WHO GIVES A FIDU?

FIDUCIARY 101..... OR WHO GIVES A FIDU?

In keeping with industry tradition of backward processes and thinking, I will start with part 2 and then move on to part 1. This is important to reinforce the understanding that the sales discussion is most important and is always front and center. The information component required to make an informed choice will be provided at the end ....for those few who get all the way to the end! Think of it being just like a mutual fund sales conversation where key information is delivered well after the sale is closed.

PART 2:
So let’s get to my main topic: Fiduciary 101:

An advisor is a salesperson. A trusted advisor should be a "fiduciary". What is the difference and why should an investor care?

Fiduciary Duty would require an advisor to be legally and morally bound to put a client’s interest before their own interest.

Maybe I am just too simple a person but I cannot help but ask “why is this such a big deal for an advisor”? Why would any investor not want to be assured their advisor was acting in their best interests? We all understand that salespeople work to maximize commission, so it is always a case of "buyer beware"! But what if you did not know your salesperson was a salesperson? What if they created a false and misleading title to fool you? In that case a salesperson might deceptively call themselves an "advisor", "financial planner", or "investment manager", "retirement specialist", "estate planner" or any number of misleading titles! But underneath the sheepskin lies the cunning wolf we call a salesperson! A word of caution to all investors, whether experienced or a novice: If approached by a salesperson using one of the above deceptive titles, immediately put your left hand over your wallet and back away slowly! Place your right hand in your pocket and make a fist so that a pen cannot mysteriously appear in your hand to sign any seemingly harmless document!They are cunning so try to avoid direct conversation or answering any leading questions

But common sense and integrity aside...... let’s just look at real life for an example.
Starting Premise: For a fiduciary obligation to exist we would need to have a situation where one party has far more expertise, knowledge, access to information, and skill than the second party to a transaction. Now let’s look at the advisor/salesperson relationship with a new prospective investor.

STEP ONE IN SALESPERSON RELATIONSHIP:
The salesperson will:
- proclaim their accreditation and designation from an educational institute (typically Canadian Security Institute ) signifying both knowledge and skill
- explain their experience in the industry and with their current employer to show expertise as an advisor and money manager
- sell their access to current privileged information from company analysts and direct access to mutual fund managers and portfolio experts

The client will:
- Complain they do not understand what happened to their money with the last guy they trusted
- Profess a greater knowledge than they have for fear of looking like a pigeon to be plucked
- Sign whatever they are told to get the process started, regardless of any true understanding of the jargon
- Write a cheque or sign a transfer document
- Abdicate most or all decisions to the new saviour/advisor/salesperson

STEP TWO:
The salesperson will:
- Prepare a Know Your Client questionnaire to say whatever the salesperson pleases, exactly as they are trained to by their compliance department (department of obfuscation)
- Explain vague terms like “risk” in such a manner as to suggest only morons would claim to be low risk and only vegetables look for conservative returns
- Have the client sign forms to purchase securities being careful to:
o Avoid showing any alternatives that are lower cost
o Maximize the commissions to the salesperson without disclosing amounts or options
o Keep the salespersons employer happy by pushing proprietary securities
o Do everything they can for the client up to the point where an action might infringe on the advisor commissions or the parent company’s profitability

The client will:
- Nod when requested
- Sign where told
- Ignore the poor performance for years before getting frustrated and returning to step one.

WHAT WOULD THE FIDUCIARY DIFFERENCE BE?
Step 1:
- THE ADVISORS FIRM WOULD ENSURE THE ADVISOR HAD PROPER SKILLS AND ACCREDITATION SO THEY WERE NOT EXPOSED TO A LAW SUIT FOR VIOLATING THE FIDUCIARY OBLIGATION TO THE INVESTOR
- THE ADVISOR WOULD REVIEW THE PLANNING NEEDS AND INVESTMENT REQUIREMENTS OF THE CLIENTS SO INVESTMENT DECISIONS WERE BASED SOLELY ON ESTABLISHED CLIENT NEEDS
- THE ADVISOR WOULD STAY UP TO DATE ON PRODUCTS, FEES, COMMISSION STRUCTURES, PERFORMANCE OF SECURITIES AND REGULATORY REQUIREMENTS
- LESS TIME WOULD BE SPENT ON THE ADVISOR STORY AND MORE ON THE INVESTOR STORY

Step 2:
- THE ADVISOR WILL COMPLETE A THOROUGH ASSESSMENT OF THE CLIENT NEEDS, RISK TOLERANCE, AND KNOWLEDGE
- THE ADVISOR WILL EXPLAIN THE K.Y.C. FORMS AND ENSURE EVERY BOX TICKED IS APPROPRIATE
- THE ADVISOR WILL REVIEW THE UNIVERSE OF SECURITY OPTIONS AVAILABLE, DISCLOSE WHETHER THEY ARE RESTRICTED FROM SELLING CERTAIN TYPES OF SECURITIES, AND SELECT SUITABLE SECURITIES FOR THE CLIENTS NEEDS
- THE ADVISOR WILL EXPLAIN THE SECURITIES CONSIDERED, EXPLAIN WHY SOME WERE SELECTED OVER OTHERS, EXPLAIN THE COSTS OF ALL OPTIONS CONSIDERED AND EXPLAIN HOW MUCH THEY PERSONALLY WILL MAKE FROM THE PURCHASE OF THE SECURITIES IMMEDIATELY AND OVER TIME

Conclusion: Oh yeah, I get it now! Being a fiduciary would be a real pain in the butt for a sales person trying to maximize revenue with a quick deal! And yeah, if a client had the full range of product options, profits from hidden fees would be tough to maintain. And of course it costs money to actually train advisors on all the options they need to consider and the licensing they require to sell those other options. In fact, many of the sales persons disguised as advisors would have to spend months and thousands of dollars being trained to meet the new standards.

The compliance people would need to learn why a KYC questionnaire is filled out instead of how it should be filled out to protect an employee!

Of course all you salespeople hiding behind advisor titles can relax. We will not see fiduciary duty extend to the advisor industry in the near future! Whew, that was scary for a moment.... it was like a weird dream where investors have rights and advisors work for clients not security and fund companies!

PART 1: THE CONFERENCE

I recently attended a conference on FIDUCIARY requirements in the investment industry. Most advisors did not attend as they are not fiduciaries; and I suspect they also do not know what the big multi syllabic word means. In fairness, almost all investors also ignore discussions on “fiduciary duties” since they only tend to learn about advisor/salesperson obligations after they have been fleeced.

Based upon the conference discussions, it was clear to me that the usual entrenched positions are still in place. As always, the fiduciary question excites the lawyers who make a living from investor disputes and it excites the investment manufacturers (fund and insurance companies mostly) who make a killing by avoiding fiduciary obligations. The third excited group are the investor advocates and regulators who know fiduciary obligations should be in place but cannot seem to get attention or focus on the issue.

And again based upon the conference dialog, the third group will remain easily distracted by sidebar issues that prevent them from really working towards the end goal of investor protection.

A last comment on the conference would be to lament that the Ombudsman for Banking & Investment is very much an under-funded, under-focused, and under-performing group. The first two “unders” contributing to the third “under”! If an investor was willing to slog through the investment broker/mutual fund advisor complaint process, stick handle through the idiotic Bank employed Ombudsman, and then finally reach the end game Ombudsman for B & I: they would find themselves tired and frustrated from what has been a 3-6 month battle just to get to the starting line.

At this point they would be assured that a small over-worked group will look at their situation sometime in the next six months or so. They would also find a group that does not consider the battle to be one of giant company versus little investor, but rather a battle of equals. Taking a cautious non controversial approach they will likely try to saw off some workable agreement and get everybody to go away with a small piece of the loaf. Based upon the example situation presented to the conference, the small guy will get no break when confronting the big company lawyers and liars with paperwork to back them. The O for B&I has no big stick to make change, cannot order restitution and may well, at some point, be looking for work again from one of the big bank/insurance/law firms that oppose the little investor.

On the legal front, it was almost embarrassing to listen to the lawyers who work for the big firms. No duty or obligation is so small that it cannot seem far too onerous to enforce on the poor hard working advisor!

Hell, the Canadian contingent at the conference was still debating what name to call a salesperson as if that minor detail was an insurmountable hill to be climbed! While Europe and Australia lead the charge on big issues, Canada has no momentum and no process for change!

It seems the Canadian establishment is going to obstruct the regulatory changes on every front for fear a small win for investors will turn the tide of the battle. We should expect no concrete ideas or solutions from the industry or any willingness to listen. They will jam every panel, write a sea of position papers, demand second, third and fourth reviews and basically ensure no progress occurs!It is as close as we can get in Canada to having a Republican Party mentality of "obstruct at all costs!" Think I am exaggerating, then consider the recent Point of Sale document debates! It's been years of haggling and infighting to get a watered down thin gruel of a document.

Of the distinguished panellists present, Allan Hutchinson of Osgoode Hall was one of the few who seemed to get it! Peter Smith from the U.K. FSA also clearly got it and actually was able to do something about it for U.K. investors. I thank FAIR and the Hennick Centre for making the conference possible. Maybe next time they will find a way to have an independent investor voice on a panel as well as all the official institutions, but overall, a job well done in laying out the size of the opposition faced by investors in Canada!

Your "I give a fidu!" advocate.....soismike

p.s. The firm I work with has just passed an international fiduciary certification audit so fiduciary duty is real and we "walk the walk" while most firms just "talk the talk"! Check out Weigh House Investor Services at CEFEX for details on the certification process available for all firms who act as fiduciaries for clients.....including the one you deal with!