Wednesday, February 18, 2015

Research paper on Ponzi schemes: Cam McCormick University of Lethbridge


The Earl Jones scam is a particularly interesting read.

GET MAD, STAY MAD: EXPLORING STAKEHOLDER MOBILIZATION IN
THE INSTANCE OF CORPORATE FRAUD AND PONZI SCHEMES
Abstract:Using a multi-case study, three Ponzi schemes were investigated: Road2Gold, Bernie Madoff’s empire, and the Earl Jones affair. This grounded study used an inductive bottom-up methodology to observe and describe stakeholder mobilization in reaction to corporate fraud. This research on stakeholder behaviour in Ponzi schemes articulates new theory for describing stakeholder behaviour and possible determinants for successful mobilization to action. The data presented here point to a useful distinction in the stakeholders in a corporate fraud: reluctant and engaged stakeholders. Reluctant stakeholders seek only interest-based ends, whereas engaged stakeholders have additional identity and ideological goals shared by a mobilized group.
Read the paper here 



Tuesday, February 10, 2015

Checklist: Was your complaint handled fairly?

It's no secret- investment dealers hate to admit they provided bad financial advice. They will try very hard to avoid accountability for losses.

The industry has a longstanding over reliance on form documents such as disclosure forms, agreements, account statements and KYC forms, seeking to meet regulatory KYC and suitability obligations; however, more and more, courts and regulators are looking to the record of direct communications between the advisor and client to assess the degree to which the advisor's recommendations and the client's instructions were truly informed regarding risk and suitability issues. In some cases the 'paper' is not a barrier to the imposition of liability for losses sustained by the client.That should be your mindset as you assess the dealer's response letter.

You should assume the relationship between you and the complaint investigators is adversarial regardless of the soothing words of fairness and unbiased investigation. Some very smart seasoned people are reviewing your complaint to ensure the dealer is immunized from providing restitution. This Checklist should help you determine just how objective the investigation has been  Read the Checklist here.  

Related readings :

Calculation of Damages: Securities Fraud & Protection Resource Center http://www.securitieslaw.com/information/calculation-of-damages.asp

Resolving Investor Disputes : Is your Advisor to Blame?

Compensation for Retail Investors :The Social impact of Monetary Loss http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rep240-published-May-2011.pdf/$file/rep240-published-May-2011.pdf ]

Tuesday, January 20, 2015

INVESTOR ALERT : Return of Capital Mutual Funds

Return of Capital mutual funds have given rise to a significant numer of investor complaints and concerns.This ALERT explains the issues . Read the article here

Monday, January 19, 2015

The Suitability Standard in plain Language

The suitability standard for advice giving is the standard used by most dealer Representatives to make investment recommendations to you.It's important you understand how it works so you can assess your Rep's diligence in determining suitability.It will also be of use in the event you file a complaint.Read the article here

Saturday, January 17, 2015

CRM2: Quick Guide for Retail Investors No. 2


Here’s Quick Guide # 2 for making the most of the Client Relationship Model Phase 2 disclosures.
 
NOTE: Fund Facts is a disclosure document for mutual funds. Dealers may charge fees not articulated in Fund Facts or set higher minimums for initial investments than defined in Fund Facts.While these fees will show up in CRM2 client statements , the cost for managing the mutual fund will not. Neither will the brokerage commissions incurred by the fund.These costs must be added to the CRM2 fee summation to get a complete picture of the fees you are paying.
Read the article here

Tuesday, January 13, 2015

CRM2 : Quick Guide for Retail Investors No. 3

This Guide will assist you in gatting maximum utility out of the disclosure provided by CRM2. Read the Guide here   Although the deadline set by regulators is July, 2016, many firms will be providing the fee and performance information earlier. Some can already provide it now.In any event, get up to speed on the information by reading some of the plain language references provided.

Thursday, January 8, 2015

CRM2 : Quick Guide for retail Investors No. 1

This post describes Phase 2 of new securities regulations called The Client Relationship Model.This is information that retail investors should be aware of. Thanks to the Small Investor Protection Association www.sipa.ca for the information on trade confirmation slips and to the Investment Funds Institute of Canada www.ific.ca for the information on benchmarking.
Read article Other Guides to specific portions of CRM2 will be provided in the future. Stay tuned.

Sunday, January 4, 2015

Expected Impact of CRM2 on retail investors


The robust Fair Dealing Model was killed off in 2004 and replaced with the Client Relationship Model whose basis is transparency not fiduciary duty.Ten years later (!) the countdown is on for a long overdue era of transparency for retail investors on the reporting of fees and account performance by the financial-services industry. Under CSA regulatory initiatives known as the Client Relationship Model, Phase 2 - or CRM2 -- various new disclosure requirements will be phased in over the next few years. Per the current schedule ( unless lobbyists obtain another delay), effective July 15, 2016, investment brokers and dealers will be required to provide two new annual documents. One is an account-performance report, summarizing the percentage investment pre-tax returns for the previous year, the past three-, five and ten-year periods, and since the account was opened (if it was longer than ten years ago) . This report will require reporting of money-weighted rates of return, customized according to when new money was deposited or taken out of the account.There is much research that shows that the equity risk premium is wiped out by fees, the impact of active management, buying and selling at suboptimal times and the use of volatile specialty funds that sport notoriously poor investor performance. CRM2 may help reduce this loss of return if investors apply the data to their decision making.

The other new required report, as of July 2016, will disclose fees and other charges. This report will itemize the cost of everything from embedded trailer commissions, to redemption fees, point-of-sale commissions/front-end loads, switch fees and RRSP administration fees, and provide an aggregate dollar figure for the 12-month period.The part of the mutual fund management fee charged directly by the fund company - and not passed along to the dealer in the form of trailers and other commissions - will not show up on the dealer compensation/fee statement. The dealer can only provide a precise accounting of items that are paid to it (whether paid by clients or a third party).Statements of securities held by a party other then the dealer or adviser (a.k.a client name accounts,off-book accounts) on which the Dealer receives continuing compensation will also be required.:

The technology has existed for years (possibly decades) to provide information to investors that would better assist them in understanding exactly how their investments are doing and exactly how much they are paying. The most elaborate financial plan available is useless if the investor doesn’t know whether or not they are on target to achieve their goals. If the detailed financial plans that many investors are provided with, with all of its colorful charts and graphs call for a specific rate of return in order for the investor to achieve their goals , if they cannot obtain their actual net of fees rate of return from year to year (or even more often), then the entire exercise is fruitless and a complete waste of time and paper.But that hasn't stopped dealers from claiming they are in the wealth management business or dealer representatives from calling themselves “advisors”.

The majority of retail investors in Canada are treated like mushrooms by the investment industry who does absolutely everything in their power to maintain the status quo and perpetuate the knowledge asymmetry that currently exists in order to maintain their unconscionable profitability at the expense of Canadian retail investors. Then the industry has the gall to suggest that the major issue that these obvious and logical reforms have not been implemented years ago is time and expense It is shameful that it has taken over a decade to alter the current state of ugly affairs in the Canadian Investment Industry . It's been irresponsible of industry to stonewall every reform initiative as an automatic reflex and for regulators to be passive observers - not merely because that introduces undue cost and risk on Canadians, but also because it thwarts the achievement of fair and efficient capital markets and adequate protection for retail investors, particularly seniors,retirees and other vulnerable investors.

Check out a sample of what the annual charges and compensation report (Appendix D) and investment performance report (Appendix E) might look like.

Assuming the CRM2 actually comes to be as regulators intended what will the impact be on investors?:

  1. Sticker shock , possibly anger,when all the fees and charges are added up and presented in one place.The changes to the detail, timing and requirements for disclosure through CRM2 will change how Reps communicate with their clients, what they talk to them about, how often and when.
  2. Return shock when the money-weighted return ( after fees) is presented in percent which can then be compared to a benchmark , a GIC or the target return based on the financial plan ( assuming a real one exists).
  3. The Reps most likely to be grilled will be those who did little more over the course of the year than send holiday cards in December , invite clients to “Free Lunch “ seminars and solicit RRSP contributions in February.
  4. Some investors will dump their current “advisors” on the grounds that they're not getting their money's worth in performance , communication or service.
  5. Fees and expenses will become an integral element of suitability criteria
  6. Greater transparency may prompt dissatisfied investors to seek lower-cost approaches to investing. Among them are fee-based advisors who employ low-fee indexing strategies. Other alternatives include technology-driven advice substitutes -- known as robo-advice -- offered through online discount brokers. Others may join an investment club, maintain an advised account and an online account and/or become Do-It-Yourselfers .
  7. The media , bloggers , investor advocates and maybe even regulators will write insightful articles on how to use the new information provided for more informed decision making.
  8. Regulators will be forced to act on at Rep proficiency and a Best interests standard as horror stories surface in the media and courts.The value of the true financial planner will be revealed.
  9. Many investors may ask Reps why low MER mutual funds, low fee ETF's , low-cost index mutual funds or hybrid mutual funds that invests in ETFs aren't being recommended or why a price break isn't offered on large accounts.
  10. Overall, the savings and retirement nest eggs could result in more money for investors ( if they read , understand and use the information ) and less complaints about dealer/ Rep abuse- the rudimentary beginnings of professional advice giving. Robust Regulatory enforcement is critical to making CRM2 a success..

It's not all roses however. There is a real danger that unscrupulous Reps will steer people into more expensive insurance products ( segregated funds)/ exempt securities , recommend unnecessary fee-based accounts ( “reverse churning”) or just raise fees hoping that Canadians passivity will prevail.Minimum account sizes may be invoked or minimum annual fees made part of the account agreement.There is a possibility that some dealers will list so many fees that instead of opening eyes, they will glaze them.Some Reps may take some material out of the mal-disclosure Handbook and downplay the value of the added transparency.Some dealers may decide to charge for mail delivery of confirmation slips or even account statements as the telecom firms have done.Investors will have to be alert.Unless investors take ownership of their investments, the expected benefits of enhanced disclosure may be lost.


CRM2 shines a much needed light on the relationship between a salesperson ( “advisor” ) and the investing client. CRM2 may open people's eyes and potentially empower them but it won't mean they are dealing with a fiduciary. Dealer Reps who are just salespersons and don't provide good value for money ; savvy clients might drive them into thinking about getting a different day job. CRM2 may also prompt reforms by banking and insurance regulators to get off their butts and better protect financial consumers.NOTE:Although CRM2 is a net step forward , the cracks in the suitability-KYC system are being papered over and a real opportunity to reform the system has gone. It is a crying shame that FDM was killed stillborn. We are set to go into the next market downturn with an inappropriate advice system and who knows what we will unearth .


ADDENDUM Some thoughts on disclosure effectiveness

Regulators and many in the industry believe that annual fee disclosure and performance reporting will allow retail investors to make better investment decisions and assess their dealer representative. Research however suggests this dream may not be accomplished. For instance ,when executive compensation disclosure was mandated ,the result was an increase in CEO compensation.One never knows for sure of unintended consequences.The mutual fund " Simplified prospectus" is another example of a enticingly good disclosure idea that went South and has since been supplemented with Fund Facts, a streamlined two page plain language disclosure document.

Disclosure effectiveness is linked to the level of investor engagement, the investor's financial literacy/numeracy , the amount of information to absorb and the investor's dependence on his/her Rep ( and the level of trust).The usefulness of disclosure is also dependent on the nature of the disclosure, how it is presented , when it is presented and the investor's ability to compare to reference data. Rest assured that Bay Street will not readily relinquish billions of dollars in fees via better disclosure without a well orchestrated counterattack

Here's some research on disclosure  for you to peruse:

The unintended consequences of conflict of interest disclosure
http://www.cmu.edu/dietrich/sds/docs/loewenstein/UnintendedConsq.pdf The research found that people generally don't discount advice from conflicted dealer Reps as much as they should, even when the Rep's conflicts- of- interest are disclosed. The more startling findings, however, are that disclosure can have a variety of perverse effects and make the situation worse .

Duties of Disclosure

How does simplified disclosure affect individual fund choices?
http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p121994.pdf Research suggests that simplified disclosure does not improve investment decision quality / responsiveness to fees but does speed up decision process.

Worthless warnings: Testing the effectiveness of disclaimers in mutual fund advertisements
"More than $11 trillion is invested in mutual funds in the United States. Mutual fund investors flock to funds with high past returns, despite there being little, if any, relationship between high past returns and high future returns. Because fund management fees are based on the amount of assets invested in their funds, however, fund companies regularly advertise the returns of their high-performing funds. The SEC [ the U.S. Securities regulator ] requires these advertisements to contain a disclaimer warning that past returns don’t guarantee future returns and that investors could lose money in the funds. This article presents the results of an experiment that finds that this SEC-mandated disclaimer is completely ineffective. The disclaimer neither reduces investors’ propensity to invest in advertised funds nor diminishes their expectations regarding the funds’ future returns. The experiment also suggests, however, that a stronger disclaimer – one that informs investors that high fund returns generally don’t persist – would be much more effective...."
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1586530 Canadian regulators use the same worthless warnings as well.

The effect of fee disclosure on mutual fund selection

Mandatory Disclosure and the protection of investors(1984)

Financial reporting disclosure: investor Perspectives on transparency , trust and volume: CFA Institute

Reading the Fine Print: The Devil is in the Details - The Art of Retirement

Will dealers and dealer Reps really accept that transparency demands a willingness to present the facts in an unadulterated state? Will the industry be willing to be upfront with the most critical information or will there be wordsmithing and game playing? Will Reps call a “commission” a “fee” so that the fact that the Rep's compensation is tied to sales will mask the true nature of the advisory relationship provided? Will investors be shifted into inappropriate fee-based accounts thereby converting "commissions"  into "fees"? That sort of doublespeak runs contrary to the spirit and intent of CRM2. The CRM2 information must be presented prominently to ensure it’s really drawn to the client’s attention (or will its value be maligned/downplayed)? CRM2 does not specify a defined disclosure format -will dealers merely make the data “accessible”/ embed it in a mountain of details using a small font size and industry jargon? To the extent that the financial services industry remains a reluctant participant in  providing transparency, it is to that extent that the full benefits of CRM2 will be subject to sabotage.


Regulators should closely monitor the implementation and conduct a full assessment after say, 18 months.Changes to the regulations should be made based on the observations and assessment.


Tuesday, December 23, 2014

User Guide for Fund Facts



The Kenmar Associates team has prepared a User Guide for Fund Facts that should allow you to obtain the most value from this disclosure document.

The attached Guide is written in plain language and broken down by sections in Fund Facts for ease of use.While current regulations require pre-sale delivery of Fund facts only in May 2016, many firms will start providing it now. In any event, you can ask your dealer for it now- it’s your money. Get the Kenmar Guide here.
 
 
 
 
 
 

Checklist : Diligent Supervision of Off Book and Outside Business Activities



This checklist is intended to help identify diligent supervisory practices used to detect Off Book and Outside Business Activities by  "advisors".We sincerely hope it will help in the successful prosecution of investment dealers who say “ I had no idea” by identifying prudent practices that should be in place to prevent investor abuse. For seniors and retirees this abuse can be life-altering.There is no room for wilful blindness in today's advice giving industry.

 
We hope regulators and SRO’s will apply the Checklist in their deliberations as well. Too often the dealer Representative  is called to account and the investment dealer gets away with “ I had no idea” yet took no pro-active steps steps to get an idea. Read the article here