Saturday, November 22, 2014

The Folklore of Finance : How Beliefs and behaviors Sabotage Success in the Investment Management Industry

In  “The folklore of finance: Beliefs that contribute to investors’ failure” Paul Sullivan discusses a new study The Folklore of Finance : How Beliefs and behaviors Sabotage Success in the Investment Management Industry  indicating that “the way individual and professional investors made investment decisions was so skewed that achieving both high returns and long-term objectives was nearly impossible”. What the study found is that due to “’the folklore of finance’…people were overconfident in their investing ability, unable to focus on their stated long-term goals when distracted by short-term noise in the markets, and had come to distrust their advisers and lose interest in receiving professional investing help.”  The study also found that the prognosis is poor for changes to investor current behavior exemplified by: “futile quest for alpha”, short-term orientation instead of focus on “setting a financial goal and meeting it”. If your advisor is not calling you regularly to discuss how you are doing against your long term goals, perhaps you should be looking for a new advisor. Thanks to Peter benedek at  The Full Study is available at In effect, the financial services industry faces a crisis of faith that may lead to more Do it Yourselfers that can be counter to investors' long term interests.The financial services industry needs to develop a new Folklore of Finance that reinforces the values to achieve true success beyond the profitability of industry participants.

Saturday, November 8, 2014

There's disclosure and then there's mal-disclosure

Disclosure is intended to foster robust communication and understanding between the dealer representative and the investor.It permits an understanding of the risks, fees and suitability of an advisor recommendation so an informed investment decision can be made . Emailing a copy of Fund Facts is technically a disclosure under a transaction business model but providing complex documents to retail investors without engaging them is not disclosure in a client -advisor relationship model.Sending it AFTER the purchase decision has been made adds to the nonsense. But even if an effective mandated disclosure regime is implemented ,dealer Reps have a variety of techniques to subvert disclosure should they wish to do so.Unfortunately , some do. This article sheds some light on the murky world of  investor mal-disclosure processes . Read the article   Be AWARE.

Outside Business Activities can Impair your Financial Health

This article explains why working side deals with your advisor may not be the smartest move. Lots of potential bear traps. Read the article here 

Friday, November 7, 2014

Complaint handling from Seniors in need of major reform

Complaint investigators have not tailored their protocols to match the unique challenge of complaints from the elderly. Most haven't made the cultural shift to comply with CRM and IIAC's list of Best practices in dealing with seniors. The mindset change from a transaction business to an advice business is not encapsulated into operations or complaint investigation methodologies /assessments. Complaint investigators need to realize that the risks clients face saving for retirement are different than the risks they face during retirement. Building a plan to distribute a nest egg in a manner that mitigates the unique risks the client will face during the retirement years is absolutely necessary yet most complaint investigators do not consider this in complaints received from seniors and retirees  Dealing fairly, honestly and in good faith with clients includes the handling of complaints. Further, a number of civil cases have demonstrated that new standards of care are expected within Canadian society and complaint investigations should take them into account.

Once Securities Commissions and the MFDA/IIROC  improve their processes it can be a example for investment dealers to follow. This article describes the practices and behaviours that need to be changed. Read it here 

Tuesday, November 4, 2014

The Great KYC Deception....a relationship not in your favour

Kenmar Associates                    Financial Literacy Month                                        November , 2014

Investment KYC Deception, investors deceived, "set-up" from the account opening..a relationship not in their favour

Here's our contribution for this year's Financial Literacy Month. How millions of investors, Canadian and American are deceived, and "set-up" from the very account opening into a relationship which might not be in their favour. Unlike industry participants and their lobbyists, we concentrate on Investor Protection via Streetproofing-making retail investors street savvy.

The KYC (Know You Client/Customer Application Form) is designed and completed in a manner to be used against your investment interests by salespeople and dealers, and used against you a second time if and when you complain against them.

It is one of your first acts when you visit investment sellers, and this video by seasoned investor advocate Larry Elford ,shows how the dealer is years and years ahead of your experience in the matter, and how they take advantage of this to set the stage…..for themselves. Not every broker/dealer does this of course, but the percentage is in the majority, so your odds of going through the process described in the video are quite high.Enjoy the Video.

Investment KYC Deception   Click here 

Keep in mind that even if you have the MOST TRUSTWORTHY man or woman on your side, the dealer who sponsors their sales license should be approached from a Caveat Emptor perspective.Until a Best interests regime is implemented , that's the safest approach.

Stay tuned for more Streetproofing educational materials.

Rules of Prudence for Individual Investors

Rules of Prudence for individual investors
A plain English set of  common sense rules that could save you a lot of money and anguish. 

Saturday, November 1, 2014

Mandatory and Voluntary Disclosure Leads Advisors to Avoid Conflicts of Interest

Abstract Professionals face conflicts of interest when they have a personal interest in giving biased advice. Mandatory disclosure—informing consumers of the conflict—is a widely adopted strategy in numerous professions, such as medicine, finance, and accounting. Prior research has shown, however, that such disclosures have little impact on consumer behavior, and can backfire by leading advisors to give even more biased advice. We present results from three experiments with real monetary stakes. These results show that, although disclosure has generally been found to be ineffective for dealing with unavoidable conflicts of interest, it can be beneficial when providers have the ability to avoid conflicts. Mandatory and voluntary disclosure can deter advisors from accepting conflicts of interest so that they have nothing to disclose except the absence of conflicts. We propose that people are averse to being viewed as biased, and that policies designed to activate reputational and ethical concerns will motivate advisors to avoid conflicts of interest. To read the full Paper click here 

Monday, October 27, 2014

The role of securities regulators in “educating ” financial Consumers

The role of securities regulators in “educating ” financial Consumers                   October, 2014

October is Investor Education Month in Canada so it's a good time to discuss the role of regulators in educating financial consumers. We support financial literacy for Canadians but have warned against depending on it as a tool against consumers making big mistakes and industry abuses. Laws and Codes , a Best interests standard and robust enforcement are needed to protect consumers - financial education and disclosure alone can't do the job.A Best interest standard and "merit regulation" would benefit investors far more than "investor education" which no matter how good it is, does not narrow most investors' competency/capability gap.

That being said, actions need to be taken until financial advice is delivered on a professional basis.

The MFDA prepares some excellent guidance materials for the dealers it regulates. It should do the same for its most important stakeholder - the mutual fund investor - materials that will explain their rights , how the MFDA protects them and where the bear traps are. We call this type of education Street proofing -getting investors primed to engage with Bay Street- improving awareness. If well done, it would increase the level of engagement that regulators have with Main Street and help prevent at least some complaints and potentially increase client satisfaction. It would help create a cadre of oonstructively critical and inquisitive investors determined to better understand the advice given and the nature of their investments.

Recently ,the Mutual Fund Dealers Association of Canada (MFDA) announced the launch of an investor education section on its website. In the new section, investors can find information about mutual funds, including information about fees and Fund Facts documents, as well as information on checking a salesperson's ( advisor's ) registration and disciplinary history, the MFDA /IPC investor insurance scheme , OBSI and advice on avoiding fraud and financial harm. Links to investor education resources from members of the Canadian Securities Administrators are adroitly used as well as other regulators and international organizations. Including the SIPA and FAIR Canada websites would be helpful too. Investors who are seniors / retirees can also review the seniors' section of the MFDA website which contains information about the assistance that the MFDA can provide to seniors, as well as a library of links to on-line resources directed towards Canadian seniors.A good MFDA communication plan should ensure it will be accesssed by many information hungry mutual fund investors.

This initial effort by the MFDA is welcomed but much more can and needs to be done. There are a number of areas that we think deserve special attention from the MFDA. These are primarily areas where we are receiving a lot of requests for additional information or where there have been a significant number of complaints. These include but are not limited to : Outside business activities, the risks of leverage, dealing with advisors that are dually registered ,"Free Lunch" Investment Seminars -Avoiding the Heartburn of a Hard Sell , Guide to filing a robust complaint , peeling back the DSC onion, completing a NAAF to prevent problems,What the heck is KYC and why it is important? , How mutual fund salespersons are paid , Understanding the impact of conflicts-of -interest, Understanding the difference between Best interests and Suitability, Understanding and using the Fund Facts Risk disclosure , Using the Account Statement for better investing outcomes, The difference between Suitable and Unsuitable investments and the meaning of “advisor “ titles and credentials ( could link to Glossary on IIROC website) . A forthright presentation in text and/or smart phone APPS of these tough issues will help reduce investor abuse / undue losses and improve investor outcomes.

Better design of forms would allow a certain amount of education to be embedded in the form itself.For instance, there have been numerous suggestions to make the New Account Application Form more meaningful and for Risk Profiling approaches to be documented and standardized.Online forms could be made “ intelligent ” and interactive . Such an approach is consistent with Just in Time delivery of information and education.

We would also like to see the MFDA ( and IIROC) issue timely ALERTS informing investors of specific issues and hazards prevalent at the time. This could include warnings about deceptive advertising ( a great example can be found at ), Betting the Ranch: Risking Your Home to Buy Securities , The signing of blank forms, explaining Return of Capital mutual funds, Alternative Funds Are Not Your Typical Mutual Funds , The risks and dangers of making financial side deals with your salesperson , Using the MFDA Whistle blower program, How to effectively use Fee disclosure and Performance reporting , Watch out for Misleading Titles and Designations , How to read the Fund Prospectus etc. ALERTS should also inform investors of ongoing Consultations and new or pending regulations/ rules of interest to retail investors. Investors would subscribe and have the ALERT sent directly to their email inbox. This kind of real time investor protection is vitally needed in today's fast paced investment world.

Investor education can also be effected by the use of Case Studies ( narrative and /or video) which showcase people's experiences with different investments and dealers. Such studies make investing issues real to main Street. It is well known that for retail investors , personal stories are more effective in conveying messages than dry facts. Given the wealth of data locked up in MFDA investigations and Enforcement Cases ,the MFDA should use Case studies to inform investors what can go wrong and how to protect against advisor /dealer malfeasance. Street proofing investors is a core element of investor protection.

Finally, a comprehensive Glossary of all the commonly found terms in the mutual fund industry would be extremely useful. A good example would be the one provided by Morningstar Canada. A simple link would do the job.

All documents , ALERTS and Warnings should be written in plain language and available in both English and French.

A similar set of ideas apply to IIROC but these would include additional topics uniquely relevant to the brokerage industry. Similarly, Securities Commissions could fill in the gaps for the Exempt market , in particular, Equity crowdfunding. By working collabartively with SRO's a robust Street proofing educational regime can be esttablished at reduced cost.

Financial literacy topics such as portfolio construction , risk minimization ,the calculation of performance return , asset allocation, tax optimization, The relationship between risk and return, The Grass Isn’t Always Greener-Chasing Return in a Challenging Investment Environment , Structured products , Financial tools and calculators etc. should , with a few exceptions, be left to professional educators that are independent of both the industry and securities regulators.They have much greater leeway to be constructively critical of regulations, regulators, industry participants , industry sales practices and behaviours.

Of course , if investment advisors were professionals working to a Best interests standard , much of this Street proofing education would be redundant . There would be no need for CAVEAT EMPTOR


     1. Investor Enquiries and Complaints Archive: Kenmar Associates
  2. Improve consumer protection by SROs: C.D. Howe Institute research report
  3. Marketing of mutual funds (2005) Ken Kivenko
  4. How to know when your advisor is behaving badly - The Globe and Mail


Friday, October 24, 2014

Advisor's Alpha :Good for your Practice and your Clients ( Vanguard 2013)

Outperforming the broad market has historically been very difficult, both in absolute terms and in tax- and risk-adjusted frameworks. Where adding value is the goal, advisors may be better served by changing their performance benchmark from the market’s return to the returns that investors might achieve on their own, without professional guidance. A financial advisor has a greater probability of adding value, or Alpha, through relationship  oriented services, such as providing cogent wealth management and financial planning strategies, discipline and guidance, rather than by attempting to outperform  the market.Read the Paper

d research May 2012

Tuesday, October 21, 2014

On the stability of Risk Tolerance

It is widely believed that (financial) risk tolerance is highly unstable and particularly subject to market conditions. However, through a series of independent studies there is now strong evidence that this view is incorrect. The most recent study clearly demonstrates the stability of risk tolerance across the 2003 to 2009 market rises and falls through detailed analysis of test/retest data, involving two tests of the same individuals, the first during the 2003-7 bull market and the second in the subsequent bear market. The study confirms the anecdotal evidence from FinaMetrica subscribers that clients' risk tolerance scores remained remarkably stable through the most turbulent market conditions in living memory. Many advisors and others involved in financial advisory services will now need to change their views about the nature of risk tolerance, how it should be assessed and its role in the financial advising process - all of which will be discussed under Consequences for Advice. However, before considering the consequences we should review the evidence for the stability of risk tolerance and before that we should examine why the contrary view is so widespread.Read the Research paper here