Thursday, May 25, 2017

Self-Protection Checklist for Seniors

We're pleased to provide a Checklist that should help you protect your savings nest egg. Once you retire or stop working full time, there is little room for error when it comes to your investments. A loss when you are 35 years old gives you years to recover—and leaves you the opportunity to delay retirement if you must-but a mistake when you are 65 or 70 years old can be devastating and irrecoverable. Elderly investors are disproportionately targeted by unscrupulous brokers (aka “advisors”).The Investment Industry Regulatory Organization of Canada has published Guidance for dealers on how senior investors should be treated and protected.

Here's a Checklist you can use to assess the actual treatment you have received:


·         Does your broker use a title that truly reflects his/her qualifications? Be aware many brokers use made up titles like VP that are unrelated to their qualifications or registration. His/her actual registration is Dealing representative or salesperson. Check for any limitations or disciplinary actions.

·         Does your broker routinely explain products, costs and associated risks before selling them to you?

·         Ask your broker regarding his experience in managing a RRIF account that requires a minimum annual withdrawal and special skills.

·         Ask your broker if you have been sold any product ( like a mutual fund sold on a deferred sales charge basis) with early redemption penalties or minimum hold periods? If so, ask why.

·         Ask your broker to demonstrate with comparative mathematical calculations that your account type is the most appropriate and cost-effective for you. ?

·         Do you receive confirmation slips from your dealer for each transaction?

·         Do you receive a Monthly account statement? Do you check it for errors or unexplained or confusing transactions?

·         Has your broker provided you with a report detailing your rate of return for each account and the annual fees you have paid?

The relationship

·         Do you have a well-articulated Power Of Attorney specific to investments filed with your dealer? (as applicable)

·         Did your broker develop a documented Investment Policy Statement with you?

·         Did your broker ask you to provide a trusted person contact?

·         Did your broker tell you that he/ she works to an advice standard that is not required to be in your best interests? i.e. it is not a fiduciary standard.

·         Were you informed as to how your broker is compensated?

·         Were you informed by your broker of any conflicts-of-interest

Know-Your Client

·         Do you and your broker have a common understanding regarding the objectives for each investment account?

·         Do you and your broker agree on the time horizon for each account?

·         Are you comfortable that your broker understands your risk tolerance and capacity? Your true level of investment knowledge and experience?

·         Are you and your broker clear as to the composition of your net Worth?

·         Has your broker asked about your cash flow needs?

·         Has your broker asked as to the composition of your annual income? If not, consider informing him/ her.

·         Has your broker asked about your debt obligations? If not, consider telling him/ her.

·         Has your broker asked about your insurance coverage? You decide if he should know this.

·         Have you informed your broker of any medical issues that may be relevant to his/ her provision of advice?

·         Do you have a signed/ dated copy of your Know-Your-Client (KYC) form?

·         Has your KYC been updated at least annually?

Red Flags

·         Ask your broker whether he/she is licensed to sell other products like annuities or Segregated funds? If so ,be aware you might be sold a product that is not processed through your dealer and could be unsuitable for you .

·         Has your broker asked you to sign blank forms? If so, raise a Red flag.

·         Has your broker tried to borrow money from you? If so, raise a Red flag.

·         Has your broker attempted to get you to make investments not processed through the dealer? If so, raise a Red flag.

·         Has your broker attempted to have you assign them as a trustee or executor? If so, raise a Red flag.

·         Are you being pressured to take out a Home Equity Loan or establish a margin account? If so, raise a Red flag.

·         Have you been asked to write a cheque in the broker's name or the name of an entity other than your dealer? If so, raise a Red flag

·         Have you been asked to increase your risk tolerance for no apparent/valid reason? If so, raise a Red flag.

Complaint handling

·         Were you informed on how to file a complaint?

·         If you have filed a complaint and are not satisfied with the response, escalate the complaint within the firm. Consider getting some help in articulating your complaint.

·         If you have a complaint or issue with your account, act quickly. If your dealer is bank-owned do not allow the dealer to nudge you to the internal:” ombudsman”.

·         Has your dealer informed you that if you are dissatisfied with their handling of your complaint, you can refer it to the Ombudsman for Banking Services and Investments (, an independent and free dispute resolution service?

NOTE: For seniors, many investor advocates consider a fiduciary duty as an important consideration in the client-advisor relationship. Tell your broker IN WRITING, that you are relying upon them 100% for fair, honest and professional investment advice that is entirely in your interest and in the interests of none other… other-words, you are assuming that your financial relationship with the broker is one of a fiduciary level of care, as it is understood in law. Ask them to confirm this in writing to you and to reply if they cannot confirm this standard of care to you in writing. If not a fiduciary, you may be sold products and services that, while not unsuitable, may not be optimum for you and may be more expensive than other available alternatives.


Thursday, May 4, 2017

Investor ALERT: The Compensation Grid vs trusted advice

Investor advocates always suggest you inquire as to the method of compensation of "advisors" (actual registration category is Dealing representative or salesperson). This is because most “advisors” work to the suitability standard. Under this standard these advisors are not required to act in your best interest. They need only recommend investments that are suitable; not the best or cheapest or least risky. Knowing the method of compensation gives valuable clues as to how they will behave and how you might be able to interpret their recommendations.

In this ALERT we look at the compensation grid, a grid that depicts what percentage payout advisors will receive based on sales in a certain period of time. These complex grid structures are designed by the dealer to skew the recommendations made by investment advisors. The grid clearly puts "advisors" in a conflict-of-interest as the more they sell, the higher percentage commission rate they will receive. 

Here's an illustrative sample :

Generally speaking, advisors will be compensated more richly for producing higher overall annual commissions (as seen by the general increase in payout as you move down the columns). They will also be compensated more richly for generating higher commissions per transaction (as seen by the increasing payouts from left to right). This could be done by trading larger positions or by selling higher commission generating products (like the 5% upfront payout for Deferred Sales Charge mutual funds).
Notice how a Reps “recommendations” can be modified based on how the grid is structured. In this example, high “producers” are highly rewarded and Reps with low sales volume are given little incentive to retain the status quo (that could mean incentive to sell more product , or they resign due to lack of income). Further, incentive is given to placing trades that generate higher commissions as well (either by looking for more money to get the client to invest,recommend leveraging , putting them into a higher allocation to equities which generally generate higher commissions than fixed income products, or charging higher commissions on stock trades).

Some dealers have creative exceptions to the grid, with sales of certain types of products given special payout rates. For example, a dealer may give special incentives to sell proprietary actively-managed mutual funds, new equity issues that it underwrites (IPO’s), or securities of which it has excess inventory that it is eager to reduce . These exceptions and bonuses can be permanent or temporary. All can be harmful to the unsuspecting investor.

The full-service brokerages all have different grids. Fixed payouts can vary with some paying higher than 70% and some paying lower. And not all flat-fee dealers charge the same flat fee to their advisors. The dealers are free to structure the commission payouts as they see fit, and there are no specific rules or regulations which they have to comply with other than certain disclosures.
According to another by-product of some grids is that by the end of the year, if a Rep is near the next production level (i.e. He/she has generated annual gross commissions of $375,000 for the year), then by finding a way to generate another $25,000 in commissions in the final month moves the Rep up a grid level. The new payout may apply retroactively to all commissions for the year. For example, let’s assume that our broker has $399,999 in gross commissions for the year. If they ended the year at that level (and assuming all tickets were at the $500+ level) then they would have earned $195,999.51 in net commissions. If they made only one more dollar of commissions (gross) then they jump up a grid level and their net commission jumps to $204,000. So that $1 dollar in extra gross commissions was worth about $8,000 (net) to the advisor. Imagine the incredible motivation to sell that $1 to an unsuspecting retail investor.

Temporary sales bonuses traditionally have been referred to as "flavor of the month" promotions. The concept of offering special sales incentives for certain products, especially in-house products, has come under increasing fire since they can put the financial advisor's interests at odds with those of his or her clients. As a result, a few firms have done away with such special incentives, and tout their "open architecture" approach that leaves the financial advisor undistracted in seeking the best investment vehicles for the client. Calls for securities firms and financial advisors to be subject to the more stringent fiduciary standard, as opposed to the looser suitability standard that traditionally has bound them, often have cited practices such as "flavor of the month" promotions and trailer commissions as evidence that regulatory reforms are necessary.

Compensation grids and sales targets are coming under greater scrutiny as the Investment Industry Regulatory Organization of Canada (IIROC) steps up an assessment of how the country’s investment dealers handle compensation-related conflicts. Investment dealers will be required to turn over their compensation grids as a standard item in every upcoming business compliance exam, so the self-regulatory agency can “better review dealers’ treatment of compensation-related conflicts,” IIROC has said. The grids will help determine whether clients are being put into investments that trigger richer rewards for Reps and dealers. A 2014-2016 IIROC review, which looked at how well investment firms are meeting a requirement to manage compensation-related conflicts in the best interest of the client, found that firms were relying too heavily on disclosure of conflicts without first addressing them with clients in another way. In other words, CAVEAT EMPTOR- the grid is after your money .

Saturday, April 29, 2017

IIROC fines on individuals- Are they a deterrent?

IIROC fines on individuals- Are they a deterrent?

The Investment Industry Regulatory Organization of Canada (IIROC) has argued that their inability to collect fines from individuals reduces their credibility as a regulator. Their position: “If you break the rules and abuse the trust your clients have placed in you, you must pay the penalty and be seen to pay it." In Alberta , Quebec and PEI, IIROC can apply to courts to certify its decisions and fines, which gives the organization court approval to enforce fines .As a result, they seek authority from other provinces and Ontario is next to provide that authority .

Loss of registration and public shaming can be effective deterrents for individuals .We don’t think better collection of fines from individuals will enhance deterrence or improve investor protection at all. Even provincial Securities Commissions with the necessary authority aren’t very good collectors. For example, the British Columbia Securities Commission has collected less than 5% of monetary sanctions imposed since its incorporation in 1995. Individuals tend to declare bankruptcy, have few assets to seize or relocate to another province. In 2016, IIROC collected just 8.3% of fines against individuals.

IIROC would collect the fines if it made the dealer responsible for the fines of its individual reps. This would lead to the dealer caring about its individual reps receiving any fines and would therefore improve compliance and deterrence of wrongdoing in the first place.

The hard facts of the matter are that the vast majority of root causes for rule breaches can be traced back to the dealer: these include poor advisor recruitment and training, advice - skewing incentives/inducements for advisors, deficient KYC / risk profiling tools, weak supervision, ineffective administrative controls, poor compliance processes all in a culture of greed. In some cases, branch managers and supervision are compensated for branch sales putting their supervisory roles in a conflict-of interest. The result is that the person at the bottom of the pyramid takes the fall, the individual advisor.

Let's take a closer look at exactly how IIROC operates. First off is its board is decidedly stacked with industry oriented Directors. The Small Investor Protection Association has issued a report on IIROC governance and found that industry participation on the board is strong while investor representation is weak. It does not have an Investor Advisory committee and its engagement with retail investors is not considered strong. The vast majority of the fines it levies are against individuals rather than its fee-paying Member dealers. IIROC rarely obtains restitution for victims of financial assault by its Member firms. Fines collected go into a restricted fund - they cannot be used for investor restitution but can be used to subsidize certain IIROC operations including Hearing Panels and market participant/investor education. When IIROC collects money from disgorgement it retains the cash instead of returning it to harmed investors.

Are the fines a deterrent? We think not since fines are generally a fraction of what the investor lost .On a statistical basis the number of complaint cases in the industry seems to be stable perhaps even increasing. Suitability continues to be the major issue year after year.

Not only is effectiveness and deterrence value questionable there is actually a potential downside. Giving IIROC collection authority will divert scarce human resources from investigating dealers to fighting court battles. It will also require added legal expenses. Although IIROC will cherry pick its cases there is still the chance it will lose a case and that could have a negative impact on the SRO.

We'd rather see IIROC focus its limited resources on preventing investor abuse by  1.(a) changing its rules for suitability, dealing rep compensation and complaint handling; (b) establishing more cooperative agreements with insurance and banking regulators and most importantly (c) step up its enforcement of dealers and 2. Holding dealers accountable when they reject an OBSI restitution recommendation. That would put money in the pockets of the investor rather than the SRO. 

The financial services industry will not reform because the current deflection strategy works well. Instead of assuming responsibility, the industry is able to deflect all attention to the miscreant dealing reps. Periodically, to appease the protests of the public and media, a rep is hung in full public view to "demonstrate" the "concerns" of the industry but these instances are nothing more than show trials. This situation will only change when the buck stops at the dealer. Only when the dealers are held liable for the transgressions of their employees/representatives will the situation change and not a second before.

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  about $25 Billion  in mutual funds at discount brokers are A class ( a class of fund with a portion of the cost intended for advice per Fund Facts) which means that  investors are being overcharged  .Since discount brokers cannot and do not provide investment advice, clients of A class funds are being robbed of returns.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 

that is not 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