Tuesday, November 18, 2008


A friend was lamenting the other day, about why all politicians lie. I had to clarify that they do not lie, they obfuscate! She responded, what the heck is that supposed to mean? I said, “ah ha, it works!

OBFUSCATION: to make something obscure, to confuse

Politicians obviously are the masters of obfuscatory practices, however those in the investment business can take their place of pride alongside, some might even say “under”, politicians. The business of advising investors has long been a very fertile ground for the obfuscators.

At first, in honing their practice, advisors sought confusion via simply creating a “lingo” that excluded those investors not on the inside, or in the know as it were.
Terms were designed to make investors feel small. Who knew whether a 60% margin meant you had to put in 60% or your loan was 60%?, who knows a “put” from a "call", what's an option or a warrant? Yup, this is tough stuff, I better pay a small fortune to hire a translator who we will call a “broker”.

The broker quickly left investors broker so a new obfuscation was required; let’s call them advisors! But, you cry, aren’t they just sales people? Most don’t go within a mile of a prospectus, they just read the “hot sheets” from head office and sell whatever crap is on the sheet. How can they be called advisors…..ah, obfuscation!

The next stage was more devious, as you would expect from an industry with no oversight to speak of. Instead of picking off investors one at a time, they needed an obtuse process that could channel investor lemmings to the advisory cliffs! But they couldn’t just say, hey suckers come see what we are selling now. The old “pump and dump” was well known and not nearly as lucrative as it had been. Thus we entered the new age of the “mutual fund”! This gathered lemmings by the thousands and told them all about sharing risk. What wasn’t explained, was a thousand people taking too much risk is a thousand people losing too much money!

Obfuscation (I like the word obviously) was not limited to explaining the underlying risk. With mutual funds came:

  • hidden fees to obfuscate the costs,

  • misleading fund descriptions ,( think “balanced fund, Canadian Focused funds, Opportunity funds”),

  • false reporting ( a mutual fund is not an asset class folks)

Having learned that you can make more money by suckering the masses on a large scale, the industry started to look at how they could pry cautious GIC investors from their money. Low and behold, along comes the Principal Protected Note (PPN)! If ever a name was going to obfuscate, this was it. Investors thought they were the “protected “ party.

If markets took a big dip, they were protected and when it skyrocketed they got to “share” in the gains. Note the obfuscation around the word “share”. The advisor got paid BIG commissions up front, the manager got fat annual management fees and a totally unwarranted share of profits through capping market gains. And if the markets had a bad spell in the middle of the 5-7 year terms, hell management cashes out and moves on to the next sucker game. The investor, well your locked in with all "market participation" cancelled for years to come!

Don’t worry, we will be back in a few years to hand you your inflation ravaged principal! What, you didn’t read the 89 page small font section on “protection events”, oh, you thought you were the protected party? Sorry, I thought you knew what obfuscation was? Look, don’t worry. When you get that piddly principal back we have a great new product for you….guaranteed to make up for any losses! What, details…..don’t you worry about the details, you have an advisor! He can clearly spread the obfuscatory fertilizer well enough to separate you from your money…..and we have some great news for you!
You will (snicker, snicker) be fully informed (giggle, giggle) according to the “principle based” (how can I keep a straight face) "Point of Sale" documents coming into effect!

Oh, you’re skeptical? Who designed the POS document? Why it was designed by a committee of the same folks who oversaw the PPN’s. Wait, come back,.... I’m warning you... those GIC’s are bad. They're too simple, they have no hidden fees….you’ll be sorry!

I trust the above was not too clear....after all, I am a professional!
sois mike

Sunday, November 2, 2008

P.O.S. = Profits Over Service


To quote U.S. politics; You can put lipstick on a pig, but it is still a pig!

I recently reviewed the POS document from the Joint Forum of Financial Market Regulators. Given the makeup of the group I will admit I was worried they would gloss over the key points and produce a lame document. I could NOT have been more wrong!

They did not gloss over the key points when they produced the LAME document. They flaunted the fact they knew what should have been in the document, and told you why they don’t really care! It was a bold and clear statement that investor’s rights are well back of industry rights!

It looks like Joe Killoran, the over-energized investor advocate, is proved correct. His POS alternative may provide way too much information, but at least he starts from the viewpoint that investors often can read above a grade 6 level! (I can’t make this crap up; it is a requirement of the Joint Forum that the POS be written for no higher than a grade 6 level of reading. Thanks for protecting us dumb investors from all those big words like “capital loss” and “hidden-commission ”.

I began to copy sections that concerned me but quickly realized I was copying most of the document. I was reminded of a statement by Warren Mackenzie, of Second Opinion who stated “the industry is always pleased to move the investor slightly forward so long as it does not impact commissions”. But you get the point; investors get a story instead of facts and any concrete practical requirement gets so watered down it becomes irrelevant by the time you read it.

But a poor blogger like I can’t do this justice, so let’s let the Joint Forum speak for themselves. (to those who are sarcasm challenged, no such interview took place, but the quotes do belong to the Joint Forum. The witty dialogue is all mine).

Fundsellor: What's the secret to remaining so vague that this document does not give any real information to those masses of mutual fund investors?

J.F.: “It does not outline specific requirements for the new regime. Rather it sets out concepts and principles agreed upon by members of the CSA and CCIR. The framework will form the basis for implementation.”

Fundsellor: Huh?.... anything I can actually understand?

J.F. “In response to comments, we have also revised the framework to include less frequent updating and filing of the Fund Facts…. Other aspects, including the specific content under some items, will be left to fund managers and insurers to determine.”

Fundsellor: Is there any way we could make it easier to just pretend investors have the incriminating….er, necessary information to evaluate the fund?

J.F. “Electronic delivery could include, for example, sending directly to the investor an e-mail with an electronic copy of, or link to, the Fund Facts, or directing the investor to the relevant Fund Facts on the fund manager’s or insurer’s website.”

Fundsellor: So they do not actually have to give and explain the document to the investor…..slick! How did you come up with this neat dodge…er, option?

J.F.: “Many commenters were opposed to the requirement to deliver the Fund Facts before or at the point of sale for subsequent purchases because of the potential disruption to the purchase process. “

Fundsellor: Obviously we can’t have lack of vital information slowing down the sales commissions or the industry will really have a crisis to deal with!

Fundsellor: With all this asset backed paper making people nervous how are you going to deal with short-term investments?

J.F. “We have therefore excluded money market funds from the point of sale delivery requirement because they are generally of low risk..... In these circumstances, the adviser may go back to the client after the initial recommendation of a money market fund and resume the e discussion of what fund or funds may be more suitable as a longer-term investment. “

Fundsellor: I get it; no big commission equals no disclosure. That will teach investors to buy low fee products! But seriously, if I really want to sell a juicy commission product is there any way I can set it up to avoid all this?

J. F. “. If the investor initiates the purchase” (bolding by the writer not the J.Fer’s)

Fundsellor: That’s easy enough to arrange. It’s not like anybody else was in the room with us. How do we sell this gigantic loophole?

J.F. “We agree that investors who initiate the initial purchase of a fund through an adviser should be able to decide whether they want to receive the Fund Facts before or after the point of sale. “

Fundsellor: How about the prospectus. A few clients read that and then give me some flack when I maybe glossed over a few fees or risk factors. Can I escape that problem too?

J.F. “ Dealers will have to deliver the simplified prospectus to investors only on request. “

Fundsellor: Have we been able to hide any other fees?

J.F.: “A few commenters suggested adding the trading expense ratio (TER). We considered these comments, but for simplicity, we have kept the reference to the MER only.”

Fundsellor: How about the real basic stuff? I assume there is no way to get around providing meaningful benchmarks now?

J.F. “A few commenters wanted to see benchmarks added to the performance information. We considered these comments, but based on our principle of simplicity, we have not included benchmarks. “

Fundsellor: You can do that?.....I mean, well done! I don’t suppose you got rid of the risk disclosure as well?

J.F. “The framework contemplates use of the IFIC risk scale at least until an acceptable alternative is developed. “

Fundsellor: Wow, we get to use the risk ranking designed by the companies selling the funds. You guys are amazing! Next you will tell me we can still hide my fees from the investors! Sorry, that might be expecting a little too much. You folks can’t work miracles…..can you?

J.F.: We have removed the adviser compensation section and changed references from “adviser” to “firm”.

Fundsellor: so you mean I can hide behind the firm and not disclose my skim on the fees, great! Hang on. Are you sure the investors won’t figure out that they are paying all the costs for everybody? How did you word that section?


Fundsellor: Wow, you guys couldn’t do better if you had all worked directly for the fund companies and advisors. Just kidding!
I noticed that the asset allocation does not show the split between fixed income, cash, and equities. How can that even be considered asset allocation?

J.F.: “Flexibility will be permitted in certain areas to allow fund managers and insurers to describe their funds accurately. These include:
-the description of the fund’s investments
-providing up to two pie charts for investment mix
-the type of allocation used for pie charts "

Fundseller: Well, thank you to the J.F.er’s on the committee for the great job. I haven’t seen so thorough a review since the Warren Commission looked into the grassy knoll! I only wish I could have smoked the “joint” your committee was named after!

Soismike: Well folks you heard it straight from at least one end of the horse! No full fee disclosure by advisors, no benchmarking, no clear asset allocation, and no proper risk ranking! Thank goodness the industry has regulatory oversight to protect us……Say it ain’t so Joe, say it ain’t so!