Friday, January 15, 2016

The NAAF and Know Your Client

Despite its innocent sounding name ,The New Account Application Form is a very important document. It forms the foundation of the investment recommendations made to you. Alas, things are not so simple. It can also be used against you in the event of a complaint. This article covers the intricacies in detail and how it can save you a lot of grief.

Monday, January 11, 2016

Gag orders: Purchased Silence

Gag orders: Purchased Silence                                                     January , 2016

Behind closed doors, abused investors whose accounts imploded are receiving settlements from Canadian financial institutions including all the big fund dealers and banks. After a prolonged and aggravating process with customer service, compliance officers and ombudsman, frustrated investors finally attract attention by threatening litigation. Legal action and the threat of a public airing of their grievances seems to motivate financial institutions to settle, at least some times. The cost of legal action or even arbitration is not insignificant and the outcome is far from certain. Firms are well aware of this and take this into account when negotiating settlements. Rarely do these investors recoup their losses. Most are lucky to get 20-50 cents on the dollar . The vast majority decide to write it off as a learning experience.

Settlements can save both sides the money and time [ and investor stress] of dragging litigation through the courts. But you won't hear about them in the media because one of the stipulations made is to adhere to the terms of so-called Confidentiality clauses, Non-Disclosure Agreements or as investor advocates call them "Gag orders." As they pay their hush money, dealers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though that’s the real reason they’re settling. In return for financial restitution, these investors are unfairly put in a position where they would violate legal contracts if they disclose specifics of their deal and become subject to legal intimidation.

Often, such settlement agreements provide that the parties will not make any negative or defamatory statements about one another, and require the customer to keep the terms of the settlement confidential. Sometimes the investor is so embarrassed at his situation he might actually welcome silence.

Some “creative ”agreements may require settling investors to withdraw or alter claims that have been filed with regulators. Such provisions are obstructive and frustrate the ability of regulators to enforce prevailing regulations. They also interfere with the ability of other law enforcement agencies to take appropriate action. According to regulators, such practices are not permitted.

"The industry covers up this huge problem of investors losing due to industry wrongdoing." - Stan
Buell, President, Small Investor Protection Association

Investors who settle disputes with their brokers or mutual fund dealers are routinely asked to sign such detailed settlement agreements, usually prepared by sharp, battle-tested lawyers. The investor, who is happy to be recouping at least some – typically a fraction- of his or her losses, is eager to sign on the dotted line and move on with his/her life. Consequently, he or she is unlikely to voice a vigorous objection to the so-called “boilerplate provisions ” of the Confidentiality provisions of the agreement. From the investor’s point of view, the dispute is over.

A fund dealer or brokerage firm may have sound business reasons for inserting the “boilerplate provisions. Confidentiality can make sense – at least from the broker’s point of view. Investment dealers do not want to encourage other similarly affected clients to file claims, or signal a predisposition to fair settlements.

Per Mutual Fund Dealers Association Policy 03 Handling Client Complaints dated Feb. 1, 2010 Member or Approved Person of such Member may impose confidentiality restrictions on clients or a requirement to withdraw a complaint with respect to the MFDA or a securities commission, regulatory authority, law enforcement agency, SRO, stock exchange or other trading market as part of a resolution of a dispute or otherwise.” Similarly ,the Investment Industry Regulatory Organization of Canada ( IIROC ) rules prohibit confidentiality conditions that are intended to prevent a client from initiating or continuing a complaint with a regulator or enforcement agency. Neither of these organizations are geared up to provide investor restitution so most victims “lose interest” in pursuing a regulatory complaint once they have been compensated.

These disclosure obligations do not extend to the media. which, regrettably, has under-reported the dark practice of gagging. The only exceptions are for disclosures made to lawyers, financial planners or accountants for income tax purposes.

For investors who have legitimate complaints against their dealers/brokers, the gagging can be emotionally stressful.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got." Source: Jonathan Chevreau, “Grievances never see the light of day: Banks, brokerages use confidentiality pacts to great effect “, Financial Post, June 26, 2004

Thus by keeping settlements secret, other investors with the firm are in the dark even though the malfeasance and the resultant settlement may also be applicable to them and may still be occurring.

The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being” –Investor advocate Joe Killoran Source: Jonathan Chevreau, “Grievances never see the light of day: Banks, brokerages use confidentiality pacts to great effect “, Financial Post, June 26, 2004

Financial services firms aren’t the only one wanting to keep information confidential. A complaint to the Ombudsman for Banking Services and Investments ( OBSI also places restrictions on disclosure. By signing their engagement letter, you agree that OBSI’s correspondence and discussions with you as part of the complaint process, and OBSI’s files, are confidential. You must also agree that in the event of any subsequent legal or other proceedings you will not use that correspondence or information. In addition, OBSI require you to agree that you will not seek to compel OBSI to produce its files and records, or seek to compel the Ombudsman or any other OBSI staff member or advisor to give evidence or testify in any such proceeding. This wouldn't be so bad if OBSI had retained their mandate to investigate systemic issues. If the firm rejects the OBSI compensation recommendation and you settle for something lower , OBSI will not implement their “ Name and Shame” protocol which means their “ Name and Shame” statistics understate the true situation.

Another threat to investors are provincial Limitations Acts which require investors to file for legal action within a certain period of discovery. In Ontario this is two years. This actually encourages financial services firms to drag out the complaint process and make low -ball offers with gag order attached. Investment dealers must respond to you in 90 days after which you can file a complaint with OBSI. Unlike OBSI , if you agree to send your complaint to the Bank's internal “ Ombudsman”, the limitation time clock keeps running. If this drags on beyond the statute of limitations period you will lose your right to civil litigation.

Gag orders perpetuate asymmetric information, with ordinary Canadians at the bottom of the food chain. Surely, allowing the cover-up of incompetence, fraud and criminality is not in the spirit and intent of the Securities Act. Although some of our regulatory leaders say they believe in transparency, nothing is being done about the industry practice of covering up widespread wrongdoing and then settling with complainants by making “ low ball”offers and covering up with gag orders.
As the late U.S. Supreme Curt Justice Louis Brandeis said: Sunlight is the best disinfectant. The financial services industry and its regulators needs to Walk the Talk. It’s time to implement real investor protection.

Thursday, January 7, 2016

IIROC complaint handling rule needs an update

It's been quite a while since IIROC's rules on complaint handling have been updated . Our research identifies a number of critical areas that need to be amended in order to keep up with modern client complaint handling processes . See our Report here.

Friday, January 1, 2016

Investing landscape in Canada like a minefield

A very informative article aptly entitled SCREWED summarizes the situation Canadian investors face when investing for their retirement , It is a real eye opener - reading it may help you prevent some grief. It is available here .

Monday, November 30, 2015

WHITE Paper : The "Advice gap"?

This paper discusses the postulated " advice gap" from an investor's viewpoint. Read the paper here

Tuesday, November 24, 2015

The Advice Chasm

Industry participants have predicted an " Advice gap" for small investors if needed regulatory reforms regarding the advice process are introduced. Investor advocates have argued that unless the prevailing " Advice chasm" is resolved millions of Canadians face challenges in retirement . This chasm is the huge gap between what Canadians need in the way of trusted advice and what they are actually receiving. There is no question that the conversion from a sales based advice system to a professional system will be disruptive but the end result will benefit Canadians Other jurisdictions have decided reforms are necessary and are dealing with the bumps in the road. The status quo is no longer a viable alternative. Read the article .

Monday, November 16, 2015

The socio-economic impact of traler commissions

Trailer commissions create a conflict-of-interest between a dealer representative ( "advisor") and a  mutual funds client. This can impair client retirement accounts due to mis-selling and over-selling. With $1.2 trillion of mutual funds having been sold to Canadians , billions of dollars are involved. Read the article   If you want to see the long-term impact of fees on returns try the fee impact calculator at  .Other trailer related issues that have unduly  cost Canadians tens of millions of dollars include mutual fund churning and the impact of paying for advice to discount brokers who could not and did not provide that advice. We have covered those abuses in previous posts.

Saturday, October 10, 2015

Think twice before appointing your stockbroker as your executor


We have written this article to advise you of a serious issue that could impact your heirs and loved ones. IIROC , the regulator for securities dealers, is considering allowing clients to appoint their stockbroker as an executor for their will.Kenmar is very concerned that if this IIROC rule change is approved , clients could be placed in harm’s way. We’ve laid out the issues and leave it to individuals to make their own decision.  Read the article [ Investor advocates have vigorously opposed the rule but have not thusfar been able to dissuade IIROC . ]

Friday, October 9, 2015

Are you a Reverse Churning Victim?

You've probably heard about the fee-based financial advisory model-and "broker" being relegated to dirty-word status -but do you know about reverse churning? You should, before you opt for the fee-based model simply because it's becoming commonplace .Dealers love it because of the steady cash flow it provides and simplified cost reporting. But is it suitable for you?

The entire concept of fee-based accounts was introduced in the mid nineties to try and resolve the conflict of interest related to commission- based accounts. The simple explanation was that in an effort to reduce account churning issues and minimize regulator attention, the investment industry started to request that brokers open fee-based accounts. As a result of the success, many of the brokerage firms encouraged their advisers to open more of these types of accounts.

The idea behind fee-based accounts is that you are paying an ongoing fee in lieu of brokerage commissions as compensation to your financial advisor. It's typically based on a percentage of the value of your account and recalculated periodically to account for changes in the value of assets. While a fee-based account is perceived as some sort of advisory promised land of fairness, it isn't for everyone .When assets are placed into a fee-based account just for the sake of the advisor collecting the fee, with little or no ongoing advice, service and/or trading, it's called reverse churning.

Sometimes an old-fashioned brokerage account could make more sense for you. If you have an account that is inactive or just sitting on investments with very little chance of being bought or sold, then a fee-based account could actually be harmful to you. You would be in the detrimental position of paying an extra expense for nothing, making your account an unnecessarily expensive financial proposition. So while "broker" has become a dirty word these days, the reality is that, depending on the circumstances, a brokerage relationship could be a better choice for you.

In particular , be sure to check that if you own mutual funds you are not being sold a series that pays a trailer commission to the dealer. That would be double dipping. You should be sold the F Series of the fund with a lower MER due the trailer component having been stripped out.

In deciding which type of account is better for you-fee-based, brokerage or possibly both-you and your investment advisor will need to determine the level of ongoing service advice and investment management that you desire in order to make the most appropriate choice.


NOTE: Some dealers may not offer a choice of account.You may be asked to transfer to another dealer.Others may impose a minimum annual amount for commissions.

Saturday, October 3, 2015

Opening a new account:As easy as 1,2,3?

Think opening a new account is as easy as 1,2,3? Careful consideration must be given before you fill in all the forms and sign on the dotted line. Here's some tips to help avoid some costly mistakes. Get the article here