Investor ALERT : Outside Business Activities

Many people don't know that they are vulnerable to solicitation by their “ advisor” for “opportunities " outside the scope of the registered dealer with which they have an account. These are called Outside Business Activities (OBA , also “Off book”) and too often lead to significant losses for investors .  These OBA activities include :

Reps who borrow from clients, allow clients to borrow from them, or who get involved in investment schemes with clients - these have created a major conflict-of-interest which is against the rules . Other "Off book" transactions could include unregistered securities, Ponzi schemes , investment scams,securities sold outside of the dealer, including Principal Protected Notes deemed to be securities under provincial legislation; private placements; limited partnerships; other exempt securities; and, referral of securities related business outside of the dealer - all can cause harm .Be Aware- CAVEAT EMPTOR. Read the ALERT

Fund Facts Risk Disclosure Incomplete

The disclosure of risk in regulated mutual fund Fund Facts documents is currently provided on a five point scale – Low, Low to Medium, Medium, Medium to High, and High. As it stands,,the description of the risk is determined by the fund manager and the risk described captures only the "volatility risk " rather than risk more broadly. A system developed by fund industry lobbyist IFIC is the virtual risk classification industry standard although it has not been subject to public comment or regulatory approval.This simple word scale masks just how bad the loss can be under a "Medium" rating. A number of commenters have observed inconsistencies and misleading ratings using this rating system.There is no requirement to provide a benchmark and as a result there is no context provided to allow an assessment of the described risk or past volatility. In a number of surveys and research reports, respondents more frequently mention "loss of money" as their view of risk i.e. downside risk. Thus they seek a downside risk metric. Investors need to be able to put mutual fund risk and performance in context in order to make an informed investment decision. Fund Facts disclosure of risk should be improved by including a description of the principal factors that make up the “risk” of holding the fund in addition to downside risk measures such as worst 12 months. Most retail fund investors do not understand statistical metrics such as the standard deviation and should not have to. The CSA is reviewing the situation and hopefully the recommendations of investors will be considered. See our Comment letter

Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs

Abstract Economists are beginning to investigate the causes and consequences of financial

illiteracy to better understand why retirement planning is lacking and why so many

households arrive close to retirement with little or no wealth. Our review reveals that

many households are unfamiliar with even the most basic economic concepts needed to

make saving and investment decisions. Such financial illiteracy is widespread: the young

and older people in the United States and other countries appear woefully under-informed

about basic financial computations, with serious implications for saving, retirement

planning, mortgages, and other decisions. In response, governments and several nonprofit

organizations have undertaken initiatives to enhance financial literacy. The experience of

other countries, including a saving campaign in Japan as well as the Swedish pension

privatization program, offers insights into possible roles for financial literacy and saving

program. Paper available here  

Our response to Ministry of Finance on a Financial Consumer Protection Code

The Ministry of Finance asked for ideas on the development of a Financial Consumer Protection Code. We provided quite a number of ideas to better protect Canadian financial consumers. See our Comment Letter

Do advisors help clients manage risk?

Estimating Risk Tolerance: The Degree of Accuracy and the Paramorphic Representations of the Estimate Michael J. Roszkowski  and John Grable

According to this research , the answer is no.Using a sample of 386 financial advisors and 458 of their clients, the study sought to determine how effective financial advisors and clients are at estimating risk-tolerance, and to test how well items from a risk tolerance test and demographic information can represent the judgmental process used to formulate these estimates (a “paramorphic representation” of the decision). The client’s self rating and the advisor’s rating of the client produced a Pearson correlation of .40. Moreover, the advisor’s rating correlated at about the same level (r =.41) with the client’s score on a test of risk tolerance. The data also showed that when it comes to estimating one’s own risk tolerance, clients are better than are advisors at this task. The estimates could be represented paramorphically in terms of a few variables. It was observed that advisors assign too much diagnostic value to certain demographic variables in estimating client risk tolerance. Keywords: Risk tolerance, paramorphic representation, financial advisors . Read the paper here

Here's a useful IPS Worksheet

The Investment Policy Statement (IPS) is a core document in the process of providing investment advice. This worksheet will help you prepare a robust IPS.Read it here

How Seniors Change their Asset Holdings During retirement

A very interesting paper for those approaching or in retirement . Read the paper

Involving Consumers in Securities Regulation - Taskforce report ( 2006)

This wonderful paper provides practical ideas for Securities regulators to engage ordinary Canadians in the development of securties regulations. Read the paper

 

 

Legal Origins, Investor Protection, and Canada by Poonam Puri

Three issues are examined in this paper: first, how and why Canada fared relatively well in the recent financial crisis; second, why Canada has not yet created a national securities regulator; and third, how Quebec, a civil law jurisdiction, operates within an overarching common law framework, and the implications of this cross-fertilization of systems. These three issues are explored by examining the development of various investor protection laws and structures over time in Canada , and also by providing context to explain why certain rules and structures have been adapted and others, while economically efficient, may have been rejected. Download here

Closet Indexing:Your Mutual Fund May Be Too Lazy

It is well documented that on average active mutual fund tends to underperform the market. However, there is now a further issue with mutual funds according to the recent research of Antti Petajisto formerly of Yale University and now at Blackrock. The problem is this. The point of owning a mutual fund is paying a team of analysts to pick stocks on your behalf, but according to this research, a significant group of mutual funds are no more than “closet indexers”, closer to following the market than trying to beat it. This matters because not only are you paying a high fee, you aren’t getting what you might expect. It’s a little like paying a premium for Gucci loafers and then discovering that the shoes you received are remarkably similar to a pair from Walmart Read the Article   Paper at http://www.cfapubs.org/doi/pdf/10.2469/faj.v69.n4.7 

The Ultimate Guide to picking an Adviser

This Guide will help you pick an adviser you can trust. Thanks to Lary Elford . Get the Guide here

Excellent free book on Retirement

Unveiling the retirement Myth  is written by an engineer, Jim Otar , so is fact-filled and free of industry jargon and biases. Read it here 

Kenmar Position on Misleading "Advisor" Titles and Designations

Misleading titles can cause harm to unsuspecting retail investors. Seniors/ Retirees are particularly vulnerable .Read the Kenmar commentary