Sunday, August 13, 2017

Kenmar Guidelines for regulator inquiries Offices


Inquiries offices at securities regulators play an important role in the investor protection chain. When handled effectively many issues can be put to bed quickly and painlessly. People who take the time to inquire/complain should be viewed as invaluable sources of information. An inquiry or complaint should be welcomed as an opportunity to resolve a problem, revise a rule or change a policy. Yet in our communication with retail investors, they tell us the satisfaction level with inquiries Offices is less than satisfactory. Complaints range from non-responsive, impatient and dismissive to abrupt and insulting. The most frequent complaint by far are responses that investors perceive as bureaucratic bafflegab that fail to answer the specific issues raised. This can result in a chain of communications that result in caller frustration and even anger.

Here's some ideas for improvement:

·         Access - phone, mail, email, FAX - physical offices – convenient operating hours

·         Languages-provide most common in the region

·         Response times to inquiries- state target times clearly and keep to less than 3 days for most inquiries : explain if a delay is necessary

·         Know your caller - elderly, vulnerable investor, veteran, recent immigrant, despondent due to losses....Tailor response to the type of caller.

·         Understand the issue (s)- realize retail  investors need help articulating the issue(s)

·         Listening- apply assertive listening principles – try to understand the underlying issue(s)

·         Respect- never insult the intelligence of  callers , never ridicule

·         Clarity- avoid use of  investment industry jargon, acronyms and legalese in communications

·         Plain language- use plain language principles.

·         Remember, the majority of Canadians have low financial literacy.

·         Linear response - answer  specific questions asked, not questions not asked ; be forthright and straight to the point

·         Patience- retail investors, especially complainants, need to be treated with a lot of patience- this is a new process for most ; do not close file prematurely

·         Compassion and empathy  - show understanding and be tolerant of  occasional outbursts of caller frustration 

·         Facts and evidence- use objective material and references;  do not ignore or dismiss caller evidence and paperwork

·         Updates- provide periodic updates as required

·         Responses- address the issues raised point by point in easy to understand terms; invite caller to contact you for further information

·         Referrals- explain why referral is being made to another agency, provide full and clear contact information to referral

·         Nest steps- if caller unsatisfied , explain/ suggest escalation procedure

·         Satisfaction Survey - conduct  caller annual satisfaction survey , publicly release results and commit to addressing issues identified

We believe that Inquiries Offices have an important role to play in investor protection. Taking the time to listen to the Voice of the Investor is a WIN –WIN for all stakeholders.


Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document and others in the series is to educate investors by bringing together personal finance information from a variety of sources. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.


Monday, August 7, 2017

The Discretionary Account

There are two general types of investments accounts: Non-discretionary and discretionary. A non-discretionary account requires the representative to obtain client consent before he/she makes any investment decisions. With discretionary accounts, investors delegate day-to-day investment decisions to their portfolio manager (PM). That differs from non-discretionary accounts where clients must make final trading decisions on each transaction.

Because a discretionary account allows a dealer representative to make account transactions without the client’s prior approval, a common law fiduciary duty will virtually always arise with such an account. A fiduciary duty may also arise where the client has a non-discretionary account depending on the actual power or influence that the representative or dealer has over the client, and the extent to which the client relies on the representative or dealer.

Discretionary accounts are suitable for investors, such as busy executives, business owners and others who don’t want to be involved with portfolio management. These accounts are most suitable for investors who prefer a balanced approach to investing and have a long time horizon. Discretionary accounts usually have higher minimum investment requirements, often starting at $250,000. Fees are usually based on assets under administration, which at least in principle, motivates portfolio managers to perform well because their fees are linked to portfolio performance. Do not hesitate to negotiate fees. Fees are generally tax deductible in non-registered accounts.

In a fast-paced financial world, delegation can make a difference. Consider an advisor with a 150 clients in non-discretionary accounts, each holding a particular stock. Should the markets take a turn for the worse or the company post unfavourable results, the representative must contact each of those clients for approval to sell the position. This can be a serious disadvantage when a situation warrants immediate action. A good PM can take emotion out of the equation by making the decision for the client in a timely manner.

Likewise, the PM is better positioned to seize buying opportunities. When the markets dip and a good quality stock inexplicably drops in value, he or she can again act immediately.

Portfolio managers use different investment management approaches and styles. Some managers are product specialists, some adopt a certain style such as value, growth or momentum, and some offer a combination of products and styles.

As with any account, the PM will need to know your KYC parameters such as net worth, time horizon and risk profile (tolerance and loss capacity) and your investment objectives.

The PM doesn’t invest without restriction, but is bound by the parameters outlined in a jointly developed Investment Policy Statement. Investors may even establish constraints based on such things as personal principles and specify stocks to avoid from industries they feel are socially undesirable. You can instruct your personal PM that you don't want to invest in booze companies, or you don't want to go near junk bonds, or that you want half of your holding always in GIC’s .The investor has more peace of mind knowing that discretionary accounts are subject to greater governance and oversight .

But for some investors, discretionary accounts aren’t suitable. Passive Investment management strategies, which are characterized by low portfolio turnover, are generally more compatible with non-discretionary accounts. The same would be true of a “buy-and-hold” strategy. The fewer the trades, the less client meetings or phone calls necessary to gain authorization to execute transactions. Clients who like to be hands-on with their investments will also be better served by a non-discretionary account.

The qualifications to be a portfolio manager require higher levels of education and experience than other advisors. However, when choosing a portfolio manager, investors should seek even more distinctions, including access to high quality research and freedom from any influence toward proprietary products. The PM should have a clear communications plan and be readily available to answer clients’ questions. Above all, you need to be able to trust your PM and the dealer. You can check registration and disciplinary history at

Here's some questions to ask before signing up for a discretionary account:

        ·         What services are provided?

·         What are all the fees and expenses associated with such an account? Obtain in dollars and percentage terms.

·         Are you a fiduciary? If yes, obtain confirmation in writing, If no, reconsider this type of account. See this sample fiduciary form from the Small Investor Protection Association

·         What are your qualifications and experience?

·         Can I see a sample Investment Policy Statement?

·         How do you manage cash in the account?

·         What is your trading strategy? Expected portfolio turnover?

·         How do you effect tax optimization?

·         Have you ever been sanctioned or disciplined by a regulator?

·         Can you supply references?

·         What information and reports will I receive? On what frequency?

·         Can I access my account online?

·         What is the complaint process in the event of a dispute? Is OBSI available?

If your account is not discretionary and your advisor has been making trades in your account without your permission, contact the Compliance department of your investment firm right away and document your complaint. If you are not satisfied with the response of the Compliance department contact your provincial securities regulator for more information about your options and where to go for help.
Be sure to take the time necessary to review carefully all the information when filling out the applicable account forms. And do not sign them unless you thoroughly understand and agree with the terms and conditions and fees they impose on you.


Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document and others in the series is to educate investors by bringing together personal finance information from a variety of sources. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.

Sunday, July 30, 2017

What the Limitation Act means for retail investors


During the investing lifecycle, chances are you may have a complaint against your dealer/advisor. The complaint process has always been a painful experience. But in 2004, retail investors faced a new challenge to their ability to recoup undue investment losses caused by bad advice .The new challenge was reduced statute of limitation time periods.

In 2004, provincial governments started to standardize statute of limitation time periods. As a result, most provinces ended up reducing the limitation period. For example , effective Jan 1, 2004 the Ontario Government ( several other provinces have similar statutes known as Limitation Acts ) implemented legislation reducing limitation periods (the time within which plaintiffs must take the initiative or lose their right to take civil action) from six years to two years. The basic limitation period under the Act is two years from the date on which the claim is discovered, or ought to have been discovered whichever is earlier, by the person entitled to bring the claim. Nailing down these dates of course isn't always easy. Some special limitation periods that remained are nevertheless subject to some of the principles established by the Act concerning minors, incapable persons, dispute resolution and the 15 year Ultimate limitation period.

At least in Ontario, an agreement  ( called a  “tolling agreement” ) to let an independent third party mediate or arbitrate the dispute will suspend advancement of the limitation period for the duration of the arbitration or mediation process, but if that process fails to resolve the dispute, the limitation period countdown resumes where it left off. 

So, retail investors now have to act much more quickly if they feel they've been a victim of dealer/advisor wrongdoing. For unsophisticated investors, seniors, retirees, widows, recent immigrants and others the shortened Limitation presents a real challenge.

Most victims of industry wrongdoing, that results in significant loss of their life savings, can take a year or more to come to grips with this life-altering event, and to determine what action they must take. The stress of a life-altering event such as the loss of a hard earned retirement nest egg can be so debilitating that it can lead to depression and the inability to make a rational decision. In this mode, it’s unlikely an investor will have the emotional strength to file a claim or take civil action in a timely manner

Handling of complaints by industry participants, the OSC, SRO’s, and internal Ombudsmen services commonly cause delays 6 months or more. A complaint investigated by the Ombudsman for Banking Services and Investments (OBSI ) stops the limitations clock but OBSI will not consider restitution claims until they have progressed through lengthy time- consuming industry and industry- sponsored processes. Even after OBSI makes a recommendation for compensation, this recommendation is non-binding so the next step involves a decision to institute civil action.

The move by some provinces to reduce the limitation period for lawsuits from six to two years tips the playing field even more against investors and in favour of the bank-owned brokerage industry. In Canada, a complainant has two remedies: A lawsuit or a complaint to the OBSI. OBSI has a target of 180 days to resolve a complaint but some can take more than a year. Before an investor can benefit from this free "service" he or she must proceed through the bank-owned brokerage firm's manager, compliance officer and then , on a voluntary basis, the individual ombudsman of the bank involved. Unlike OBSI , a complaint to an internal bank “ ombudsman” does NOT stop the limitation time clock. For reasons we can only surmise, banks actively encourage the use of their own " ombudsman" ahead of the real Ombudsman, OBSI.

Once all that's finished, then the investor may take the case to OBSI. But OBSI won't accept a case if the investor has already sued. All of which amounts to a Catch-22 because jumping through all those bureaucratic hoops within two years is no mean feat .

Canadian investors will find they have no legal remedy if they go to regulators such as the Investment Industry regulatory Organization of Canada (IIROC) That’s because IIROC doesn’t fully investigate each complaint and those investigations it undertakes can take more than two years, by which time they will have lost the right to sue. ( the statute of limitations time clock does not stop with a complaint filed with IIROC)

So, by the end of this turbulent cycle of events, two or three years can pass leaving the investor with no recourse with the oppressive Limitations Act in place. The ability to seek compensation through the courts can be lost forever. This is why lawyers suggest their early involvement with a case to ensure all aspects of the case are considered.

Usually, the lawyer will require a period of time to investigate the material facts and to determine whether the investor is on a solid footing in filing the complaint and whether a cost/benefit analysis supports loss recovery actions. The time required will depend on the complexity of the claim. The lawyer will assess the investor’s right to sue and provide an opinion with respect to the practical merits of starting a court action or an alternative dispute resolution process. This takes time and the limitations clock keeps ticking.

To be sure, litigation is no panacea. The process is lengthy, stressful and expensive with no certainty of success. Expect to face some of the sharpest lawyers around. That's why investor advocates promote increased professional qualifications for advisors and the assumption of a fiduciary duty to clients. Prevention, rather than remediation, is a far better solution that will lead to superior outcomes for investors.

Until such time as the Limitation Act is amended, investors are encouraged to (a) ensure their KYC is up to date, (b) establish an Investment Policy Statement with their advisor, (c) carefully examine their client statements / trade confirmations upon receipt, (d) look at bottom-line account trends and most importantly (e) ask questions and complain promptly whenever something doesn't feel right.

If at any time you’re not sure of your rights or what to do, consider consulting a lawyer. This is certainly one area where professional advice can pay big dividends. Failure to do so in a timely manner could mean you get ZIP even if your restitution claim is rock solid.

Tuesday, July 25, 2017

This Court cases teaches investors many lessons

We urge investors to read this judicial decision . It has a number of lessons that can help ordinary Canadians prevent a lot of problems.

Here are a few:

  • Contact the applicable regulator to check on the background of your advisor
  • Understand that advisors are not required to act in your Best interests
  • Understand that many advisors are paid by sales commissions
  • When filling in forms, be modest about your investment knowledge , risk tolerance  investment experience and financial position. Never leave any block blank.
  • Retain a signed  and dated copy of your account application form ( KYC )
  • Place orders to buy and sell carefully and ensure trade confirmation slip matches your instructions. If not, contact the dealer immediately
  • If not happy with action /explanation, file a formal complaint without delay
  • Provide  KYC updates  to dealer when your personal situation changes
To review the case click here 

Sunday, July 23, 2017

Should I use the institution's internal “ombudsman “?

Investment dealers are required to respond to a complaint within 90 days. Offers for compensation are binding on the dealer.
After you receive a response to your complaint from the dealer ( or bank) you have a few choices. You can accept the decision, abandon the complaint altogether , use IIROC binding arbitration ( if an IIROC dealer), take legal action , refer the complaint to the Ombudsman for Banking Services and Investments (OBSI ) or the firm may “encourage” you to use their internal "ombudsman". The banks and insurers have created these entities to give the institution a second chance. We view the diversion from regulator-approved OBSI as an unnecessary step.
It is well known that the more steps in a complaint process, the greater chance the complainant will give up and drop the complaint. If the internal “ombudsman” confirms the dealer position, most complainants will not have the will or fortitude to start all over with OBSI .It is entirely possible a complainant with a very valid claim could be shortchanged.
An internal “ombudsman” is run quite differently than Ombudsman authorized by regulators. Such entities lack the transparency  real and perceived independence and disclosures as compared to true  institution - independent ombudsman services such as a OBSI.Recommendations by an internal " ombudsman" are non-binding on either party.The use of an internal “ombudsman” is entirely voluntary but you may be nudged by the dealer to use it, rather than OBSI. Once you receive the final response from the dealer , you have 180 calendar days to bring your complaint to OBSI. Before consenting to use an internal “ombudsman” you should be informed. There are risks and pitfalls to consider. You need to ask some questions before giving consent.
The list of questions we provide is comprehensive. But don't worry about asking them all. After the first few questions , based on our experience, you will quickly become uncomfortable with the responses or worse, you will not get any responses. That's why Kenmar suggest going directly to the Ombudsman for Banking Services and Investments (OBSI) if you intend to pursue your complaint. At least that way you can avoid being rejected a second time by the same institution.
OBSI is a free, institution-independent ombudsman service endorsed by securities regulators and overseen by them. Unlike a bank or insurer internal " ombudsman", a complaint to OBSI stops the limitation time clock. Compensation can be recommended up to $350,000 .In 2016, nearly half ( 45% ; 150/323) of investment complaints ended with monetary compensation - average $ 15,552 . The latest OBSI satisfaction survey showed that 75% of respondents rated the quality of service as good / very good. Visit for more information
These are the questions an investor should be asking before voluntarily opting to use an internal bank ombudsman:
Performance statistics
> In what percentage of complaints do you recommend restitution greater than that offered by the dealer?
> What is the average and target time to investigate a complaint?
> What are your user satisfaction statistics?
> Have you ever been employed by the dealer/ bank before becoming ombudsman?
> Is any part of you or your staff compensation package tied to bank profitability?  
> To whom do you report?
> Do you receive company stock options? Shares?
> Who approves your annual operating budget?

          > Are your offices and locale physically separate from the dealer/bank ?
> Are you overseen by a regulator or other independent organization?
> Are you periodically audited by a third party and are the results made public?
> Do you assist Complainants in formulating their complaint?
> What is your loss calculation methodology?

> How does your investigation process work?
> Is there a dollar limit on your recommended compensation? 
          >What happens to my case file records after you provide me with a response?
> Do you deal with systemic issues ?

Tuesday, July 4, 2017

Transferring Accounts can be unpleasant

It should be no surprise there's an increase in the number of Canadians looking to transfer their accounts away from expensive, conflicted and abusive firms. Scandals like double dipping, expensive products, high fees, conflicted advice, risky Off book sales and even misappropriation of assets are key drivers. Investors are looking for trustworthy fee- only advice , fiduciary advisors, low cost robo -advisors and even discount brokers for those who want to control their own financial destiny. But transferring an account isn't that simple. There may be hefty account transfer fees and a lot of stalling before your account is transferred.

Virtually anyone who has ever transferred an account from one dealer to another is aggravated as to why the process takes so long. We would argue that it takes so long because there are no enforced regulatory requirements around maximum timelines and basic corporate behaviour is such that a dealer is slow to transfer out client money since that directly impacts firm revenue. To facilitate this, the MFDA, IIROC and the CSA should consider regulations regarding account transfers including maximum transfer times and apply fines for non-compliance.

Further,there is the potential for client harm resulting from delays in the transfer of accounts . And perhaps worst of all, restrictions of the type of securities that can be transferred.

In 2016 the MFDA asked all Members who sell proprietary investment products whether they permit clients to transfer those investments in-kind to other registered dealers or if instead clients are required to redeem the positions and transfer in-cash.  Several Members stated that some or all of their proprietary mutual funds or other investment products are exclusively distributed by the Member and therefore cannot be transferred in-kind. The MFDA has received complaints from investors who were unaware that certain mutual funds could not be transferred to another dealer.  In some cases, these investors incurred early redemption penalty fees to redeem their securities and convert to cash. There may also be tax consequences to a redemption and transfer in-cash versus a transfer-in-kind. Non-transferable assets deters mobility of consumers and therefore hinders competition for consumers business.

Kenmar feel that dealers that offer proprietary mutual funds or other investment products that cannot be transferred to other dealers, should, at a minimum, clearly disclose this to clients at account opening in their relationship disclosure document.  Where only certain specific funds or investment products cannot be transferred in-kind this should be specifically disclosed at the point of sale of the particular investment product.  In both instances, the disclosure should include a specific discussion of any potential fees or tax consequences that may result from a redemption and transfer in-cash. We’ve asked the MFDA an IIROC to issue Investor ALERT Bulletins on the issue.

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.