It's heart-wrenching, and you must watch it. Stories like this inspired Onus Consulting Group. It tells the story of a hard-working dairy farmer and his wife, who had their account churned by an investment advisor at a reputable firm from $217,000 to $1800. Besides covering the grave injustice that occurred, the story goes on to cover the farmer's inability to receive restitution from the Investment Dealers' Association, the self-regulatory organization that oversees full-service financial advisors. The segment's lambasting of an adequate means to seek restitution without mentioning the Ombudsman for Banking Services and Investments is where I take issue. The journalist claims at the end of her segment that the best way to seek restitution is to take it to court, which I disagree with....at least initially. Please read.
For a straight-forward tutorial on how to assess churning, see page 14 of our Investor Awareness Kit available on the top left of the page.
A part of my comment, which had its debut on wheredoesallmymoneygo.com:
The one thing I didn't like about the segment is the lack of respect toward OBSI (Ombudsman for Banking Services and Investments) in resolving the matter. OBSI is a private organization, so unlike the IDA and MFDA, they're are not financed by its members. IDA and MFDA are more concerned with policing (and yes, the jury is out on how effective they are) brokers. Restitution, simply, is not their concern.
OBSI, on the other hand, is totally independant. The services are free, and the clients can take legal action if they don't find the judgment satisfactory. While it is true that their judgements aren't binding, their decisions are agreed to by both parties almost all the time. Furthermore, while they cannot order restitution over $350,000, many clients, including the exploited dairy farmer, can really get some justice.
If a client feels that their advisor has commited some sort of malfeasance on their account, file a complaint with OBSI. The news segment really should have stressed this! Unfortunately, it was only briefly mentioned by the anchor after the segment. The journalist covering the story didn't even mention them.
File a complaint with the IDA (or MFDA, if you're dealing with a mutal fund dealer), as well....however, just so the advisor can be disciplined. Don't count on them for restitution.
There were a couple articles last week by Canada's two power personal finance columnists, the National Post's Jonathan Chevreau and the Globe and Mail's Rob Carrick, pointing out the drawbacks of fee-based accounts. Quite simply, a fee-based account is a method in which full-service financial advisors compensate themselves by charging their fees as a percentage of their client's portfolio size.
If you've been a regular reader of my blogs [and I know there are just millions of you out there], you would know that I have been a fan of advisors who use fee-based in their practice. The transparency it brings to the client-broker relationship is unrivalled. John DeGoey, in his book The Professional Financial Advisor II, believes financial advisors embracing this compensation method illustrates one of the most important steps to bringing a sense of professionalism to the industry. It's hard to deny such a move would remove the conflict of interest that a revenue-driven, transaction-based approach employs, as the advisor is no longer being compensated by each trade or mutual fund switch.
The Drawbacks (the following information is also provided in my Investor Awareness Kit, which can be downloaded by clicking on the link on the top-left corner):
1) A buy-and-hold method with a few trades doesn't justify having to pay a fee based on the percentage of your assets.
Thoughts: A fair point. Detractors of this method do point out that the incentive for the advisor to pursue future investment opportunities is severely undermined if they're already paid upfront. However, I believe that the client will be in touch with this anomaly, if there is one. They'll know exactly what they're paying each year, and they'll know what they're getting in return. An observant comment to Carrick's column written by a financial advisor spoke of the great lengths that they go through. It's not just putting trades through, but also working on the insurance, tax and estate planning. It's the time spent servicing the Investment Policy Statement or updating the financial plan.
Regardless, if there is value or not, the client will know how much they are paying, and it will be far easier to make a qualified decision whether or not the advisor is worth their compensation, as they can put an actual dollar value to their financial advice.
2) For advisors to bias toward securities with embedded fees (most notoriously, new issues) once their clients are placed in fee-based accounts.
Thoughts: Okay, this observation has a great deal of merit, and it's something that should be kept in mind. When a brokerage firm acts as the principal in a transaction (they own the investment product being sold and are not acting as the agent between their client and another party), there are always embedded fees involved paid out to the brokerage. New issues, for example, carry a 3%-5% commission to the broker. Limited partnerships and flow-through shares make up some of the 'sexier' products out there and advisors know how to pitch these in a manner to make their clients salivate. By recommending these products, they are giving themselves quite the raise from the fee they are already collecting from the client.
This is a problem, but it shouldn't be a factor to completely do away with fee-based advice. I've been excited to see brokerage firms broach this issue dead on with them not passing the 'embedded fee' comission to the advisor. While this isn't mainstream yet, several brokerages firm have initiatives in place, and it definitely is a start. We can do our part by educating the client and holding advisors that do commit such reckless behaviour accountable for their actions.
With 10.7% of the full-service financial advisor community using this method, I still feel there is a long way to go in making this the more mainsteam compensation method. It is not to say that transaction-based (being when an investment is bought or sold) should be completely done away with, especially for large portfolios with few trades, but I do disagree with Carrick when he entitles his article, "Fee-based accounts sounds good, but they're just as open to abuse." There simply is many more methods an advisor can employ to take advantage of a transaction-based portfolio.
I agree with DeGoey that fee-based will make financial advisors stronger professionals. The public doesn't need salesmen when it comes to their investments.
The take of SqueezePlay's Kevin O'Leary on the fate of retail investors of ABCP
"Maybe Granny will actually ask her broker next time (the person puts her into a piece of paper) what it is she's buying. Maybe you need these lessons occasionally to cleanse the markets....to scrape the plaque off the veins that make the financial system run."
So says Kevin O'Leary on April 22, 2008, as he makes the case for retail investors not getting back the par value of their asset-backed commercial paper (ABCP) suggesting instead that the value should be what the market dictates. I was complete shocked at the opinion put forth by the SqueezePlay anchor. The man, who shot to mainstream fame in Canada on CBC's the Dragons' Den, has the idea that retail investors should hold themselves responsible for not doing enough due diligence. I'd like to present is a Canaccord advisor's e-mail to his or her client suggesting ABCP:
We have been able to secure a block of AAA 1 year money market paper yielding 4.80 to our clients. This paper offers the following: - Liquidity: You can sell the Planet Trust at anytime before maturity. GICs are non-redeemable. - Protection of the capital: The rating of the Planet Trust is AAA credit. GICs are only ensured [yes, the broker misspelled it...it's "insured"] up to $100000.
This e-mail was taken from none other than SqueezePlay. Tell me, Kevin...Is it really possible for retail investors to do further due diligence being pitched of the merits of an investment in such a manner? Especially, when Canadians rely on their financial advisors as being their source to the happenings in the investment industry. Here they are being pitched an investment product as a substitute to a GIC. Until the offer to match par by Canaccord, which was recently matched by Credential Securities (the other party in this debacle), these investors were risking losing everything with no liquidity. Market pundits were putting the value of this paper at twenty cents to the dollar no more than a few months ago (now, it's looking more like sixty apparently). Imagine....close your eyes, Kevin....losing 80% or 40% or whatever '%' of your investment on something that was recommended to you as liquid (which it currently isn't) and as a substitute to a GIC? Uncanny.
It is absolutely shocking that the man seeing what he has seen would have such an opinion. You can't argue that he made this argument out of ignorance. You can't argue that he made this argument out of a lack of competence. What are we left with? This attitude will destroy the profession of finacial advice. Advisors should be trusted to make suggestions given their clients' needs. This is the reason full-service financial advisors are recruited in the first place. Having to second-guess constantly and to take out of this "don't trust anything that's being recommended to you," will seriously undermine the profession. This paper had a high credit rating and was exempt from prospectus disclosure, so even due diligence wouldn't have saved them. Wouldn't it be more powerful to give the players involved a sense of accountability over what has been done? Penalties? Fines? Lawsuits? Wait, lawsuits are looking very unlikely, as it is a condition for the retail clients to get their money back.
With the vote on the proposed plan of investors being bought out at 100 cents to the dollar being held this week, it is widely expected (indicated by proxies coming in) that retail investors will accept the offer. Of course, they should, but, as stated, they will give up their right to pursue legal action. Not exactly a great thing, as it won't help the players develop a sense of accountability. This is where the problem lies.
I do want to give credit to Mr. O'Leary...His imagery of paralleling "plaque" to retail investors being sandbagged is incredibly poetic. Rudyard Kipling couldn't have done a better job.
Sources: SqueezePlay [BNN], Globe and Mail "ABCP ruling to come Thursday"
An ad campaign I saw today on the TTC features young kids with epilepsy revealing their aspirations.
Child #1 Aspiration: Construction worker "Because I like to build."
Child #2 Aspiration: Chef "Because food makes people happy."
Child #3 Aspiration: Dentist "Because smiles are important."
Child #4 Aspiration: Stockbroker "Because fast cars are cool."
It's funny how the child who wants to be a stockbroker wants to be one due to the expectation of a posh lifestyle. Not to make the world a better place, unfortunately. On the other hand, the other children's ambitions are rooted for constructive reasons...the betterment of society. The young man's stereotype of the profession is common, and I genuinely hope he will drive that fast car.
Dare I believe that a similar child even a decade from now will want to be a financial advisor [yes, he won't use the term stockbroker] to "help people reach their financial goals in life." We could simplify it, but you get the drift.
Onus Consulting Group's inaugural mention on the blogosphere
Check out our first mention on the great blogosphere on the "Relative Benchmarks and Absolute Benchmarks" entry at http://www.wheredoesallmymoneygo.com/. The blog is an informative Canadian personal finance blog run by Scotia McLeod Investment Executive, Preet Banerjee, dubbed a member of a "new breed of finacial advisor" by the National Post's Jonathan Chevreau and the author of "RRSPs: The Definitive Book on Registered Retirement Savings Plans."
Diagrams and everything...David Harper and the great people at Bionic Turtle do a good job of explaining asset-backed commerical paper. Take 5 minutes.
Note: Keep in mind, these trade receivables, which he speaks of, extends to credit card and mortage debt (David speaks in a more broader manner of companies, in general, being owed money by its customers).
Purpose: The whole point of them is to convert money owed to an entity into cash more quickly.
Canaccord finally comes through...Will their clients forgive them?
Today, it was announced that Canaccord will be buying back asset based commercial paper (ABCP) from their retail investors at par. Groundbreaking....Some are saying it's about time they made a move, but quite frankly, I'm surprised they didn't wait until they were closer to the Purdy Crawford Committee restructuring proposal. It is the retail investors that are going to control the vote on restructuring that will be happening, as they make up the vast majority of those holding the ABCP. Of the 2000 retail clients, most of them are from Canaccord (1430 of them).
More on the Canaccord Relief Program and ABCPs, which have been a crux in the Canadian capital markets, later.
Not to long ago, I was watching an interview of Som Seif, CEO of Claymore Investments, on Jonathan Chevrau's http://www.wealthyboomer.ca/. Myself...I have a great respect for the passive management approach (taking advantage of ETFs and index funds), and Claymore is one of the very few players in the industry (the other being Barclays iShares and Horizon Beta Pro). Claymore has blossomed in an arena where both TD and StateStreet have entered and dropped out.
The argument of passive vs. active management isn't one to be made for this blog entry, and it, unfortunately, hasn't really reached a fevered pitch within the broader retail investment industry. Regardless of this, the emergence of ETFs, in the last few years, has been an incredible feat. It has been remarkable to witness the amount of advisors themselves approaching their clients with the notion to access these funds, although it means having to visit the fee-based model with no trailer fees. It served as a reminder that there are a good many advisors out there that want the best for their clients (STANDUP advisors as my virtual mentor, John De Goey, calls them).
However, recently, Claymore added an Advisor-Class ETF where trailer fees(embedded compensation) will be paid out to financial advisors. This is something that hasn't been done in the past and, as Seif conceded, the SEC doesn't allow Claymore to do such a thing in the United States. Is this useful? It will definitely get more advisors aboard getting their clients to recommend ETFs. Since this innovation, the only optimum choice a financial advisor had in getting their clients into ETFs was adopting a fee-based compensation structure. This method of charging their clients upfront as a percentage of their portfolio greatly enhanced the transparency between the client and his or her broker. Intuitively, I believed that the rise of ETFs and index funds would have proved an excellent vehicle to making fee-based compensation more mainstream.
This changed with Claymore's recent move. "The benefit of the dot A is it allows advisors to now use them across their books, but, more importantly, it allows them to have the conversation about the ETFs to move their clients to a fee-based platform," Seif told Chevreau. Honestly, does he really believe that? If the advisor has an embedded fee option, it sort of avoids having to have that conversation about the benefits of fee-based compensation. Clients have been programmed for so long to not having to look at certain fees that it really is a challenge for advisors getting them to see the benefits.
Will the other ETF firms follow suit? I hope not. Barclays iShares has done something more in line with the Onus ideology and that's simply to educate. Their recent ad campaign points out problems in the client-broker relationship and the broader retail investment industry, including my favorite: "Canada has the highest MERs in the developed world. Should your clients care?"
All this being said, Seif's reasoning is that ETFs are great products, and if clients are being steered away from them because of a lack of trailer fees, then something should be done about it. It must be mentioned that I, admittedly, have a genuine respect for Som Seif. A respect that extends outside the retail investment industry. Seif accomplished the feat of setting up Claymore Investments all the while coaching the U of T water polo team to a championship season (his third one in four years). He admitted doing it at the expense of having to cut some of the team's more promising players because he didn't want to jeopardize the team chemistry. A risk-taker. A great coach. A genuine leader in my books.
However, in this case, I feel he's leading the wrong way.
