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.

Number 1

They opine over the absence of a cost benefit analysis (CBA) as to whether or not the POS fund facts should be delivered prior to the point of sale. 

Personally, I do not think this is a CBA issue: under current regulation the investor is deemed to be responsible for the transaction and clearly if you are to be responsible for the transaction you need to know what you are buying.   Fund facts in this context have to be delivered prior to the point of sale.

There are of course costs are there not?  

If you depend on the transaction and as many transactions as possible and you are forced to wait for an investor to receive a POS document and to read it, the transaction may be delayed or derailed.  Who knows investors may start asking questions which will need to be answered, taking yet more time. 

Benefits: good question!  

Will the investor benefit.  Possibly at the start they may get confused as to why they have to be handed the fund facts, after all in the past they relied on the instruction of their advisor.  “Do I have to read it now, do I have to understand it all?” and I am sure it will all be passed off as a formality, which it is really, so “you can understand the recommendation better”, or “keep it for future reference”.

Clearly there is a big difference between understanding the fund recommendation at a fundamental level, especially if it is an active fund with high costs and even more so when there is a lack of any written recommendation concerning portfolio structure and rationale for the fund within that structure, than at simple parameter to parameter level.   I have made the point previously that regulators have a misplaced belief in the KYC model: they believe that it is an effective lowest common denominator for investment advice when it is not.

POS data does not provide enough information to help a client make an informed investment decision: an investment professional would not be able to make that decision without a structure to place the fund into and a more detailed analysis of the fund itself.   Neither of these are the province of minimum standard transaction services.

No, I doubt very much whether the costs of the administrative change will outweigh the benefits of the administrative change.  But that is beside the point.

If the client/advisor/er were operating in a best interests standard environment where a recommended structure was needed to place the fund into, where the advisor/er was responsible for the integrity of the structure and the efficiency of the fund recommendation, then a simple explanation of the fund profile would have use and would have benefit and would not curtail the service process.   But this service process would have a totally different cost and a totally different service structure and the industry has long argued that they do not like the costs of this structure nor the benefits it would confer to the investor.

Unfortunately the industry already presents itself as one of providing valuable and reliable advice based relationships, in fact the type of relationship where a fund fact would not have a material bearing to the outcome.  But they do not want to be held to such a higher standard because then they would no longer be able to profess to one (advice) while practising the other (the transaction). 

The Fair Dealing Model of the OSC long ago recognised the conflict between the message and the content of the delivery, so are today’s regulators hanging on to their hats in the storm instead of the reins of the beast they are riding?  Only time will tell but an erroneous belief that the POS will assuage meaningful asymmetry may be a guide as to the balance of probability.     

So we come to the next point: Number 2

It is at this point that I curse Fasken Martineau not for their arguments but for the fact that you cannot copy and paste the text of their pdf.  

The proposed amendments will require that a dealer deliver the relevant fund facts to the investor before the dealer accepts an instruction from the investor to purchase the securities.  

If you look at the industry and legal arguments made in the best interest standards submissions you get a totally different perspective of what is being defended.  The following is comment from Ms Paglia of Torys from the 25th June 2013 Best Interests Roundtable discussion:

My concern is when you have an industry that wants to be compliant and wants to act in the best interests — and I can tell you, representing advisors, they say “best interest” all the time. If you say to any given advisor on any given day, “Do you have an obligation to act in the client’s best interest,” they say, “Of course. Of course I do. I try to do that every day.”

So the industry and its advisors change the argument depending on whatever the threat to the ability to deal is.  Where best interests standards want to be brought in we have the argument that advisors already provide this, that clients depend on advisors for advice and that the CRM is the way to regulate it.  When we have the POS issue we call advisors dealers and we speak of investors making the transaction request.  So which is it?  In a way it is both: it is an industry pretending to advise and hiding behind the regulation of the transaction to get away with bad and self interested advice.

Go figure! Until regulators and the government(s) step up, we are doing no more than flogging a dead horse because this stage, the submission stage, is a front and will not solve the fundamental problem.

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