Saturday, January 16, 2010



As 2009 arrived it seemed like the only silver lining to the economic and investment mess was the fact that true change would come to the investment industry on the investor rights front. It seemed inconceivable that the media, politicians and regulators could ignore the disastrous consequences of the unfettered sales approach of the securities and mutual fund salespeople. Similarly it seemed a certainty that investors would not allow the status quo to continue; either voting with their feet or demanding redress from the security sales forces that had miserably failed in their duty of due diligence.

The financial crisis exposed irresponsible sales activity by all levels in the security industry. Indeed the only common denominator seemed to be the absolute lack of due diligence by all participants. The bond rating agencies were on the defensive arguing that their triple-A ratings did not mean the securities were safe; just that they existed, in some form, somewhere, and contained some stuff that smarter security firms seemed to somewhat understand. Clearly they had no intention of supporting the investors who counted upon their ratings nor acknowledging the fact that ratings were deficient if not fraudulent. Integrity is a very rare commodity in the securities field....only found in amateurs such as retail investors.

So against that tumultuous backdrop, how did investor rights do in 2009? Well, the answer is clearly a split decision! International investors, supported by strong regulatory bodies and engaged politicians, have made strong progress. Australia and Britain have taken aim at hidden trailer fees that distort the honesty of the sales forces selling mutual funds. I suspect that within 5 years trailer fees will be limited to only Canadian sold mutual funds. In the U.S. the government has taken dead aim at the sales person conflict of interest and is looking to enforce a fiduciary obligation on all financial sales people. The surprise for most people is discovering that sales people, hidden behind advisor titles, actually have no duty to protect their investor clients.

So, in the glass is half full view, the international rights of investors have prompted action worldwide. Investor rights have been supported by numerous regulatory driven legal actions, including large fines and settlements levied against Canadian banks in the United States. Worldwide there is a consequence for the firms who lead the retail investors down a greed filled path.
Now, let’s talk about Canada. At the start of the year we hoped that Canadian complacency would finally be overcome by the need to act to protect our financial futures. As with Britain, Australia and the U.S., our democratic, free market approach would allow the will of the people to manifest itself in corrective action. The time was now and the need was great! So let’s reflect on what has occurred in Canada.

Federal Politics & Media: Alas, the political class continued to play politics in Ottawa and self preservation and power games (think our coalition farce of a year ago) were the focus of our political parties as well as our myopic media. Between the Toronto Star, The Globe & Mail, and CBC, the media heavy weights did what they do best: they focused on their own agenda and had little time for the plight of Canadians. In a midyear blog I espoused the belief that action required an engaged media and politicians who could use the media focus to drive legislation through parliament. Again, I note that by media I do not point at the financial media, but rather the editorial pages that are the key to broad awareness of complex issues. Clearly I was far too optimistic that issues driving worldwide change might be noticed in Canada.

Provincial Governments: With securities regulation being well within the provincial mandates, and with Ontario in particular having a nanny state approach; it seemed to be a natural fit for the Provincial Government of Ontario to take up the plight of the Ontario investor. The ability to influence regulatory bodies meant that Daddy McGuinty had a great opportunity to improve on his primary focuses (banning pit bulls, banning cell phone use, mandating helmets for all activities involving movement). Again, the plight of investors fell to the wayside as the provincial focus was on helping auto workers maintain massive incomes, benefits, and pensions not available to investors. Indeed, if investors had the pension plans of either McGuinty or an auto worker this focus on investor rights might well not be a major issues for investors.

Regulators: With regulators worldwide lighting the path it would seem that investors in Canada might benefit by even some simple "copy cat" legislation. In short, we did not need to create the better way, just follow the better regulators. Alas, in a bizarre way, Canadian regulators have used the mess of 2008 as an excuse to assist dealers at the expense of investors. How so you ask?
Dealer Representatives: One of the few points of clarity for investors in this bizarre regulatory mess was the fact that security salespeople were licensed as salespeople. The primary focus of regulators should be to add clarity to the security industry. Instead our regulatory folks thought this would be a good time to blur titles so that investors have no idea whether they are dealing with a sales person striving for a fee or commission, or a fiduciary advisor focused on investor needs. Now you will deal with a “dealer representative”, which is Latin for “huh?” Apparently the solution to the concern about selling securities nobody can understand is to create titles that nobody can understand! Clear only to IIROC ,we can presume.

Point of Sales Disclosure Documents: The regulators had a great idea when they surmised that investors would benefit from a clear Point of Sale (POS) document explaining the features, benefits and risks of the security you are about to buy. They also correctly determined no normal investor could read or understand the legal prospectus. This great idea, however, was quickly attacked by the investment industry. My father often said that “a camel is a horse designed by a committee”. By the time the self serving SRO’s had flooded the process with objections, the document was missing a few rather vital components. Small questions like “how much does my sales person get for selling me this”, “what other purchase options exist for this security and what would those options pay my sales person”. As well the document was not sullied by "performance against relevant benchmarks" or information on the risk ratios that might assist an investor. Clearly investors were not sharp enough to understand a Sharpe Ratio!
Similarly, the regulators are either not sharp enough to know when the industry is playing them or are more focused on dealer relationships than investor protection!

Product Complexity: Well, the P.O.S. is at least a partial victory. It speaks to the need to make disclosure more transparent and thus protect investors from complex products with risk profiles they cannot easily quantify. On the heels of this success (?) the regulators then opened the markets to higher risk and higher complexity products. Counter-intuitive to me, but clearly a quid quo pro for security dealers. Rather than be chastised for the abuses occurring with leveraged ETFs that were sold by sales people with little understanding of the risks, now sales people could sell complex derivative products with even higher risk potential. After all, what could possibly go wrong?...... Welcome to CFD’s and the joys of combining gambling with investing. Throw in “blind pool” investing and mix well until your portfolio melts! My forecast is that abuse of these products will result in significant losses for many unwhitting investors over the next 5 years.

Pet Peeves:
Well, as you can see, 2009 was not what investor advocates in Canada hoped for! Will it get better? I am afraid the answer is not likely. I wanted to end this dismal year with a message to two groups who can potentialy make a difference.

FAIR: The advocate community has been further splintered with the addition of FAIR, a foundation who appear well positioned to bring advocates together . As the only advocate group with a source of funding (tainted as it may be), FAIR needs to rally investor advocates. Arrogance toward those who have long fought the advocacy battles is both unwarranted and unhelpful. Focus more of your efforts toward changing the industry and a little less towards chastising the approach of other advocates.

Ombudsman Offices in the Banks: An ombudsman is supposed to investigate impartially on investor concerns in dealing with the banks. The office of the ombudsman was not intended to be a “tactic” used to shield the bank. The offices however appear to be fulfilling little more than the role of a speed bump. They slow, frustrate, and deflect investors with little apparent desire to resolve conflicts. Again I offer a little unsolicited advice; if you have completed the report on an investor complaint without ever speaking to the investor, you are probably not an ombudsman and should change your title.

Investor advocates and investors should mourn a year lost…….and then get back at it! I just received a notice today from TD Waterhouse raising the fees on a registered account so I can help them attain a new profit record in 2010! Obviously the timing is meant to show the empathy they have for the many investors who they exploited in their "advisor" services guidance in 2008 and who have yet to get back to where their retirement accounts need to be.