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

Mutual fund 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 $1.5 trillion of mutual funds having been sold to Canadians , billions of dollars are involved. 

Read the article  to better understand how your retirement income security may be jeopardized by the nasty advisor behaviours such commissions stimulate.

If you want to see the long-term impact of fees on returns try the fee impact calculator at  .

Don’t forget you can reduce up to 10% as  “free units” each year .By actively redeeming the units that don’t attract redemption fees each year, investors can get out of DSC funds more quickly. Setting distributions in cash is another way to do it but you can’t do both (i.e. cash distributions typically count toward an investor’s free units) .

Other trailer related issues that have unduly  cost Canadians hundreds 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. Caveat Emptor.

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

Tuesday, September 15, 2015

Choosing your Advisor Checklist

Here's a handy checklist you can use to help you select and evaluate your advisor. It's written for a UK audience but it applies here as well. Choosing an advisor is more important than choosing which funds to buy. Get the Checklist here.

Sunday, September 13, 2015

The ABZ's of Personal Wealth by Ted Graham

We are delighted to host an eBook by Mr. Ted Graham . The book contains practical, no-nonsense ideas for building wealth without a shred of Bay Street hype. In his own words :
" . I am (very much) a senior--- having owned securities for 76 years, and common stocks for 69 years. I also head up several entities which hold investments, mostly for family members. Our cause has been to assist the people new to the financial world -----to understand the methodology of managing money and of investing. Especially, we hope to help young people who wish to be educated in the perplexing world of personal finances. No one can avoid the necessity of personal finances. Everyone is impacted by banks, mutual funds companies and stock brokerages. The individual has a simple choice, learn about personal finance so that—as a small investor, one can do well in the world of money, or ignore the whole subject, in the fond hope that some else (a spouse, a banker or a broker)- will  “look after my (i.e. your) money”.

This book, ‘The ABZ’s of Personal Wealth’, is an attempt to help you to maximize your own prosperity. In producing the book, I had great assistance from my children and from our tax strategist. We hope you benefit from the book. "
Get the book
If you have questions, please contact

Saturday, September 12, 2015

INVESTOR ALERT Pre-Signed Blank Forms

INVESTOR ALERT Pre-Signed Blank Forms                                  September, 2015

When you sign a blank or incomplete form ,you put yourself in harm's way. Under securities rules, salespersons are obligated to deal fairly, honestly and in good faith with their clients and observe high standards of ethics and conduct in the transaction of business. Obtaining pre-signed forms from clients is contrary to this obligation. Salespersons ( aka “Advisors”) may only use forms that are duly executed by you after all information on the form has been properly completed and provided. This is why we urge you to completely fill in the form and retain a copy of the signed and dated original for your files.

Every client must be afforded the same protections, and that the expected conduct is no different if the client happens to be a family member. This principle applies where a spouse’s signature is forged, either by an advisor or by the other spouse. There is always a risk that the spouse who signs the other’s name, or who authorizes someone else to do so, is being deceptive. We are not aware of any circumstance where one person can be authorized to sign another person’s name to a document – a person may act as the authorized agent of another, or under a Power of Attorney, but in neither instance may the agent or attorney sign the other person’s name .

The know-your-client (KYC) , and suitability obligations are among the most fundamental obligations owed by registrants to their clients and are cornerstones of Canada's investor protection regime. If these are contaminated , the client-advisor realationship is contaminated.

What forms are involved?:Some examples of pre-signed forms noted by our team include KYC forms, blank trade order forms, Loan applications, RSP changes, cheques,CRA forms , U.S. Tax Cerifications , risk disclosure and acknowledgment forms, private placement subscription forms and New Account Application forms . In other cases, information on legitimately completed and signed forms may be subsequently altered or removed, or signatures may be physically cut from other documents and then used to create photocopied forms that appear to have been signed by the client. Be alert to any changes in your account statement and check all trade confirmation slips.

Why such a rule?: The existence of pre-signed trade order forms in client files may be evidence that an advisor is engaging in discretionary trading or even fraud. Some dealers and advisors have taken the position that pre-signed forms can be used appropriately in certain situations strictly for the convenience of a client. Securities regulators do not agree with this position. Any act of forgery is a step onto a steep and slippery slope of deception that is always potentially harmful to clients and actually harmful to the dealer and the securities industry as a whole. If you are not available to sign a document either wait or send a FAX or email or use a courier service giving specific instructions. Follow up to obtain a copy of the revised form.

A pre-signed form may allow an unscrupulous advisor to unduly increase your risk tolerance , investment knowledge, income, employment status or net worth or mis-state your objectives. Because every investment recommendation and every investment decision is based upon information contained on the forms, any inaccuracy in the information necessarily taints a recommendation or decision made based on that information. Further,the uncertainty about your risk tolerance impairs the dealer’s ability to comply with securities laws, to ensure that all investments are suitable for you. An incorrect risk tolerance could lead to unsuitable investment recommendations and undue losses . In the event of a complaint, the dealer may point to your signature on the form and deny your claim for restitution . Subversion of the KYC system is serious given that it is at the heart of securities regulation.

In the case of forms to be submitted to the Canada Revenue Agency or to Human Resources and Social Development Canada, there is the risk that you will be taken to have certified as to the accuracy of incorrect information that you did not have an opportunity to review.

Know Your Client (‘KYC’) information that is incorrect could cause a dealer to run afoul of Anti-Moneylaundering laws and regulations and could cause you trouble as well.

A potentially more significant risk is that a pre-signed form could be used for unauthorized discretionary trading or fraud. If you pre-sign a trading form, the risk of fraud is particularly serious with respect to this form, given that the form typically directs a dealer to do one or more of the following things: (a) switch the client’s funds within the same fund family;( b ) effect a purchase or sale of securities; or (c ) pay sale proceeds to a specified bank account or recipient. Responsible investors don't let themselves get exposed to wrongdoing by pre-signing blank forms.

Even in cases where there is no evidence of intent to use a pre-signed form for the purpose of discretionary trading or misappropriation of assets , the use of such forms destroys the integrity of the audit trail for activity in the relevant client’s account. Having a reliable audit trail is important to the dealer and to its regulators. A dealer's ability to assess its employees’ compliance with regulatory requirements, and a regulator’s ability to do the same, are both undermined if the very documents upon which the assessment relies are not genuine.

Bottom Line

We consider forgery as the creation of a false document with the intent that it be acted upon as the original or genuine document. The use of pre-signed forms is therefore forgery .Forgery is fundamentally dishonest and it is harmful. That is why regulators prohibit pre-signed blank/incomplete forms.The sooner digital signatures are commonplace in the advisor world, the better.

Remember , your advisor /salesperson broker is not required to act in your Best interests. They are not fiduciaries. Don't sign anything you do not understand . Consider it a Red Flag if your salesperson says “ it's just for administation, sign it and I'll fill in the blanks”. Sign only a completed form ,cross out sections that do not apply and retain a signed/dated copy of what you do sign for your files. It's YOUR money. CAVEAT EMPTOR

Tuesday, September 8, 2015

WARNING: Seniors "Free lunch" educational seminars

Seniors "Free lunch" educational seminars

The North American Securities Securities Administrators Administration has issued an ALERT on these so -called  “ Free lunch “ seminars. 

State securities regulators warn senior investors to be aware that a combination of “free lunch” seminars, misleading professional “senior specialist” designations, and abusive sales practices can create a perfect storm for investment fraud. Remember: there’s no such thing as a free lunch.

Many individuals over the age of 50 have received an invitation in the mail offering a free lunch or dinner investment seminar. There’s a certain consistency to the invitations enticements: a free gourmet meal, tips on how to earn excellent returns on your investments, eliminate market risk, grow your retirement funds, and, spouses are urged to attend. These words should be red flags for investors.

And while the ads may stress that the seminars are “educational,” and “nothing will be sold at this workshop,” many of these seminars are intended to result in the attendees’ opening new accounts with the sponsoring firm, and ultimately, in the sales of investment products, if not at the seminar itself, then in follow-up contacts with the attendees. Seniors seeking educational insights and information should be aware that the primary goal of the sponsors of these free meal seminars is to obtain new customers and sell investment products.

Here are some recent seminar titles our readers have told us about :

Invest like the millionaires -exploit low interest rates- borrow to invest
Opportunities in Equity Crowdfunding- Find the next Apple 
Using Home Equity to magnify returns 
New hedge fund offers exceptional opportunity 
New tax strategies to save you $$$ 
Why Segregated funds fit into your Portfolio 
Exploring the Exempt Market 
Market linked annuities perfect for retirees 
Making superior returns in volatile markets 
Fee based accounts offer piece of mind and cost savings 
When commuting a pension makes sense

The venues and meal offerings are enticing.The invitations are beautiful - comparable to wedding invitations.


Saturday, September 5, 2015

The DSC sold Mutual Fund under the Microscope

The DSC under the Microscope September,                               September , 2015

Lately, some dinosaurs of the fund industry have been promoting the benefits of the DSC ( deferred sales charge ) sold mutual fund. One benefit they claim is that all your money goes to work for you right away since there is no front end sales charge. In fact , according to independent research the typical FEL today is 0 %. Another “ benefit” claimed is the early redemption penalty keeps people invested during downtimes. First off , there is little robust evidence this claim is accurate. Besides, isn't it claimed that one of the main benefits of a financial “advisor” is to contain investor behaviour -for that service , a never-ending trailer commission is paid - so why is a redemption constraint needed in addition? How much investor punishment is too much?

Could it be that the real reason the DSC is popular with salespersons is commissions? Look to the commissions paid advisors who sell funds to understand why the DSC charge option persists. Fund companies pay dealers/representatives who sell DSC funds a juicy 5-% upfront sales commission .The dealer/salesperson ( aka “advisor “) also receives ongoing yearly compensation -called trailing commissions - of 0.15 to 0.5 % until you redeem the fund.Given their structure, DSCs give the incentive for an advisor to work hard to get their new clients into an investment but leaves little incentive to do any work thereafter. Once you’ve committed to the investment ,the advisor has received the lion’s share of their compensation and arguably has little direct motivation to continue fostering his or her relationship with the client.

Further , with a DSC sale (advisor getting his/her upfront 5% and trailer of 0.5%) they then move 10% each year to FEL to get the higher trailer commission of is really quite the racket enabled by the existing compensation structure.

As noted , the prevailing standard investment industry justification for DSC charges is that they provide an incentive for investors to stay in their funds for the long term and not make self-destructive moves in and out of the market. There's some validity to this because retail investors do hurt themselves by jumping in and out of the market too much.The problem is that there is little definitive evidence that the DSC actually accomplishes this behavioural change . Additionally, if you're not getting the level of return you need this just traps you to stay with the same fund company. Investors might be interested in “buying and holding” but with a different fund; the DSC fee effectively prevents this.

In any event, flexibility matters more. Today's market swings are unprecedented and some investors are discovering that they have taken on too much risk. It's unacceptable to have to pay charges of up to 5.5% simply to adjust a portfolio to make it more suitable .And for retirees ,the need for more liquidity as unexpected expenses, particularly health-related and personal service expenses, rise , makes flexibility a key feature of portfolio design.

The real cost of buying DSC funds is often greater than is anticipated at time of purchase. In practice, what frequently happens is that the DSC either gets triggered by an early sale, or an opportunity is lost when the investor hangs on to a expensive/poorly performing  fund in order to avoid triggering the DSC penalty fee.Incredibly , some money market funds are sold on a DSC basis which makes no sense since the purpose of holding a money market fund is liquidity.Such funds do pay trailers which may explain why you are sold them.

When investors are sold deferred sales charge mutual funds, instead of front-end funds, their main motivation is to save on fees. In fact, however, investors who hold these funds pay more, not less, in fees. An investor who buys a mutual fund on the DSC sales charge method pays no transaction fee at time of purchase. And if the fund is held for up to seven years the early redemption fee can be totally avoided. There is a significant cost, however, if the fund is redeemed before the end of the DSC schedule.

At the time of purchase, this waiting period never seems to be a problem. The investor is optimistic about the fund’s potential, or he/she wouldn’t let himself be sold it, and at this point he cannot imagine any reason to sell it before the DSC fee expires. Paying no fee sounds more attractive than paying even a relatively low 1% or 2% up-front fee ( actually 0% is most common today). In this case, the certain cost of 1% or 2% seems greater than the possibility of having to pay 5% or 6% in the unlikely event that the fund is sold before the DSC period expires. The thinking is that the DSC fee doesn’t matter because it will never be applied. Fund salespersons can exploit this thinking to their advantage.

This thinking frequently turns out to be wrong, however, because many investors do sell before the DSC fee schedule expires.The average investor hold period is 6-7 yeas, meaning that about 50% of funds are sold before DSC expiry. Further, very few mutual funds are themselves more than 7 years old ( due to mergers and closings) . The reality is that new and better products are always becoming available, mutual fund managers leave the fund they were managing, fees are increased, fund mandates change, the funds gets merged with another fund and sometimes fund managers go into a deep slump. For these reasons, investors routinely make a decision to sell the fund before the end of the DSC schedule. The fee is usually about 5.5 %, if redeemed in the first year, 5% if redeemed in the second, and so on. The fee for early redemption can be based on the purchase price or the market value at the time the fund is sold. This will be defined in the Prospectus

From the financial advisor’s point of view, selling on a DSC basis is initially more attractive than charging a front-end fee. With a DSC purchase, the dealer/financial advisor makes a commission of about 5%, which obviously is more attractive than the 0%,1% or 2% they would earn on a front-end sale. The bottom-line reason for the DSC fee is that the advisor gets paid by the fund company as soon as you have been sold the fund. If you don’t keep the fund, the mutual fund company needs to get its money back. They do so through the DSC early redemption penalty fee that you pay.The original advisor could be long gone either via retirement ,hopping over to another dealer or selling more lucrative insurance products .

Trailer commission paid to the dealer/ advisor are generally higher on the “front end” version of a mutual fund. Typically, the trailer commission on a front end fund is 1% per annum , while the trailer commission on a DSC fund is 0.5% per annum. Except for a few firms like Fidelity, the management expense ratio (MER) is generally the same for both the front end and DSC versions. Over the long term, therefore, the representative actually earns more by selling front end load funds.That is unless he/she redeems the fund at the end of the redemption period and sells you a new DSC fund, starting the nasty cycle all over again, a process called churning.

In some cases, the mutual fund owner effectively becomes a prisoner to the DSC fee. Often, to avoid triggering the DSC redemption fee, the opportunity to purchase improved or lower cost investments will be lost. Too many people feel they have no choice but to hang in for a few more years until the DSC fee expires – and to keep hoping that the markets would improve.If the investor dies or a major financial emergency occurs, the penalty will still have to be paid . There is definitely a benefit for liquidity.

Bottom line: Each year Canadians incur tens of millions of dollars in early redemption penalties or hold on to losers. We find it hard to see any benefit of allowing yourself to be sold a DSC mutual fund.

Saturday, August 29, 2015

Paper on the regulator- corporation complex

Accommodating Power: The “Common Sense” of Regulators : Laureen Snider , Queen's U.
The OSC seems not to have been captured by the sector it regulates but handed over to them” Andrews, 2006: 86 “

This paper examines the perspectives, strategies and practical `common sense' of those charged with regulating and enforcing securities laws in the post-Enron era. It argues that crackdown periods following stock market disasters disrupt dominant patterns of governance and empower regulators to proactively enforce laws against powerful financial actors. The article shows how officials negotiate their regulatory terrain and accommodate the economic and social capital of the `stakeholders' they are charged with regulating outside crisis periods and how they re-interpret and redefine their mission in response to political, economic and ideological change. Empirically the article is based on 21 interviews with regulators and enforcement staff in securities commissions and law enforcement, and on the discourses and directives found in key regulatory documents Read the article here 

Saturday, August 22, 2015

How to assess mutual fund ads

We wrote this piece over 10 years ago. The recent scuffle over investment awards in sales communications prompted us to republish the paper. The key point to remember is that these ads are sales pitches. Canadian Securities regulators help unsuspecting retail investors understand the limitations of past-performance data by requiring fund ads touting historical returns to include a warning that states “The indicated rates of return are historical annual compounded total returns including changes in unit or share value and reinvestment of all distributions and dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. ” .

The Annual investment awards have one basic purpose- to market the "winners". Current research shows that most funds under perform their benchmarks over the longer term. The awards have little economic or information value for Main Street but do have potential sales value for Bay Street.They have the same value as "Free lunch" seminars at best. BE AWARE. Here's the article: Analyze fund ads for clues 


Monday, August 17, 2015

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

To better understand the flawed beliefs and behaviors within the industry, what State Street describe as “folklore,” they examined the views of thousands of investors, investment providers, government officials and regulators across 19 countries over 18 months. What they learned is that true success lies beyond what the industry previously accepted. It includes not only producing alpha - perhaps more importantly, it also requires helping investors achieve their long-term goals. They’ve outlined concrete steps that the industry must take to develop a new “Folklore of Finance.” Explore the full report

Thursday, August 6, 2015

Subject: 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.

Wednesday, July 29, 2015

ALERT Threats to your Financial Health

We have issued a number of Investor ALERTS in the past but new threats keep on appearing or old ones become more sophisticated. Here's our latest take on what to be on the alert for. Awareness of threats from Bay Street  is a key to successful investing.

Saturday, July 4, 2015

Advisor Titles requires Investor vigilance

Advisors use titles and designations to gain trust. While some titles and designations are meaningful, many are not.You need to be alert . Read Business Cards, Titles and Investor Trust

Thursday, June 25, 2015

Advisors as Executors: A wise move?

This article outlines the risks involved in appointing your investment advisor as your executor. Right now regulators do not perrmit this but the IIROC Board is considering allowing it subject to some conditions. Read the article

Fiduciary Standard and Financial Advice: Findings from Academic Literature

Fiduciary Standard and Financial Advice: Findings from Academic Literature

Abstract: This article provides an overview of theory and empirical evidence related to the benefits and costs resulting from the application of a fiduciary standard of care to the conduct of brokers, dealers (broker-dealers), and investment advisors. The purpose of this document is not to advocate a position on possible regulatory actions. It is intended to provide an in-depth review of the extant literature, primarily from economics, finance, and law, related to the regulation, incentives, and outcomes of the existing advice marketplace. Opinions on the likely impact of various strategies on the marketplace are entirely those of the author and are based on the preponderance of empirical evidence and the strength of related theories.

Wednesday, June 17, 2015

Kenmar Commentary on the CSA commissioned Fund Fee Research Report

Dealer / advisor conflicts-of-interest are top of mind for regulators and investor advocates.Conflicted advice can skew recommendations that are not in the best interests of investors , thereby impairing savings and retirement accounts. The CSA commissioned third party research into the impact of advisor compensation on advisor recommendations.The Researcher was to conduct a literature review to evaluate the extent, if any, to which the use of fee-based vs. commission based compensation changes the nature of advice and investment outcomes over the long term. Following a competitive procurement by the CSA, the Brondesbury Group was contracted to conduct this research. The Brondesbury Group  has now completed their work and their findings are set out in the Mutual Fund Fees Research report which is the basis for our commentary. The report concluded that there is sufficient evidence of skewing to consider regulatory reforms.Indirectly, the report also  points to the need for the standard of advice giving  to be examined since a change in compensation model alone cannot satisfactorily resolve the core issue.Read our Commentary on the Report which is made from the perspective of the retail investor.

Tuesday, June 16, 2015

INVESTOR ALERT: Think twice before using internal Bank "Ombudsman"

If you  have a complaint with a a Bank-owned IIROC  investment dealer you may find yourself getting an offer to make use of the Bank's internal "Ombudsman" if you didn't accept the dealer's restitution offer ( if any). This INVESTOR ALERT tells you that the use of this " Ombudsman" is entirely voluntary and warns of the risks involved . You may want to use the Ombudsman for Banking Services and Investments, a free, independent Dispute Resolution Service.

Saturday, June 6, 2015

Can Socially Responsible Investing reduce portfolio risk?

Responsible Investing (RI) aka Socially Responsible Investing (SRI) incorporates environmental, social and corporate governance criteria into the selection of investments.For some, these constraints mean that  portfolio construction is limited, opportunities lost and risk increased.But a May , 2015 study suggests that RI provides a number of potential advantages including strong financial returns,reduced risk , and more downside protection than traditional mutual fund incvestments.RI mutual funds and venture capital funds now total $17.5 billion . The paper  Canadian Responsible Investment mutual funds : Risk?Return Characteristics Study Findings  can be read here  It should be noted that not everyone agrees with the screening criteria. For example, those who survived the horrors of WWII do not necesarrily agree that investments in weapons manufaxturers like Lockheed Martin are necessarily undesirable. To them , it means the ability to defend our democracy and freedom .

Sunday, May 31, 2015

Ethics and trust in financial Services: John Bogle

John  delivered a keynote speech before the Public-Private Partnership Symposium at Georgetown University School of Law on October 31, 2014. Titled “Values, Ethics, and Structure in Finance,” the speech discusses the importance of getting the right structure of business model and incentives in order to have a financial system that serves the needs of clients first. “Values, Ethics, and Structure in Finance,” October 31, 2014, Georgetown University School of Law .

Friday, May 29, 2015

Research on Advisor Fiduciary duty

  • Ditching the Securities Blanket - Revisiting the Financial Advisor-Client Fiduciary Obligation in Canadian Law by Mark Donald  The author's conclusion : " While obviously well-intentioned, many supporters of a blanket statutory fiduciary/best interest standard apparently view this equitable legal construct as a sort of panacea. This position ignores the significant practical legal perils that such a statutory creation would create, and puts investor advocates on an unhelpful, and arguably unavoidable collision course with IAs and the securities defence bar.The better way forward would be for all parties to consider the power of targeted, systemic regulatory changes to the financial services industry, and accept that wholesale revolution to the client-advisor relationship is not a precondition to developing a fairer and more efficient financial services industry. Such an approach could have profound, positive results, while avoiding the theoretical debates that make a fiduciary/best interest solution so elusive.".  Read it here 

Thursday, May 14, 2015

Fed up with bank fees and bank exploitation?

If the latest round of bank fee increases finally got you upset enough to take action , read this article.
Some apathetic folks are simply taking the approach " If you can't beat em, buy em" and are investing in bank stocks. Over the years the fees they collect from the docile can mean real gains and dividends for shareholders. In any event, there's a feel good emotion thaat some of the client gouging is coming back to you.

Case study : The reality of Investor Protection in Canada

This case will open your eyes . The sad reality is when you invest you have to be constantly on guard. There are many forces working against you and too few forces working to protect you from Bay Street shenanigans. Be aware that your “ advisor” is not required to act in your Best interests .

He/she may also be motivated by sales commissions to actually place you and your retirement  in harm’s way.  CAVEAT EMPTOR prevails in Canada’s “ Wealth Management industry “, an industry creating wealth but not necessarily for you.

Sunday, May 3, 2015

Equity Crowdfunding poses significant risks for main Street

Equity Crowdfunding is coming whether we like it or not - you need to be ready.Companies raising capital on regulated, public stock markets must jump through all sorts of disclosure hoops intended to protect the public from fraud. When they raise capital in private markets, often for early-stage companies, they may generally tap only "accredited" investors--those who can prove they are wealthy and sophisticated enough to participate in what are inherently risky ventures.
What if you could remove both constraints, allowing issuers to offer securities to the general public without the rigorous disclosures required when "going public"? That's Equity Crowdfunding .
Read more here

Tuesday, April 28, 2015

Brokers get a mixed review on how they treat older investors: SEC- FINRA Report

One of the primary missions of the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) is the protection of investors, of which senior investors are an important and growing subset. As part of a collaborative effort, staff of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”)1 and FINRA (collectively, the “staff”) conducted 44 examinations of broker-dealers in 2013 that focused on how firms conduct business with senior investors as they prepare for and enter into retirement. These examinations focused on investors aged 65 years old or older; this report refers to these investors as “senior investors.”

The results suggest more has to be done.“..More than a third of brokerage firms examined by regulators made one or more potentially unsuitable recommendations of variable annuities to senior investors, a report issued Wednesday found.The greatest issue regarding these sales was whether it was appropriate to exchange variable annuity contracts in light of the fees incurred, according to the report on the treatment of senior investors by the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc.(FINRA), the self-regulator of brokers. Firms generated the most revenue from seniors by selling open-end mutual funds, variable annuities, equities, fixed-income investments, unit investment trusts and exchange-traded funds, nontraded real estate investment trusts, alternative investments and structured products, in that order..”.

This report highlights recent industry trends that have impacted the investment landscape and discusses the key observations and practices identified during the recent series of examinations with regard to securities sold to senior investors, training, use of senior designations, marketing and communications, account documentation, suitability, disclosures, customer complaints, and supervision. OCIE and FINRA staff are providing this information to broker-dealers to support their thoughtful analysis of their policies and procedures as they serve the needs of senior investors.

OCIE and FINRA staff are concerned that broker-dealers may be recommending unsuitable securities to senior investors or failing to adequately disclose the related risks. It is imperative that senior investors receive proper and understandable disclosures regarding the terms and risks related to securities recommended to them, particularly non-traditional investments.

The 41 page Report National Senior Investor Initiative is available at

Stock buybacks: From retain-and reinvest to downsize-and-distribute By William Lazonick

Stock buybacks are an important explanation for both the concentration of income among the richest households and the disappearance of middle-class employment opportunities in the United States over the past three decades,” says University of Massachussetts at Lowell economics professor William Lazonick in a new paper published by the Brookings Institution. “Over this period, corporate resource-allocation at many, if not most, major U.S. business corporations has transitioned from “retain-and-reinvest” to “downsize and distribute model.

 It is unlikely that the transformation of the U.S. business corporation from downsize-and-distribute to retain-andreinvest can occur without the leadership of the more visionary of current corporate board members, CEOs among them. In 2001, Jack Welch, upon his retirement as CEO of General Electric, published a book, Jack: Straight from the Gut, about his experience as a business leader.85 But it took Dr. Welch another eight years and a financial crisis to get his gut to speak to the absurdity of the ideology of maximizing shareholder value. In March 2009 Welch told a Financial Times reporter: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy…Your main constituencies are your employees, your customers and your products.” Perhaps the interviewer had a shocked look because Welch saw fit to reiterate: “It is a dumb idea. The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees.”86 Any business executive, business school professor, or business consultant who understands what it is that makes an enterprise innovative should know that, in this case at least, Jack Welch was right. Read this thought provoking article at


Thursday, April 23, 2015

Check your brokerage service and maintenance fees

NASAA research shows investor confusion over fees| . A new advisory from the North American Securities Administrators Association (NASAA) aims to help raise investor awareness about fees charged by broker-dealer firms for account services and maintenance. In the advisory, NASAA suggests investors focus on the timing, method and content of these sorts of fee disclosures. It calls on investors to not place assets with a firm without a current fee schedule, to ensure that they understand those fees, and to pay attention to any changes that firms make to those fees. Additionally, it says that investors should know the services that they could use regularly, and ask specifically about the terminology a firm uses for its services and the associated fees. Full Report Are you an informed investor? Understanding Broker-Dealer Fees available at Fees impact returns- make sure you know what fees you are paying and that you receive the services associated with the fees.Don't hesitate to ask about seniors rebates, asset-based discounts etc. -It's your money.

Friday, April 3, 2015

“Risk Literacy”

 Using domestic and international data, Director Annamaria Lusardi finds that knowledge of financial risk is strikingly low both in the population and across a variety of demographics. Across countries and age groups, individuals show little mastery of concepts such as risk diversification and the relationship between risk and return. Indeed, in financial literacy surveys assessing knowledge of interest compounding, inflation, and risk, respondents consistently performed worst on the risk-related question. Knowledge of risk is critical to making decisions about saving and retirement planning. These findings have implications for individuals, policy makers, and the financial and insurance industry. While individuals are facing increasingly complex financial and insurance instruments, their low risk literacy may limit their ability to use these instruments on a micro level, and—on a macro level—impede the development of wellfunctioning financial markets. Read the full paper here

Tuesday, March 31, 2015

Brokers misleading investors about fiduciary duty: PIABA Report

The U.S. organization  , the  Public Investors Arbitration Bar Association ( PIABA) has issued a report highlighting how U.S. brokerages mislead investors as to the true nature of the dealer- client relationship.

They want Federal action to stop  U.S. Brokerage Firms misleading investors about their role as fiduciaries, which Firms deny to block arbitration claims.

"Investors believe they are doing business with individuals they can trust, because the brokers use titles which imply trust, their advertisements give the impression they can be trusted, and the brokers say they can be trusted to look out for the best interests of their clients.  A survey of the major brokerage firms show consistency in the advertising, in the tone they take on their websites, and the impression that they intend to leave on investors," said the report's other co-author, Christine Lazaro, director, Securities Arbitration Clinic at St. John's University School of Law.

"Yet when that trust is breached, a survey of answers filed in arbitrations demonstrate that these same firms disclaim liability when held to account in arbitration, and rely on case law to say no such duty exists. The public face of the firms is that they hold themselves to the highest standards, while the private face of the firms, in the arbitration forum where everything is non-public, is that they are mere order-takers," she says. 

A similar situation exists in Canada.Some examples of what has been dubbed The Grand Deception:

A survey of business titles by the Investment Industry Regulatory Organization of Canada (IIROC) found  that there is a wide array of business titles in use by licensed representatives both across firms and, in some cases, within the same firm. Some of the more commonly used business titles that were reported through the survey include: Advisor, Financial Advisor, Financial Assistant, Investment Advisor, Senior Investment Advisor, Financial Consultant, Personal Finance Consultant, Financial Planner, Certified Financial Planner, Wealth Advisor, Investment Associate, Private Client Principal, Private Client Associate, Retirement Specialist, Consultant to Seniors, Vice President, Senior Vice President, and Managing Director. IIROC concluded that many of these business titles do not, on their own, provide a meaningful description of the type of services and/or investment products that a licensed representative can offer to a client. Some of these business titles imply that the individual carries out an executive function within a firm, for example, Senior Vice President, where the individual is not, in fact, a corporate officer of the firm. IIROC also found that there is a wide array of financial designations that licensed representatives possess and may put forward, in addition to their business titles, in their dealings with clients. While some financial designations, including professional designations like the Chartered Accountant designation, require a specified number of years of work or hours of classroom study, passing an examination, and continuing education, the requirements for others are much less rigorous. In fact, some financial designations may be obtained after a weekend seminar or through online self-study, with a self-administered examination.These titles facilitate sales person gaining investors’ trust  and enabling the sales persons to sell products and implement strategies that are not in the investors’ best interests.

Another common example is the recommendation of proprietary mutual funds (which often bear the name of the brokerage firm). There are often similar, less expensive index funds or other mutual funds available with higher expected returns. A fiduciary couldn’t recommend proprietary funds if they weren’t the best option. A broker has no such constraints and can do so with impunity.

How about this declaration ? Your goals are unique, and BMO Nesbitt Burns Investment Advisors are here to help you develop a plan that's right for your needs. Working with us you can expect open,trusted and transparent advice...  Sounds like you'll be provided advice that is in your Best interests, eh?

A number of OBSI recommendation cases cases further illustrate the two-faced  issue . Equity Associates refused to compensate a retired couple in the amount of $83,386. After the couple sold their home, their advisor invested the proceeds in unsuitable medium-risk and high-risk mutual funds.Richardson GMP refused to compensate several investors in the amounts of $232,500 and $66,366. They entrusted their retirement savings to an advisor who ignored their investment objectives and risk tolerance.Armstrong & Quaile refused to compensate a retired couple for $34,000 after their advisor urged them to borrow to invest. They sold their investments after a market decline to cover a debt they could not afford to service.Monarch Wealth Corp refused to compensate a young couple, new to Canada, in the amount of $30,628. They borrowed to invest after being told by their advisor they would not incur any losses.Despite the Ombudsman's comprehensive independent complaint investigation, the dealers refused to accept accountability or provide restitution.

Other excuses that dealers use when responding to a client complaint include:
1. Blaming the investor- greedy , didn't pay attention to forms signed
2. Falsely claiming that because the account is a discretionary one, no duty of care is required
3. Wrongly asserting that the responsibility for determining suitability rests with the client 
4. Incorrectly asserting that ,even though the investments are unsuitable, the dealer is not accountable because risks were disclosed to the client
5. Refusing to accept responsibility if "advisor " has sold products off the books of the dealer . Sometimes dealers are willfully blind if a " producer" is harvesting a client and when things turn ugly claim that they knew nothing about the egregious behavior and are not accountable.

A recent example of the latter practice involves a case involving FUNDEX  Investments Inc. . In that case FUNDEX  argued that they had not approved sale of the exempt market product and the client must have  known they were not dealing with FUNDEX. The OBSI complaint investigator found otherwise and recommended full restitution. The dealer refused and the victims must now decide if they wish to proceed with civil litigation  or walk away with a hard lesson on who they can trust. From the FUNDEX website we note: " Since 1995, FundEX Investments Inc. has been providing independent financial advisors with an established, fixed fee business model that enables them to access a wide variety of quality investment products to best meet the needs of Canadian Investors."

Brokers and insurance companies are fighting hard to avoid becoming fiduciaries. They are currently held to the lower “suitability” standard. This means they can recommend investment products that may not be the best option available to help you reach your financial goals, as long as they are “suitable.” CAVEAT EMPTOR!

Wednesday, February 18, 2015

Research paper on Ponzi schemes: Cam McCormick University of Lethbridge

The Earl Jones scam is a particularly interesting read.

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

Resolving Investor Disputes : Is your Advisor to Blame?

Compensation for Retail Investors :The Social impact of Monetary Loss

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 for the information on trade confirmation slips and to the Investment Funds Institute of Canada 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 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? 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...." 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.