Why Another Article on Borrowing to Invest?

There have been many articles written on the benefits and risks of borrowing to invest (leveraging). For instance, we’ve all been told that if you put $100,000 into a mutual fund–using $25,000 of your own money and a $75,000 loan–and the fund gains or loses 10 % or $10,000, that would actually be a 40 % gain or loss on your original equity–before loan costs. So why another piece on the topic?


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"Fund Facts" is Coming

The Canadian Securities Administrators (CSA) has authorized a new disclosure document for mutual fund investors. It’s called Fund Facts (FF) and you’ll receive it when you’re sold a mutual fund. It is a dumbed-down version of the detailed simplified prospectus. It highlights key information for investors, including the fund performance, risk and the costs of buying and owning a fund. Regulators believe short, summarized disclosures of key information, such as the Fund Facts document, are more likely to be read by retail investors and at least somewhat understood than are longer fund prospectuses. You will no longer receive the simplified prospectus unless you ask for it. Despite FF being only 2-4 pages in length it attempts to provide the key facts of the mutual fund. In any event, make sure you understand the objectives of the fund (not well articulated in FF – seeing what the fund invests in is not the same as understanding its objectives).

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G20 High-Level Principles on Financial Consumer Protection

The high-level principles were developed as a response to the G20 Finance Ministers and Central Bank Governors call in February 2011 for the OECD, the FSB and other relevant international organisations to develop common principles on consumer protection in the field of financial services by their 14-15 October meeting.

They were developed by the Task Force on Financial Consumer Protection of the OECD Committee on Financial Markets (CMF), in close co-operation with the FSB and its Consultative Group, other international organisations and standard setter bodies and consumer and industry associations. The Task Force is open to all G20 and FSB members. It held several rounds of consultations, including a public one, on different versions of the draft principles. A final version of the draft principles was discussed and endorsed by the

Task Force on 14 September and transmitted to the CMF and the FSB. The Final High-level Principles on Financial Consumer Protection were endorsed by the G20 Finance Ministers and Central Bank Governors at their meeting on 14-15 October 2011.

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Mutual Fund Loads, Fees and Other Expenses

Mutual fund fees are the costs of running a mutual fund. They are disclosed in the simplified prospectus. What investors don’t readily see or comprehend and aren’t readily explained by their salespersons is how the method of sale effects their ongoing trailer commissions and, of course, fund returns. The simplified prospectus does have a section “Impact of Sales Charges on Purchases of Mutual Funds,” showing the amount of loads you would pay under different purchase scenarios covering 1-, 3-, 5- and 10- year periods. (Firms assume a 5% growth rate in order to calculate the future years impact.)

A controversial study that found Canada’s fund fees are higher than 18 other countries has been a thorn in the side of the mutual fund industry ever since Peter Tufano, Ajay Khorana and Henri Servaes published it in 2006. Read the full article 

Principles on Point of Sale Disclosure

Forward

The International Organization of Securities Commissions‟ (IOSCO) Technical Committee‟s Standing Committee on the Regulation of Market Intermediaries (TCSC3) and the Standing Committee on Investment Management (TCSC5) (known collectively as the Joint Group) have jointly authored the Principles on Point of Sale Disclosure Final Report. The Report sets out principles that are designed to assist markets and market authorities when considering point of sale disclosure requirements.

Introduction

This Report was produced by the Joint Group according to the Joint Project Specification on Point of Sale Disclosure to Retail Investors,1 approved by the Technical Committee (TC) in February 2007.


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Advisor Risk

Canadian financial institutions, and especially the fund industry lobbyist IFIC (at www.ific.ca), promote the idea that investing with them will lead to the good life (the Freedom 55 image). For about the last 20 years there has been an aggressive marketing campaign to convince retail investors that only by using an advisor will we safely meet our retirement and other savings goals. Advisors are the primary interface with retail investors and that’s where the risk lies. The title advisor covers a wide range of competencies, all under the same misleading title. Title inflation is commonplace in the financial services industry and rarely enforced. See http://tinyurl.com/3w6q3yj for a good plain language summary of the different types of advisors. These range from commission-driven salespersons to fee-only professionals. Read the full article

Investor Beware

The difficulty in trying to achieve restitution after being betrayed by a trusted broker or financial advisor is intimidating at best. It is much better to become aware of how the industry operates and to take appropriate action so one can avoid the pitfalls that can lead to extreme financial loss. The days of placing implicit trust in your broker appear to be over. The advice in this book is timely. Read the book 

The Financial Consumer Agency of Canada – what it can and can’t do to help you

The name Financial Consumer Agency of Canada (FCAC www.fcac-acfc.gc.ca ) conjures up an image of an Agency focused on the protection of financial consumers. As an agency of the federal government, it investigates complaints about financial institutions under federal jurisdiction. These institutions include all banks and all federally incorporated or registered insurance, trust and loan companies, and co-operative credit associations.

FCAC is not responsible for credit unions, finance companies, mutual fund dealers, securities dealers and other financial institutions that fall under provincial jurisdiction .Anything to do with stocks, bonds or mutual funds is still the responsibility of provincial securities regulators and authorized SRO’s such as the IIROC www.iiroc.ca and the MFDA www.mfda.ca . But a limited number of provisions related to Principal Protected Notes do fall under their auspices when issued by a federally regulated bank or insurance company http://www.fcac.gc.ca/eng/consumers/rights/protectednotes/protectednotes-eng.asp

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The Responsible Investor

About six years ago I was a member of one of the OSC's Fair Dealing Model's [ FDM] subcommittees, the Performance measurement team. I was the only retail investor member ; the others were dealers and lawyers along with OSC staff. A number of firms suggested that the cost of providing personalized returns would be prohibitive. A few argued it was a value-add service that should be subject to fees. Concerns were expressed about the unrealistic short term expectations that can be fostered by periodic performance disclosure if clients do not have an appreciation of market risk .Nevertheless, there was general acceptance of the proposal to focus on improved periodic performance reporting, especially of personal performance against goals, but there was some concern expressed about the way in which performance would be measured, the development of uniform performance measurement requirements and the use of performance benchmarks. There were many other good ideas to protect investors. Unfortunately, the FDM died when other provincial regulators didn't buy into its modern concepts and industry lobbyists rallied aggressively against its principles. Read the full article 

The Richest Man in Babylon

This book deals with the personal successes of each of us. Success means accomplishments as the result of our own efforts and abilities. Proper preparation is the key to our success. Our acts can be no wiser than our thoughts. Our thinking can be no wiser than our understanding. Read the full book