person may feel pressured to push one of those products because he or she gets paid a higher commission or because their employer pressures them to move so-called “house” product or that of a favored third party. That’s the dirty little secret of Bay Street’s dealer community. Suitability enables conflicts to function under protective cover.

Does it make sense in this day and age that an individual can study for a few weeks and pass a registration examination that then effectively allows that person to provide advice to the public? Absolutely not.

In Canada. we have become entranced by the siren’s song of disclosure. It has been proven that disclosure ,while necessary ,is an ineffective retail investor protection.
It is important to understand regardless of whether an advisor is acting under Best interests or not it is impossible to remove all conflicts of interest, however the Best interests standard greatly increases the likelihood of reducing the abuse of these conflicts.

The Canadian Securities Administrators are currently looking into imposing a Best interests standard on advisors but it is years away and it faces stiff industry opposition. Until the issue is resolved it's CAVEAT EMPTOR.
Some videos to watch that will open your eyes are available at the Small Investor Protection Association website

If you want to learn how mutual fund trailer commissions work visit a FAIR Canada production.

Tuesday, July 5, 2016

The Best Interests Advice Standard

This post explains the Best interest standard , a standard investor advocates want to replace the prevailing suitability standard. Introduction of such a standard would increase investor protection and lead to better investment outcomes. Read the article here .

Wednesday, June 29, 2016

Saving Money vs. Investing Money

Bay Street often refers to money in investment accounts as savings. Industry funded research also refer to investments in mutual funds, stocks and bonds as savings. The reports state that those investors with advisors “ save” more than those without . This is not quite accurate as there are very important differences between savings and investments.

Investments are volatile and may not be available when you need the money most. Market losses , early redemption charges and general illiquidity can reduce the amount of cash available. Obviously you must not put a large amount of money in a long-term investment for your down payment on a house that is closing in a few months. When the lawyer asks for the house money you can’t say: “Wait!.. the stock market is down 50%, you will have to wait until it recovers..”

There are two primary types of savings programs you should include in your life. They are:

1. As a general rule, your savings should be sufficient to cover all of your personal expenses, including your mortgage, loan payments, insurance costs, utility bills, food, and clothing expenses for at least six months. That way, if you lose your job, you’ll be able to have sufficient time to adjust your life without the extreme pressure that comes from lliving pay cheque to pay cheque .This is referred to as an emergency fund. According to a 2015 CPA study , slightly more than half of Canadian working households said they did not save on a regular basis and only half of those surveyed said they maintain a special reserve fund for unexpected financial emergencies. The almost one fifth of respondents who indicate having an emergency fund said that their fund would not cover regular household expenses beyond four weeks.

2. Any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven. The stock market in the short-run can be extremely volatile, losing more than 50% of its value in a single year. Paying. down a home mortgage is a great example of saving- it will cut the balance owing while cutting monthly mortgage payments. Interest paid on mortgages is not tax deductible .

Financial advisors that cannot distinguish between short-term savings and long-term investments or are more interested in putting you into a high commission investment or ignore your 18% credit card debt are dangerous - in such a case you need to find another advisor!

Only when these things are in place, and you have adequate property, life and health insurance, should you begin investing .The only possible exception is putting money into a pension plan at work if your company matches your contributions. That’s because not only will you get a substantial tax break for putting money into your retirement account, but the matching funds basically represent free cash that is being handed to you on a silver tray and there may be material bankruptcy protections in place for assets held within such an account should you be wiped out entirely. A RESP is another good example because of the Government Education Grants.

Remember, it's your money.

Wednesday, June 15, 2016

Conflicts-of-interest and your " Advisor"

In their day-to-day business, it is not uncommon for financial advisors to face decisions about whether a particular action or circumstance constitutes a conflict-of -interest. A conflict- of- interest exists when a advisor's. business, property and/or personal interests, relationships or circumstances may impair his/her ability to provider objective advice, recommendations or services .

Current securities regulations do not require that advisors act in the best interests of their clients as registered investment advisers, as fiduciaries must. It only requires that they sell investments that are suitable—not necessarily optimal—for their clients. In fact , advisors are actually registered as dealing representatives or salespersons. The title “advisor” is a made up one.

Conflicts-of-interest are never in the client's best interests.

One conflict for advisors is that they make their money on transactions. The more transactions they execute, particularly involving investment products with high commission rates, the more they earn. This can lead to churning of your account – the high level of trading has more to do with generating brokerage commissions than growing your nest egg.

In the case of mutual funds , the advisor continues to receive what is known as a trailing commission for as long as you own the fund. The more they sell you, the greater their ongoing commissions. Due to a conflict of interests they may not encourage you to pay down high interest credit card debt. This is also why some less than ethical advisors may encourage you to borrow to invest- the more you own in mutual funds, the greater their income. Such advisors rarely recommend lower cost products like ETF's because they do not pay trailer commissions. This borrowing may be in addition to your other household debt so your risk profile is greatly magnified.
Equity mutual funds typically pay a 1% trailer commission while bond funds pay 0.50 % thus incentivizing advisors to create higher risk portfolios. If a conflict-of-interest arises ,this may unduly increase portfolio risk.

Advisors selling proprietary products may earn a higher commission than comparable third party products .

Advisors charging flat fees have an incentive to add more clients and potentially do less work for each one. You need to assess whether you are receiving value for money.
Fee-based accounts are often mis-represented “I charge 1.5% of assets I manage, so I only make more money if you do” is an enticing but misleading sales pitch. Most people don’t do the math, and don’t realize that 1.5% of $1 million amounts to $15,000 a year — a fee they likely would resist paying if it were transparently stated as a dollar amount rather than as a percentage. Moreover, in such accounts, fees are deducted directly from a client’s account, and so tend to be forgotten.

Charging clients on total assets basis often presents more serious conflicts-of-interests than those faced by brokers because the conflicts may involve much more money than the value of a trade. Here are some typical situations where asset-based fee compensation poses conflicts for advisors:

•When advising a client to roll over a RRSP for the adviser to manage, even when the client has equivalent and less costly options if they leave their funds with the employer’s fund manager.
•When advising a client not to pay off a mortgage (thus diminishing assets), even when the mortgage carries a high interest rate.
•When advising against making a large charitable contribution to get a tax deduction (but decrease assets under management).
•When advising not to give large gifts to children to avoid estate taxes.
•When advising not to buy a larger home.
•When advising not to buy an annuity or set up a charitable annuity.
•When advising a client not to invest in real estate.

On top of these issues there are advisor compensation practices that are designed to accelerate greed . Sales quotas, cross selling incentives and compensation grids that pay increasingly higher commission rates as higher sales levels are achieved.

Complicating matters still further is the increasing number of advisors who wear two hats. Dually registered advisors are registered under securities legislation but also operate as insurance agents covered by insurance regulation ( and a different regulator). They may recommend that you redeem your mutual funds and buy segregated funds, an insurance product that is more expensive than mutual funds. Not only do they receive higher commissions but the insurance industry is less regulated than the securities industry.

In all the cases mentioned above there may be good and impartial reasons for an advisor’s recommendation, but in all these cases and many others the temptation to protect or enhance the advisor’s own compensation is omnipresent.

Fee-only financial advisers have long held themselves out as being more ethical than commissioned stockbrokers. Fee-only advisors claim to adhere to a fiduciary standard which requires them to act in the best interest of their clients, meaning they must set aside their personal interest and fully disclose all of their fees and any conflicts of interest.
Advisors have every right to earn a fair fee for the advice they provide but investors have every right to expect that the advice they receive should be in their best interests. Your retirement income security depends on it.Be AWARE . It's your money.

Enjoy John Oliver explaining retirement savings plans, fees and fiduciary duty