Fairness and balance in the complaint process where interests of the dealer and registered representative must be considered!

My first substantial post on financial services issues in Canada for some time:

I had been “lightly” reviewing the Canadian OBSI and IIROC complaint processes until I came across this section within IIROC’s complaint handling guidance:

“There must be a balanced approach to dealing with complaints that objectively considers the interests of the complainant, the Dealer Member, the registered representative, employee or agent of the Dealer Member, and/or any other relevant parties.”

The issue of semantics is an important one: how you word your guidance has an impact on the outcome of a given complaint process. Complaint processes, from the internal all the way to the Ombudsman, take note of regulatory guidance. But the issue is of course more nuanced and detailed than this…..

The UK Financial Services Ombudsman uses the following terminology: “The law requires us to decide each complaint on the basis of what we believe is fair and reasonable. In doing so, our rules require us to take account of the law, rules and good practice in the industry. This is the way in which parliament specifically intended us to operate.”

The Canadian OBSI states similarly that they “We are balanced and objective in our work…Our decisions are based on what’s fair to both the client and the firm. We take into account general principles of good financial services and business practices, the law, regulatory policies and guidance, and any applicable professional body standards, codes of practice or codes of conduct”.

What does balance actually mean, especially with respect to consideration of interests?

Conflicts of interests are known to skew investment recommendations in favour of firms and registered representatives, with negative financial consequences for the investor. These financial consequences are either with respect to increased costs, hence impaired risk/returns on products and securities, and/or excessively skewed allocations with respect to actual risk profiles and for want of a better word, risk capacity.

If regulation assumes a buyer beware, caveat emptor, transactional relationship where disclosure is intended to satisfy mitigation of a conflict of interest, and where simple information parameters are used to define suitability for transactions initiated by an investor, and where it is assumed that the collection and calibration of these parameters is conducted with integrity, then the balanced consideration of interests would tend to support the costs and the wide boundaries of outcomes irrespective. A product recommendation, within current regulation does not have to be in the client’s best interests; it merely has to conform to the parameters of the KYC.

I say irrespective because conflicts of interest also risk influencing the parameter selection that lead the client towards a selection of parameters that may reflect the interests of the distributor. The sales process and its conflicts therefore risk overly influencing the parameters upon which a complaint process assesses outcomes, especially if the presumption is of process integrity with respect to their collection – note that industry risk profiling in research conducted on behalf of the OSC’s Investor Advisory Panel found that most industry risk profiling was not fit for purpose.

Continue reading

The FCAC & The Canadian Banking “Scandal”: how could they not see it coming?

The fundamental weakness of current regulation is that it relies primarily on effective consent by consumers, effective disclosure by banks and education by regulators. In order for all three layers of regulation to work we rely on banks’ commitment to good ethical conduct with respect to service processes. Take away ethics and integrity and over emphasise aggressive sales targets and the frame in which regulators depend on to protect consumers disappears. Is it not ridiculous that the largest fine the FCAC can impose on a bank for the breaches we appear to be seeing is a $500,000 fine?

From 2006’s, “The New Science of Sales Force Productivity”:

“They can get much more out of their entire sales force by using a hard-nosed, scientific approach to sales force effectiveness.…in a few years, they will almost certainly be standard operating procedure for any company that hopes to compete effectively in the global marketplace.”

“When we studied the results of a systematic sales force effectiveness program launched in several branches of a large Korean financial services provider, we found that the branches experienced a 44% rise in weekly sales volume, compared with a 6% decline in other branches. The top quartile of customer-service reps increased their product sales by 6%, the second quartile by 59%, the third quartile by 77%, and the bottom quartile by an astonishing 149%. “

Lucie Tedesco, Annual Consumer Session, Ottawa, March 30, 2017:

 Much like the organizations you represent, FCAC is focused on consumer protection. The financial marketplace is constantly evolving, and we have to stay in step with that evolution—and evolve ourselves. We are only as effective as we are prepared for emerging challenges and opportunities.

Take an industry where relationships have been built on trust, decades of trust, where these relationships have a natural point of sale advantage, where the regulator trusts the industry to treat clients fairly and whose main lever of regulation is education and mandated disclosure.

Add to this mix a highly concentrated banking sector, where most individuals already hold an account and where the route to revenue growth lies in selling successively more and more services and products each year.

And then add aggressive management of those sales targets.

Canada needs to scrap its over reliance on education and disclosure and the “tick the box exercise” that is consent and take heed of the changes to the competitive landscape and the well recorded weaknesses of an over reliance on disclosure as a regulatory tool.

Forget educating the public, the FCAC needs to educate itself as to the realities of both the industry and regulation of that industry.

Go Public’s Investigation

In March CBC’s Go Public investigative team reported on a burgeoning crisis in Canadian retail banking. Reports strongly suggested many bank employees (both high street and call centre) had come under intense pressure, especially over the last few years, to sell increasing amounts of products and services to customers; the only way to reach sales targets (lose your job or sell) was to, inter alia, cross sell/sell/up sell less appropriate higher cost products/services instead of, at times, more appropriate lower fee/cost alternatives.

Continue reading

Issues with respect to CSA and Expert Committee Best Standard Proposals

A recent e mail exchange allowed me to briefly raise again some of my issues with the current proposed best interest standards; one of the held within the recent CSA consultation and the other in the recently released Expert Committee report .  I note my comments here mainly because they raise important issues that I have not previously emphasised.


I do not believe that there is an existing Best Interest Standard for personalised investment advice in Canada; the personalised investment advice relationship under dealing representative categories is not recognised under the securities act and regulation. 

If there is a best interest standard it applies to the responsibilities of the broker relationship with respect to the scope of the transaction relationship as per agency law.  A best interest standard for the provision of personalised investment advice should be a fiduciary standard and I note that there are many academic and legal references to the fiduciary duties of agents with regard to the lesser common law scope of agency.

To gain a better understanding of the scope of the current best interest standard, as stated by regulators like IIROC, you need to understand the historical legal precedents and regulation applying.

I elucidate here with respect to an element of my understanding: http://blog.moneymanagedproperly.com/?p=5831 with respect to the historic of regulation and legislation.

There is nothing specific in the securities act, possibly because the basic common law duties of an agent are already covered and the act has its roots in regulating primarily transaction based relationships (Prof Deborah DeMott: “Basic unit of interaction in an agency relationship is not contract but instruction...”). 

Determining whether duties extend to the provision of personalised financial advice has hitherto been the realm of the courts, but the introduction of a best interest standard should have acknowledged, IMO, this duty for advisors (who represent themselves as providing these services) in statute (note no other jurisdiction that I have read has specifically attempted to distance their best interest standard from a fiduciary responsibility, indeed legislative intent has been that the best interest standard is a fiduciary duty – i.e. UK/Australia).  Instead regulators and expert committee have spent some time eviscerating these standards/principles of such responsibility.  

The best interest standard IIROC et al are confusing, I believe, is with respect to the scope of the traditional client/broker relationship and other activities of the dealing registration and not that of the provision of personalised investment advice.

From Arthur Laby’s Fiduciary Obligations of Broker-Dealers and Investment Advisers

“under agency principles, one’s fiduciary duties are tied to the scope of one’s responsibilities…Under agency law, the extent of one’s fiduciary duty is limited by the scope of one’s agency. The scope of one’s agency depends in turn on the power that the principal has accorded the agent over the principal’s interests. Thus, in determining the nature of a broker’s fiduciary duty, one must analyze the broker’s power over the assets or affairs of the customer. This principle often is stated in the language of trust: a broker’s fiduciary duty is limited to matters relevant to the affairs entrusted to him or her”

“The court stated that the fiduciary relationship between a broker and its customer is limited to the narrow task of executing the transaction…generally speaking, in the case of a non-discretionary account, brokers are not held to fiduciary standards, except perhaps in the narrow task of executing a trade…Why then did some nineteenth and early twentieth century courts hold that brokers were fiduciaries? The reason had little to do with the advisory function performed today. Cases that labeled brokers as fiduciaries centered more on execution or custody-non-advisory-related services-than on the provision of advice. Today, however, cases addressing whether brokers are fiduciaries focus heavily on the broker’s advisory function. The question often presented is whether an investor has placed sufficient trust and confidence in the brokerage firm to justify the imposition of fiduciary obligations. The trust and confidence referred to, however, is trust and confidence in the broker’s advice.”

But, as we know the nature and scope of the actual relationship has changed, and thus has the fiduciary duty implied likewise shifted to the wider scope.  As Laby says, fiduciary duties are defined by the scope of the relationship, so to say that fiduciary duties are impractical with respect to Canadian retail financial services to a certain extent ignores the fact that they already likely apply but are restricted in scope.  This restriction in scope is to the benefit of the industry and to the detriment of the individual investor. 

I am not a legal expert, but it would seem to me that the current regulation of the transaction has effectively allowed advisors to carve out exclusions from the fundamental duties of agency law with respect to the impact of commissions on fund selection, for example, re performance and loyalty.  The best interest standards proposed by the CSA and possibly the expert committee (I have not thoroughly reviewed this yet) seem primarily focused on reemphasizing these duties via a focus on what is really the best product, the transaction, as opposed to the best outcome, the personalised investment advice from which the transaction emerges. 

From Arthur Laby’s Fiduciary Obligations of Broker-Dealers and Investment Advisers ; “Although the scope of activity can be altered by contract, in the case of non-discretionary accounts, a broker’s activity generally is limited to conduct surrounding a particular transaction, whereas the scope of an adviser’s activity extends beyond a particular trade. The different scope of activity yields different duties….. If an adviser has agreed to provide continuous supervisory services, the scope of the adviser’s fiduciary duty entails a continuous, ongoing duty to supervise the client’s account, regardless of whether any trading occurs. This feature of the adviser’s duty, even in a non-discretionary account, contrasts sharply with the duty of a broker administering a non-discretionary account, where no duty to monitor is required.  The two accounts in this example are similar in nature-both the broker and the adviser hold themselves out as providing non-discretionary investment advice-yet the adviser’s duty entails ongoing diligence while the broker’s duty is episodic”

From “DISLOYAL AGENTS” Deborah A. DeMott: “The (US) common law defines agency as the “fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act…Moreover, agency law, at least in the United States, requires explicitly that an agent act “loyally for the principal’s benefit” in all matters connected with the agency relationship. A principal may reasonably expect loyal service, not simply the due performance of the agent’s other duties.

Someone obligated to act in their client’s best interests with respect to personalised investment advice has a different set of responsibilities to someone obligated to act in the best interests of their client with respect to the transaction within the scope of the traditional brokerage relationship.

The OSC BIS is not, IMO, a best interest standard for personalised investment advice, it is a best product standard (a de facto best interest standard for a transactional relationship) because its focus is on the end point of a process that is still attached to its fair dealing (transactional) root; in other words, paraphrasing Demott, a response to the basic unit of interaction of the agency relationship, the instruction.  

I believe the CSA consultation and quite likely the Expert Committee have muddied the water with respect to the best interest standard. 

Re the BIS/SBIS: what are its roots and where does it fit within agency law (does it reinforce, refresh or replace existing duties and if so which?) and what are the scope of the relationships being considered?  If the fiduciary duty is not being assigned to the provision of personalised investment advice then why not?  Is it through difficulty defining scope, in which case if the definition of scope and duty is being left to the courts what on earth is the standard itself and its weight and why risk defining a duty at all if not to aid clarity with respect to the duty at common law?  We know that courts take note of regulatory declarations of duties and their accountability.

The Expert Committee’s BIS wishes to keep out undesirable elements of fiduciary duty with respect to loyalty and conflicts.  Yet, if we look at US commentary, fiduciary duties would already appear to exist at common law with respect to the narrower scope of agency, so just what are these undesirable elements and what components of these elements are they excluding?  


Fiduciary Obligations of Broker-Dealers and Investment Advisers – http://digitalcommons.law.villanova.edu/cgi/viewcontent.cgi?article=1050&context=vlr

CURRENT ISSUES IN FIDUCIARY LAW SEC v. CAPITAL GAINS RESEARCH BUREAU AND THE INVESTMENT ADVISERS ACT OF 1940 – http://www.bu.edu/law/journals-archive/bulr/documents/laby.pdf

The Fiduciary Character of Agency and the Interpretation of Instructions By Deborah A. DeMott* http://www.law.harvard.edu/programs/olin_center/papers/pdf/323.pdf

DISLOYAL AGENTS Deborah A. DeMott – http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2481&context=faculty_scholarship

Comments on IIROC’s proposed guidance on Order Execution Only Services

Regulation in Canada often suggests that investors should take responsibility for their investment decisions and to educate themselves (perhaps much more so than other markets and jurisdictions), and have placed their primary focus over the years on disclosure to force such (CRM, POS etc). 

The retail model in Canada is also often portrayed as one where the “advisors” are merely helping the investor to make his decisions, more of a tool almost that helps links the investor with the necessary products:

If you’re an experienced investor, you may want an adviser who offers a wide range of products and lets you choose. If you’re newer to investing, you may be more comfortable with fewer choices and more guidance from your adviser.

The role of your adviser is to give you helpful, informed advice as you build and carry out your investment plan.

The more experienced investor appears to be assigned an even more precarious position of heightened responsibility for their decisions, even within the supposed safety of the “the regulated recommendation”! 

Yet, a one dimensional IIROC consultation on Order Execution Only Services appears to take the opposite tack and paints a picture of a world where responsibility and education are risks even to those investors who have expressed a clear preference to invest on their own account.  

Continue reading

My take on Best Interests: The CSA’s Roundtable on Consultation Paper 33-404, 6 December 2016

What was my main takeaway from the roundtable with respect to best interest standards?

Not only was there a lack of overt consensus over exactly what the proposed best interest standard is, but the elephant in the room, the distribution model, around which the standard is to be wrapped, was left unmentioned.  Or was it?

In Maureen Jensen’s introduction she made the following statement: “But any changes that we’re going to make must be appropriate for Canadian investors and the Canadian marketplace.” 

Continue reading

Double charging/dipping on fee based transaction accounts in Canadian Retail Financial Services

Double dipping is where “advisors” and/or their firms charge investors, with fee based transaction accounts, a fee on their accounts at the same time as taking commissions and other transaction returns on the underlying investments.  Since these accounts are meant to swap payment of transaction remuneration on securities held within the accounts for a simple annual fee that favours those with high levels of transactions, knowingly taking commissions and other transaction returns on investments held within these accounts would be a fraudulent act.

Double dipping appears to be a systemic issue in Canada with TD, CIBC, HSBC and Scotia all having been found wanting in this respect.   Canada’s regulators have, for some reason, decided to treat these breaches of firms’ and registrant obligations and regulations as uncontested settlements with no admission or denial of the charges, and have to date seemingly relied on self reporting of issues.

Continue reading

Will the real Best Interest Standard Please Stand……..UP!


In 2012 we were led to believe that the CSA was looking to introduce a fiduciary type best interest standard into the Canadian retail financial services market. The CSA referred to a “statutory fiduciary duty” which “would likely support a private law cause of action for damages by a beneficiary against a fiduciary…The principal question is whether advisers and dealers should have an obligation to act in the best interests of their clients when providing advice to them. “

The current CSA Consultation states that its best interest standard is not a fiduciary duty and would not interfere with existing client/registrant relationships. The standard would be a standard of care and operate as a principle. The CSA document did not explain the reasoning behind the framing of the rule but it may have left some clues.

My attention was drawn to the fact that the “best interest standard” was to be inserted into the existing obligation to “deal fairly, honestly and in good faith”.

Continue reading

Best Interest Standards And Legislative Intent: a global view

In conclusion, Europe, Australasia and the US have all exhibited legislative intent with respect to implementing best interest/fiduciary standards for part or all of the investment advisory market place; Europe to date is set to implement best interest standards for the wider market place and much more restrictive and higher standards for those who wish to be seen to be delivering independent financial advice.

Canada is the odd one out! It neither has legislative interest in best interest standards nor does it have unified regulatory interest in best interest or fiduciary standards. Indeed, its best interest standard, as should become clear, is not a best interest standard per se but a best product standard, which places Canada’s regulation, in say UK regulatory time, somewhere in the mid 1980s.



Continue reading

The Tone From the Top: The CSA’s Best Interests Standard Consultation

A few submissions picked up the nuance in the proposed best interest standard, but not all.  As with much change in the regulation of the retail side, it started out as intended and got beaten down.  Like many things in Canada’s financial services industry you really have to know what you are doing.  Otherwise you have no other choice but to trust in the expertise and professionalism of those you rely on for advice or protection from bad advice.  

The OSC (Ontario Securities Commission) and the FCNB (New Brunswick Commission) are in favour of watered down change that is being paraded as the real deal, but in truth is not.  I do not blame them for trying to salvage something from the grand project.  The BCSC (British Columbia’s Securities Commission) is not and does not even want to hear Canada’s voice on the issue.  The rest have “reservations”. 

I think the fact that most Canadian regulators (our regulators are provincial) appear not to believe it is important for advisors to act in investors’ best interests is poignant.  Pure and simple it means regulators are not willing to act in investors’  best interests.  This is amongst other issues a tone from the top!    

If you cannot trust your advisors and you cannot trust your regulators, then who can you trust, and for what?  There are a few canaries in the coal mine, the OBSI being the most important, but these look like they can keep on singing, for no one who counts appears to want to hear them.  

In other countries the tone has been set by the legislature, that is the democratically elected government.  Governments around the world have pushed for higher standards. 

The lack of tone in Canada goes all the way to the top! And so here is the introduction to my submission:


The Consultation discusses a “best interest standard” for the Canadian Retail Financial Services Market place. The standard is stated as a standard of care and is effective in regulation as a principle (as per statements made in the benefits of a best interest standard) and not a rule. The proposed best interest standard is an about turn from the 2012 statement of intent which was framed as a fiduciary standard and a marked change in direction from the 2004 Fair Dealing Model which acknowledged that the relationship in the industry had transitioned from that of providing transactions and incidental advice to that of advice and incidental transaction.

The proposed standard is not a best interest standard. The CSA or rather the OSC and the FCNB have distanced it from a fiduciary duty and thus removed its regulatory intent and have clearly stated that it will not interfere with current registration categories. This is material. One of the reasons for introducing a best interest standard was to acknowledge that the advisory relationship no longer remained that of an arm’s length commercial relationship where common law would only grant a fiduciary relationship under extreme circumstances, but one where the representation of service had moved to that of the provision of advice and the duties thus elevated. The consultation provides clear instructions to the courts that the relationship is transactional, of the product, where advice is episodic and incidental.

Instead, the consultation, as part of the Proposed Targeted Reforms, has recommended that services that provide advice under a discretionary authority be accorded a clear statutory fiduciary duty. Investors receiving advice under non discretionary mandates, which rely on the same processes, should not be accorded less protection and lower standards of care. The fiduciary liability with respect to advice is represented by the gap between service representation and the integrity of a firm’s service processes to deliver the represented standard of service. These are processes over which the advisor and firm have complete discretion. We know that service representation does not promote the advisor as just a product seller, but this is the relationship which the CSA are regulating and failing to disclose.

To have a fiduciary duty for the provision of investment advice means that you are responsible for making sure that the representations of service are matched by the processes that construct, plan and manage. The Consultation has therefore framed the advisory service as one focused primarily on the point of the transaction. The act of according fiduciary status to the discretionary form of the advice has thus isolated the non discretionary service as one without discretionary process worthy of reposing trust, and placed investors advised under these services to a far lower standard of investor protection and regulatory care. The CSA has effectively prioritised the interests of the industry over those of the client. In this instance, and given the presumption that transaction remuneration is set to continue (note the extensive work on conflicts of interest in the consultation) it is difficult to see how instructions to registrants to prioritise investors’ best interests possess any rigour or tone from the top.

Instead of noting the fiduciary liability that exists via industry representations of service, the consultation chooses to focus on consumers’ misplaced trust and behavioural issues as two of the core reasons behind impaired service outcomes; that and a need to make regulatory expectations with respect to suitability clearer and enforcement of rules more effective. The consultation appears to ignore its own research, with the exception of the Brondesbury report laden with bias over investor responsibility (support for which was not found in any of the research referenced in the report), and the burgeoning literature in this area.

Canada stands alone in the world with its intent to distance itself from imposing fiduciary standards and higher professional standards for the provision of investment advice, and I detail the arguments for this in the submission. In Australia, UK and the US there is clear legislative intent to establish fiduciary standards and while the term fiduciary does not appear in UK and Australian rules for reasons of definition, it does appear in legislative intent. In the US there is both legislative intent and common law precedent for fiduciary duties for non discretionary investment advice. Canada is the only jurisdiction where there is a complete absence of legislative involvement, where the blame for impaired outcomes fails to mention the role of advisors and industry. What would a reasonable person think? A reasonable person would think that regulators are not concerned about advice, but about maintaining the market for products as is.

The proposed best interest standard is nevertheless a progress of sorts. But it is not a best interest standard, rather it is a best product standard and should be inserted as such, either as principle or as a rule into current regulation. It should not be termed a best interest standard as it will further the misunderstanding and misrepresentation of service, exacerbating the existing and unattended fiduciary liabilities within the system. Likewise the Proposed Targeted Reforms, irrespective of how unwieldy and complex they are going to be to regulate and comply with, represent some progress with respect to the standard of care in the suitability assessment.

But the progress is minor and the fractures in the system are clear. We cannot continue to stretch the transactional model. Investment is process driven, if the industry is to evolve regulators needs to encourage the development of process for the construction planning and management of assets, not regulations for transaction compliance. The Proposed Target Reforms talk of pushing transaction ideas through a suitability assessment, but the reality is transactions should come out of such a process. This is all back to front. In order to solve issues such as the advice gap, a problem not occasioned by regulatory change, but a persistent and long standing problem of the masses, we need to develop process. The reason why the advice gap has taken centre stage is because process has taken centre stage and the imperative of process is where the future of the industry lies.

The CSA may have good intent but its ignorance over investment process and construct is obscuring its understanding of the problem. It wishes to keep the horse and cart and forsake the car, to regulate the car as if it were the horse and cart, to blame the outcome and to effectively enforce consumers to comply with an archaic understanding of the financial services industry.

Presentation to the Expert Committee To Consider Financial Advisory And Financial Planning Policy Alternatives on Behalf of SIPA

Please note the following small presentation I provided with respect to the above on behalf of the Small Investor Protection Association on 3 May in Toronto.


The Small Investor Protection Association fully supports recognising the importance of professionalism in financial planning. 

Financial planning is an important component of a wealth management universe focused on the processes and frameworks that underpin the efficient planning, construction and management of personal financial assets and their liabilities over time.  

Wealth management is a complex area and those firms and individuals providing advice within it have considerable discretion over the processes that plan, structure, manage, educate and communicate.  We believe that this discretion, the complexity of the processes and the asymmetry of knowledge and experience place the professional advisor and the firm in a position of great responsibility.  SIPA believes that this places fiduciary duties, accountabilities and responsibilities on advisors for the processes that plan, structure, manage and communicate outcomes irrespective of whether the service’s nomenclature is discretionary or advisory and irrespective of title.   

Existing regulation, at the advisory level, needs to widen its remit to those services’ processes that underpin wealth management outcomes and away from a predisposition with the transaction.

It fully supports raising the standards and the integrity of service processes involved in the planning the construction and management of financial needs service processes while deemphasising the role of the transaction in process, regulation and remuneration.

The problems we see in the delivery, quality and accountability of service outcomes lie with a system that rewards the transaction and that overly focuses on the transaction in its service processes.  The focus on the transaction de-emphasises the importance of construction, planning and management in advice based service processes and constrains the development of services that put the client’s best interests first and foremost in the process.  The current system does not operate wholly in the best interests of the investor, whether this is at the advisor, firm or regulatory level.  

As the CFA institute and the Canadian Advocacy Council for Canadian CFA Institute Societies both point out, “the current regulatory scheme is incomplete”. 

SIPA is concerned over the division amongst Canadian regulators as to the merits of introducing best interest standards and the removal of commissions.  It is also concerned that even the proposed statutory best interest standard may itself be diminished by industry interests and calls on Canada’s democratically elected legislatures to become directly involved in the modernisation of Canada’s regulatory system. It believes that advisors’ responsibilities and duties with respect to advice, processes and communications are indeed fiduciary ones. 

And from SIPA’s own submission on the subject:

“This illusion fed to the general public is unfair. It results in many personal tragedies when hard working people lose their lifetime savings quite often late in life when they do not have the time to recover. It creates desperate life-altering events that result in health issues, loss of hope and faith, disruption of families and sometimes victims taking their own life.”

We live in a trusting society. Canadians believe they can trust professionals that are regulated like doctors, lawyers and other professionals. Yes, they trust their “Financial Advisors” because they believe they are regulated professionals. They are not aware they are simply sales persons without responsibility to look after clients’ best interests; they do not feel a need to study medicine or a need to study finance and investments. They are busy with careers and family.

A small investor exclaims and asks “why are regulators not collecting fines for serious violations of securities regulations?”!

This is a brief post on a very important and highly complex issue that cannot be done justice in the space provided.  There are many issues today, in Canada’s financial services industry, where funding for independent research of issues impacting consumers would be of tremendous value to the continuing debate over standards and regulation

Canada’s Small Investor Protection Association (a small non profit organisation that serves as a voice and resource for Canadian investors who have been subjected to financial abuse and/or bad advice by the financial services industry) recently released a report by one of its members on unpaid fines levied by regulators on industry participants but which have not yet been collected.  The report has been discussed in numerous articles, the most detailed of which is found in a piece written by Yvonne Colbert of CBC news.

Continue reading

Comments on Advocis’ Consumer VOICE Survey 2015 – Part 1

It is frustrating to see so much energy expended on trying to argue what should be, so clearly, an indefensible position: that commissions are such an essential part of the provision of professional financial advice that their removal would destroy the value, rational and delivery of advice itself.     

Advocis’s Consumer Voice Survey 2015, “Investor Insights on the Financial Advice Industry” makes some bold statements about the risks to the provision of advice in the event of a ban on commissions and reports on what I believe to be a heavily biased survey of “consumer views” on the value of advice, conflicts of interest and the impact of commissions on financial advice.  I will delve further into this report in a subsequent post.

Continue reading

The Zone of Interest…I think Ellen has argued very forcefully for best interest standards!

The Zone of Interest is a book by Martin Amis that fictionalises the administrative zone of Auswchitz (and I highly recommend it).  An investment world without best interest standards, where the old, the infirm, the weak and vulnerable are maligned, abused and consumed, is too a Zone of Interest:

I was particularly drawn to a recent article by Ellen Bessner, a lawyer representing financial firms and “advisors”, entitled “Serving senior clients is becoming a more risky endeavour”.

The article is about the increasing prevalence of complaints made by elderly investors and highlights a generalised case of a senior who complains, with the help of a family member, about investment performance (i.e. losses) brought about by unsuitable investments for his or her age.

The article then goes on to flesh out 4 reasons as to why this is happening, none of which discusses the fact that “advisors” are rarely trained to professional standards; commissions drive advice and transactions drive commissions; suitability standards drive transactions and not portfolio and hence risk management structures; recommendations and rationale are not required to be in writing and little or no point of reference with respect to the risk/return/asset & asset allocation/liability profiles of the often mixed bag of investments are ever provided.  Moreover no disclosure of the true nature of the relationship is likewise provided, and this has not changed under the CRM.  The construct is designed to deceive, designed to place people in a place where they are least likely to be able to accept the risks of the transaction relationship they have been guiled into. 

And, according to Ellen, the reasons why there are more complaints:

Number 1

Perversely Ellen blames the fact that aging populations has led to a drive to educate investors about their rights in contractual relationships: this education and information she says has led seniors to take their advisors to court, to seek independent judgement on their advice via the financial services ombudsman (OBSI) or to take their complaints to the regulators.  Perhaps Ellen would like no education over contractual investment relationships or dare I say it human rights: ignorance does indeed breed a blissful transaction relationship.

Number 2

The second point is really point 1 again, but I will elucidate: it complains about the fact that there is no cost to taking a complaint to OBSI, that you can hire a lawyer for free (though she does not let this one hang) and that “lawyers” see dollar signs when they see an elderly client with a financial complaint…those damned lawyers!  Ellen tends to omit a great deal of the road that often leads people to the point where they have no other option but to seek help from OBSI, lawyers and regulators, as well as the road beyond, and she also omits to opine on those “advisors” who never pay their regulatory penalties or those firms named and shamed by OBSI who refuse to pay up.  The picture has not been fully painted, but one point is clear, investors have rights and this a problem.

Number 3

Point 3 is about investors buying the highest yielding investments available, the highest risk investments available, because they have not saved enough and they need the highest returns possible to meet their expenditure needs.  So we have here an admission that yes, investments were not suitable but that the “advisor” was not responsible.  Responsibility is an important issue and present “suitability standards” allow “advisors” to avoid this nicety, this responsibility to balance risk/return and financial needs through portfolio structure, advice and education.   Ask yourself this question?  Where is the record of the process whereby the “advisor” made recommendations over structure and content appropriate to financial needs and risk aversion, the client declined and wanted something much more risky?  Well, it ain’t there and that is the problem, or a good part of it.

Number 4

Point 4 is a different matter and I am not sure why it has been slid into this argument, but it has its uses and I will aside here: in a best interests standard regime, advice and recommendations would focus on the needs and disposition of the investor of interest and manipulations of the sort described would find it very hard to survive. 

I think Ellen has argued very forcefully for best interest standards!

Compromised by its many biases the Brondesbury report completely misses the point about fees!

From one critical perspective this report appears to blame consumers of advice for the outcomes of a business model compromised by transaction remuneration.  Little is said of the inadequacies of suitability standards and their regulation or of the failings of investment processes focussed on the transaction.  Lacking such balance the report appears to advocate for the transaction model and thus is pared of its credibility!

If you had stopped reading the Brondesbury report into Mutual Fund Fees at the first summary conclusion on page 6, you might have walked away thinking the report was in favour of fees for the right reasons:

“Evidence on the impact of compensation is conclusive enough to justify the development of new compensation policies.”

If you had read on you should be left in some doubt as to how much of a marginal benefit a move to fees would have on investor outcomes.  The report appears to build an argument that suggests investor behavioural biases are the most important vitiating impact on outcomes and that advisors are merely responding to their transaction requests.    

Continue reading

Are Canadian regulators ring fencing consumer investing behavioural biases in favour of transaction returns?

“we suspect that much of what we see as impact of compensation is just investors failing to make rational decisions.” P53 of the Brondesbury Report on Mutual Fund Fees.

I am in the midst of reviewing the CSA commissioned Brondesbury Report on Mutual Fund Fees and am ploughing through the reference material which supposedly underpins its conclusions.  Amongst the many nuggets I have unearthed is the following taken from “Investors’ Optimism: A Hidden Source of High Markups in the Mutual Fund Industry” :

Previous works have identified investors’ optimism bias towards equities issued in their domestic market. In particular, academic research on mutual funds has focused on investor’s lack of financial literacy. …These empirical findings of investor’s deviation from rationality are in line with our model’s emphasis on investor’s limited financial knowledge of the mutual fund industry.

Investors’ optimism bias can be closely related to their lack of knowledge of the fund market, leading them to choose sub-optimal benchmarks such as bank savings instead of low-cost index funds or ETFs. Besides, investors’ optimism bias is probably influenced and reinforced by the marketing practices of mutual funds, which promote the sale of fund shares.

The reference to sub-optimal benchmarks is both noteworthy and ironic because both the new Point of Sale disclosure documentation for mutual funds and the performance reporting requirements laid down in the CRM2 lack mandated performance benchmarks. 

Interestingly the Canadian Securities Administrators had earlier proposed a GIC or cash based benchmark for Point of Sale mutual fund disclosure documentation, but baulked at the last minute for a number of reasons. 

So why were Canadian regulators looking to implement “sub optimal benchmarks”?  Were they ring fencing consumer behavioural biases in the interests of transaction remuneration or were they themselves acting in ignorance?  We may never know but the point is an interesting one and much more so given the deeper contextual focus in the  Brondesbury report on investor behavioural biases (chapter 5):

“Behavioral biases of investors are not easy to overcome. Behavioral biases affect advisor behaviour (just as advisors affect investor behaviour), investor choices of investment, and ultimately, investor outcomes”

“Time is a precious commodity to most advisors. There is only so much time an advisor can afford to spend to overcome the behavioral biases of investors, regardless of how they are compensated”

Investor behaviour biases lead to sub-optimal returns and these biases can be confused with compensation impacts

Behavioral biases of investors are not easy to overcome and they are a key factor in sub-optimal returns on investment. This poses a real limitation of the conclusions we can draw from the research literature, when we look solely at clients of commission-based advisors.

If there is no comparison between different forms of compensation, one can easily be misled into believing that sub-optimal behaviour is the result of the advisor’s recommendations and not, at least in part, the behavior and attitudes of the investor.

There are two issues related to behavioral biases that must be mentioned here. The first is the question of who is responsible for overcoming the behavioral biases of individual investors. While helping clients to do so may be something that a top-notch advisor will choose to do, we are not aware of any rule or principle that points to de-biasing as an advisor or a firm responsibility, regardless of compensation scheme unless a failure to do so impacts ‘investment suitability’ in some way.

“we suspect that much of what we see as impact of compensation is just investors failing to make rational decisions.” P53 of the Brondesbury Report on Mutual Fund Fees.

This quick post introduces some of my concerns with the Brondesbury report and my belief that many of its conclusions and analysis remain mired in a transaction mindset that continues to beset regulation of advice in Canada.   Regulators and, it would seem, some esteemed others appear mired in a perplexing behavioural bias towards “what does and does not represent investment advice”. 

Are they advisors or salespersons and do we have a transaction or an advice based service process?


I was thinking of submitting a few arguments to round 3 of the point of sale framework, but flogging a dead horse gets kind of tiresome after a while and also raises questions over one’s own intelligence.  

Needless to say I have not been surprised by many of the industry or “industry funded” comments.   I would like nevertheless to draw attention to some points made in the Fasken Martineau submission.

Continue reading

Naming and shaming and business titles

Two recent additions to arguments I have been following: the first from a CFA Institute blog and the second from FAIR Canada.

“Naming and Shaming”: Canada’s Move to Call out Bad Actors Sets Investment Industry Example

Our profession could do with quite a bit more of this practice, whereby we don’t shrug and wait for regulators or the media to call out the bad actors and bad practices in our midst

IIROC Guidance re Business Titles and Designations

“..the overarching problem with titles and designations is that Approved Persons at IIROC are allowed to hold themselves out as “advisors” when there is no statutory obligation to act in the client’s best interest and this is inherently misleading to consumers. “

Would the Canadian government and regulators please take note:

From A New Era of Fiduciary Capitalism? Let’s Hope So, written by John Rogers, CFA, president and chief executive officer of CFA Institute.

“In the public policy arena, governments that promote long-term savings, reduce taxes on long-term ownership, and require transparency and good fiduciary governance can help hasten this welcome change in our financial markets.”

The definition of suitability is being warped by an insane distribution culture.

OBSI is fighting a losing war against leverage, and with its latest name and shame the mark is on the current point in time.  

While all the recent leverage name and shame cases are to do with the last market downturn, the refusals to pay are all to do with the next.   If companies were to pay these cases now, they would put a line in the sand about the suitability of leverage and set a precedent that would cut them off at the knees in the next downturn. 

Continue reading

Adviser, advisor, financial adviser: but should we have the word advise in there at all…?

We all know that most financial advisers provide advice as to how much to save, how to invest, where to invest, what to invest in and when and how much to sell, if at all.

The trouble, in Canada, lies in the accountability and responsibility for that advice.   I am not going to quote any one particular study, or name any one particular company or firm, but most consumers (in most countries) believe the advice they receive is made in their best interests by advisers/ors committed to professional standards of conduct, and most firms market their advice as a very important, if not the most important, component of their service.   So are they advisers/ors?

Continue reading

OBSI Name and Shame

I would like to refer readers to the recent OBSI name and shame press release.  It concerns Richardson GMP, a firm that has been accorded a Fiduciary Certification on its discretionary mandates.

The OBSI reports are sparse and it is difficult to discern just what the securities at issue are, but I would hazard a guess that they are in the asset backed/collateralised loan/mortgage backed area given that the problems arose during 2007 and 2008 and looked to relate to once highly rated paper.

I can see why many firms would not want to reimburse investors for normal market losses, and in most instances, where a portfolio is properly structured, I would agree with them.  But it looks as if structure and transparency over structure were found lacking and I do wonder why Richardson took the risk to their good faith message in this particular instance.  I fear perhaps the lawyer’s hand and not pragmatic business logic.   But then again there is too little information here to really go on.  

However, what concerns me in the “power of ten realm” is that we are at heady market valuations and who knows how many shaky foundations are set to be levelled in the months and years ahead.

FAIR Canada & IIROC Request for Comments re Client Relationship Model – Phase 2, Performance Reporting and Fee/Charge Disclosure

I would refer people to FAIR Canada’s submission on CRM phase II.  It makes some good points re the following:

A) discount brokerage disclosure,

B) definition of trailing commission,

c) points re the clients not directly paying trailer fees and such charges being for services rendered,

d) short term trading fees and deferred charges, and

e) re requirements to report on investments not defined as securities in legislation.

IIROC’s guidance for leveraged investment

I can see that IIROC have put some real work into this and have largely done as much as they can given the constraints they are operating under: they cannot rule against leveraged investment or unilaterally move outside of a transaction remuneration regime; this is the main securities regulator’s job, if not a government level responsibility.    

Continue reading

Principle based versus rule based regulation and the hidden benefits of a best interests standard.

Regulation and investor protection begins at home, not at the regulatory level or with the courts.

There is a lot of confusion amongst the regulated that a move towards a best interests standard will lead to more rules.  This is incorrect.  They will lead to more principles and fewer rules, less conflict and better outcomes, greater self regulation and higher levels of investor protection and much reduced regulatory intrusion.  But not overnight!

The ability to deliver best interests standards depends on well structured processes that depend on a well defined set of decision rules.  Strong processes need only be regulated by principles, as the processes contain all the rules.   The trick is to make these processes transparent and accountable to a standard (best interests).  

Regulation + process = leverage. 

Continue reading