This web site is dedicated to investment fund investor education and protection. The multi-billion fund industry plays a key role in the savings and retirement plans of millions of Canadians. Many industry practices provide beartraps for the unsuspecting investor and securities regulations have not kept up with the pace of change in the industry.
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. http://www.iiroc.ca/Documents/2016/87c0e6d5-8054-4e88-9b56-9a079b8c35aa_en.pdf
Here's a Checklist you can use to assess the actual treatment you have
·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
·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
·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?
·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
·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
·Were you informed as to how your broker is compensated?
·Were you informed by your broker of any
·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
·Are you comfortable that your broker understands your
risk tolerance and capacity? Your true level of investment knowledge and
·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
·Has your KYC been updated at least annually?
·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
·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.
·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 (www.obsi.ca), 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…..in
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.
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
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
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).
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).
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.
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.
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.
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.
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 .
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.
IIROCwould 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
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.
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.
now we've all read about the scandal involving upselling by Canadian banks
especially TD Bank. It is truly disturbing that such a horrible client- abusing
culture has been allowed to develop in front of the eyes of Federal regulator,
the Financial Consumer Agency of Canada (FCAC)
Back in Oct. 2016 FCAC told us
that for the most part, financial services institutions are behaving themselves
in how they treat their clients, according to its 2015-16 Annual
report. The FCAC's report indicated that the agency has observed,
"strong market conduct" among federally regulated financial services
firms, such as banks and insurers. Specifically, the FCAC's uncovered "no
major or systemic concerns." During
that fiscal year, the FCAC investigated 708 potential breaches of federal
legislation, regulations, voluntary codes of conduct and public commitments,
the report states, noting that any compliance issues that were uncovered,
"were addressed in a timely and effective manner." In
2015-2016 no fines were imposed . Well, here we are a few months later with a
huge banking misconduct scandal on our hands.
The reaction of the FCAC to the
scandal has demonstrated no sense of urgency to investigate and protect financial
consumers. Asked to comment on the CBC’s GoPublic reporting, the
FCAC’s deputy commissioner Brigitte Goulard appeared on TV to say that the
agency had been interested in looking at these sales practices “for a while”
but had decided it was going to launch a special investigation in April. A
report can be expected by the end of the year, but how deep will it go?
by Radio Canada what would happen if a bank is found guilty of illegal actions
in its sales practices, Goulard warned that her agency could impose a fine of
up to $500,000. In 2015-16,
Toronto-Dominion Bank CEO Bharat Masrani was paid $9.38 million in his first
year as top executive so a fine of $500K would equal only a few weeks
compensation or a minute fraction of TD’s quarterly profit. Not exactly a huge
deterrent for a bank like TD.
And she added, “If it’s a serious violation, we could name the institution.”. This
is neither the transparency Canadians deserve nor the financial consumer
protection they need.
statement, FCAC commissioner Lucie Tedesco expressed concern with recent
allegations related to the sale of products and services by financial
institutions to consumers without properly obtaining their prior express
consent. “The law requires that, in order to provide consumers with new or
expanded products or increase their credit limits, financial institutions
obtain their customers’ prior consent and disclose key information about the
costs and charges of the products they are purchasing,” she said. The real
issue is not consent /cost disclosure but rather an unbridled sales culture
where client needs are subordinated to sales quotas placed on employees under
threat of termination. Clients provide personal and confidential information
that is harvested to upsell them based on quotas rather than need. That is
exactly the opposite of the type of trust relationship that should exist
between a bank and its clients.
this with the U.S. Consumer Financial Protection
Bureau https://www.consumerfinance.gov/.Its motto We’re
on your sideis right there on the first page of their website. ”We are the Consumer
Financial Protection Bureau, a U.S. government agency that makes sure banks,
lenders, and other financial companies treat you fairly.” The site makes it easy to
submit complaints, includes a searchable database of public complaints against
companies and invites whistleblowers from within the industry to spill the
InSeptember 2016 , the Bureau announced that
Wells Fargo had been slapped with fines totalling US$185-million after an
investigation found that bank staff had opened more than two million fake
chequing, credit card and other accounts for unknowing customers as part of a
company-wide effort to meet sales targets. The announcement set off a series of
investigations into Wells Fargo, including a congressional hearing .The bank’s
CEO, John Strumpf was forced out a short time later. In January, 2017, it
ordered subsidiaries of Citibank to pay US$28.8-million for failing to provide
borrowers with adequate options and giving them a bureaucratic runaround as
they attempted to avoid foreclosure on their homes. These actions send a strong
message to the banks.
2 of the scandal will unfold when abused clients file their complaints with the
bank. They will likely end up with the bank’s “ombudsman” which in reality is
neither independent nor a true Ombudsman. You likely won't be warned that,
unlike OBSI, your complaint will not stop the statute of limitations time
clock. If you don't accept their response , you'll be referred to their own
fully paid for " independent' for -profit firm ,ADR Chambers bankingombudsman ( ADRBO) which clearly is not
independent of the bank ( applies only to TD and RBC) and is not a true Ombudsman.
See this report from the Consumers Council of Canada of what they think of this
type of conflicted dispute resolution service.Canada's banking
dispute resolution systemhttp://www.consumerscouncil.com/site/consumers_council_of_canada/assets/pdf/cccbankingdisputeresolution.pdf
FCAC come down hard on the banks involved? Will abused clients obtain
restitution or have improper contracts unwound? Or will employees who behaved
badly or broke the law under intense pressure be turned into scapegoats for
With an increasing
number of vulnerable consumers and more complex banking products/services, the
need has never been greater for robust consumer protection. A Financial
Consumer Code is required. Kenmar support such a code and a strong enforcement
agency (FCAC) to make it real. OBSI should be the sole Ombudsman for ALL banks
and internal bank “ombudsman " abolished as has occurred in the UK. For-
profit Ombudsman services should be prohibited .
call on the Government of Canada to use this scandal as an opportunity to
introduce a robust Financial Consumer Code, give the FCAC the mandate and
resources to act as a consumer's advocate for Canadian financial consumers and
make OBSI the sole Ombuds service for all Canadian banks under Federal
jurisdiction. Such actions are well past due.
This ALERT is for investors who buy mutual funds via a
discount broker. Discount brokers shouldn’t be collecting opaquely disclosed trailer
commissions intended to provide you with investment advice. The obligation to
provide investment advice is contained in Fund Facts , the document you were
given before you bought the fund .A recent report provided by securities regulators tells
us that about $25 Billion in mutual funds at discount brokers
are A class ( a class of fund with a portion of the cost intended for advice per Fund Facts) which means that investors are being overcharged .Since discount brokers cannot and do not provide
investment advice, clients of A class funds are being robbed of returns.Clients are
not being treated fairly, honestly and in good faith as required by securities
laws. We've been asking Regulators for years to enforce the law; we're
still waiting for an answer.
the way, at 1% trailing commission, that amounts to an astounding $180,000,000
each year that isn't going towards the retirement funds of Canadians! Shameful,
ask your discount broker what fee you are being charged to buy and own mutual
funds. If it’s D class or involves a small one time upfront charge , that’s OK.
But if you are being charged an ongoing trailer commission for advice, you are
being charged for a service that is not being provided. Ideally, the charge would be
equivalent to what you’d pay to buy an ETF, around $9.95