Sunday, December 6, 2009

The Birth of a new Fund

Birth of a New Fund

Even the cynics in the mutual fund industry had to scratch their collective heads when the latest fund “solution” was unveiled by Invesco Trimark. It might be useful to stop a minute and walk through how the newest mutual fund came to be. New funds do not just appear without a thought to what the market either needs or will bear. It costs money to launch a fund and it costs money and time to wind down an unsuccessful fund. The industry is quite efficient at burying the dead within the living by merging the failed funds with other more successful funds to make them disappear. However, every new fund is somebody’s best idea and the fund industry needs to breed many more successes than failures if they are to continue to thrive.

The Winning Conditions: To be successful and receive support within a fund factory, a new idea has to hit two primary thresholds:
1- Can we market it successfully? Funds are “sold” not bought. As such, the fund must have sex appeal within the investing marketplace. A great example is creating a fund focused on Gold when the market is hysterical about either a crash or hyper inflation. The gold market has its moments, as all markets do, but buying a fund after the hysteria has occurred means getting in high and likely selling off shortly thereafter at a market low. Having said that, it is as easy as falling off a log to market a fund during the hysteria.

2- Can we incent Advisors/Salespeople to push our new fund off the shelf and into portfolios? Because funds are a “sold” product, you need to excite the sellers to be successful. If funds were “bought” and not sold products then you would need to excite the investor. Fortunately, while investors can be fickle, salespeople are not. The way to an advisor/salespersons heart is through their wallet. Salespeople sell to make commission.

The Birth: The latest fund to enter the investing world is PowerShares Fund which combines the efficiency of ETF investing with the (?) of Mutual Fund investing.

The Challenge: This is the point at which the marketing folks start to earn their dollars. We know that ETF Index funds are efficient, low cost, and highly diversified. We also know that investors are becoming keenly aware of the popularity of ETFs. Combine that with the knowledge that ETFs are the enemy of the high cost, inefficient salesperson sold funds and you understand the challenge. How do we meet the demand for “bought” ETFs with a “sold” mutual fund? An equal marketing hurdle is how do we get salespeople to even have a discussion about the feared and hated ETFs with a potential investor?
The Solution(s): The challenge requires two solutions. The first is to make the investor feel they are getting the latest hottest craze, these new fangled ETFs, without needing to actually investigate what makes then so efficient. For that we need a name that screams ETF and avoids any in-depth detail on what makes then work. The focus needs to be “look you can get ETFs without leaving your salesperson”! Knowing most investors are totally reliant on the salesperson to select the funds, this approach meets the criteria for a successful marketing campaign.

The second part of the solution is to position the new fund as lucrative and beneficial to the salesperson. First we commit to the old standby; a fat commission via lucrative trailer fees. When the trailer fee is sufficient the salesperson/advisor will be more than happy to ignore the investment paradox of a high fee, non-managed fund. The second part is to play on the advisor/salesperson fear of the growth in ETF investing worldwide. The salesperson/advisor is well aware the ETF trend is a threat. What better way to handle the challenge then by jumping on board with a fund product wrapped in the disguise of an ETF.

Advisor/Salesperson Pitch: The product sales pitch is a great one and easy to understand.....what, sorry? Oh, let me be clear, the sales pitch is to the salesperson not the investing client. Why would we pitch an investor who has no clue what the salesperson is about to sell them? It would be a counterproductive extra step, as well as a potential death blow to the fund launch. No, let’s stay focused on who really matters, the salesperson/advisor who butters the fund company’s bread!

Now, as I was saying, the sales pitch is easy. Say you have clients upset that the funds they own massively tanked during 2008/2009 and they are thinking of starting a couch potato low cost ETF approach. Rather than slandering the ETF approach you can now say “no problem, I can take care of that for you with no need for a messy discount broker account and all that reading and research you need for a couch potato portfolio”! A further side benefit for the salesperson/advisor is that the ETF, with a huge 500% or so increase in MER costs, may very well underperform some of the mutual funds the investor owns! You get to rake in the trailer and if the fund underperforms due to high fees, you just tell the client “that’s why I recommend the high fee active managed funds; you should have listened to me!”. Clearly a win-win for advisors.

Well, that brings us to the end of the process. For clear proof that funds are “sold” and not “bought”, keep a watchful eye on the volume of the new fund sold by advisors who, up to now, have railed against ETFs as an extremely poor investment choice for their clients.
If the advisor/salesperson truly believed the ETFs were a poor product, then the ETF fund should be a total flop! If the advisor/salesperson is motivated primarily by trailer fees, the fund should be a raving success. I know which way I am betting!

For a great article on this new fund launch visit Jonathon Chevreau’s blog, Wealthy Boomer . He raises all the relevant points and leaves no room for waffling! The follow up industry responses seem to be a hodge podge of whining and denial.

Your “still looking for the meat” blogger, SOISMIKE

Saturday, October 10, 2009

HST & Fund Folks


It is of course the oldest joke in the book when it comes to politicians (their lips are moving), however you can make a case for the fact that the fund industry is a much bigger source of disinformation than the local politician!

As for how blatant the lie can be....well we only need to look to recent events to see how little the industry respects the intelligence of the average investor. Failure to disclose all relevant information allows the industry to “stand up for the average investor” publicly while continuing to shaft the public by carrying on just like the folks the industry attempts to vilify!

How about this from a recent Globe & mail article....

” At the heart of the fund industry's lobbying effort is one of the simplest concepts in personal finance: the magic of compound interest. Take the example of a 45-year-old investor who puts $20,000 into a mutual fund in an RRSP. This hypothetical fund comes with very high fees (2.75 per cent) but nevertheless churns out some excellent gains; by the time the investor is 85, he has a nifty nest egg of about $835,500.
Here's the punch line: If not for the provincial government imposing its dastardly HST, that number would be $70,000 higher. “We would hope that the government would not want to take 350 per cent of your initial investment if they truly understood the consequence of this tax,” writes Patrick Farmer, chief executive officer of EdgePoint Wealth Management and the author of this example.”

So why is this less than complete disclosure….well part of dishonesty is telling only a sliver of the truth. You know the old saw about when I point my finger at you, 3 fingers point back at me! Well, the industry complaint is that the government can only get away with this because the fee is hidden from consumers. The point being if consumers saw this egregious fee they would surely storm parliament and have the Harmonized tax reversed.

In fact I absolutely agree with the Fund Folks on that point. And truth be known, the Fund Folks (FFs) know this because they have been charging the most ridiculous fund fees on the planet using exactly that same deceptive approach. All fund fees are hidden in the investment returns where an investor cannot see them….EVER! What the uninformed investor does NOT know WILL hurt the investor, but not the FF’s (nor the politicians of course).

So to summarize, when the government hides a fee of say 12% HST on the MER fee charged to a fund it is equivalent to theft from an unsuspecting investor…. but when a fund company hides a fee approximately 8.5 times larger from the same investor it is good business practice.

THE TRUTH: The truth is that the industry has used considerable pressure on the government to gain an exemption from disclosing its GST charges. Check other receipts and you will see the GST number and amount for virtually every purchase you make! Why not the MF MER’s that you currently pay GST on?

Well the FFs realize that the average investor may well discover that a $100.00 GST receipt means the fund fees were $2,000.00 last year. At this point the investor becomes “informed”, the advisor likely becomes “fired” and the FFs become “unemployed”! In fact, it only takes about $80,000.00 in MFs to generate those types of fees! A $100,000 fund portfolio at 2.5% MER generates $2,500.00 in MER, which taxed at the current 5% GST would be $125.00….etc,etc.

So back to another old parable….. The guy crapping on you (politician) is not always your worst enemy, and the guy helping to wash the manure off (the Fund Folks) is not always your friend. The only certainty is that it is always the investor who comes out smelling bad!
Raising a stink on HST…….sois mike!

Friday, September 4, 2009

Who Is Fighting Against Modern Commission Theory

It is encouraging to see the number of organizations and ex-industry veterans who continue to lead the charge against what we view as the greedy and unethical majority in the investment industry. More advocates seem to jumping on board every day. In fact the advocacy boat is getting so full it might well sink under its own weight. So who are these advocates and what should they do? Lets first frame the issue as viewed by SOIS Mike, and then look at the players in the world of advocacy.

The Modern Commission Theory holds that the actions of sales persons are directly driven by the ability to derive maximum revenue. Any suggestion that salespeople work in the interests of clients to mitigate risk and ensure suitability to naive at best and most likely is deceitful.

In an effort to sort out the playing field I have categorized some of the key players on the advocacy front (my opinion only of course) below
Infiltrators (Infil-traitors?): Groups that on the surface are there to help!

The Ombudsman Office of each of the major banks: The banks are not the nicest people to deal with at the best of times! But they are amongst the cleverest of the investment folks. Outwardly they have convinced many clients that they have an army of compliance folks just waiting to jump on any trade that is not a perfect match to the client’s needs and risk profile. In fact the compliance folks serve a much more important role in the banks. They are the canary in the coal mine. Complaints come in and are regularly assessed to see what damage they might do to the bank profits and bank reputation. If your claim is deemed to pose little risk you should not be surprised to get a quick note back to you saying your case has been reviewed and you signed and acknowledged the actions of your advisor/manager and thus have no claim. In fact, the compliance folks do a great job of training bank staff to ensure you signed the forms in such a fashion as to minimize bank risk. The problem is the forms are supposed to minimize your risk not the banks! Your complaint provides the bank with all the details they need to build a case against your claim. They have many experts and you are pretty much on your own.

Self Regulatory Bodies: The folks at the IDA and MFDA attempt to provide consumer education and basically a friendly face to anybody looking for information on investing. Enough said about self regulatory bodies in the past; suffice to say beware strangers offering candy. In the world of investments you need to ALWAYS follow the money trail. Who is paying for whom to do what to whom? SRO’s are member paid and industry funded to ensure the most egregious issues are dealt with before the industry gets a black eye. The day to day slashing and high sticking do not get any attention from these referees.

Nice Guys Finish Last: This group represents the folks with good ideas and a good heart, but they are entering a gun battle with only a dull knife to defend themselves.

F.A.I.R.: This group is relatively new and as stated in the past, I do not like their chances of making meaningful change without a regulatory cannon to threaten the powerbrokers in the industry. The approach of keeping a watchful eye on the industry can only drive change if FAIR can harness the media. The ability to harm reputations can get the attention of the industry; however, again we must follow the money. The media will support the ideals of FAIR but only up to the point it causes stress in the advertising budget when a big bank/investment dealer threatens to pull an advertising.

Media: Within the media, there are folks who know right from wrong (well, within the business section anyway). The journalists who challenge fund fees and hidden costs and lack of disclosure are brave souls indeed. They depend on the investment industry for the revenue that keeps the paper/TV going and keeps them employed. The net result has not been that they sell their souls for ad revenue (at least some of them do not), but their ability to criticize is limited to the generic issues. It is hard to point to a single firm like Investors Group and say “hey, your MERs are way too high”, but they can point to the industry as a whole and do in fact do so on occasion. Unfortunately many are cheerleaders for the industry and a consensus approach will never happen as long as the media battle for ad revenue.

The Ombudsman for Banking Services and Investments (OBSI): The bank is a powerful master in the Canadian investment scene. With their own Ombudsman offices being ineffective (even the politicians did not fall for that one), a Bank Ombudsman was set up to handle the investors not completely overwhelmed by the Bank’s in-house Ombudsman. Unfortunately you need to go through the bank sham to get a hearing with a truly impartial arbitrator for your complaint. How good are these guys......well RBC has stopped dealing with the Ombudsman for Banking because they found the Ombudsman was actually listening to complaints and making sound recommendations that cost the bank real money! Clearly that cannot be allowed to continue! So RBC took their ball and bat and set up their own cosy game. Good luck with those RBC complaints! The issue here is clear to see. The Ombudsman simply cannot force investment dealers to toe the line. As to why the bank would have an option to back out of this government driven approach is a question for another day. The OBSI clearly states they do not act as an advocate for investors....the scary thing is they might be as close as we get to a true impartial advocate. Of course, follow the money and they again are funded by participating firms.....does this conflict never end!

The Don Quixote’s: In this category I include all of us who knish our teeth at the investment shenanigans but who have neither media clout not enforcement powers. While we are too many to name, you only need go to a bank board meeting to see somebody stand up and challenge the status quo. Below is a short list of people who continue to tilt. I exclude myself from the list, not because I do not tilt at windmills, but compared to the folks below, I have accomplished nothing worthy of being included.
The folks below continue the battle with long odds against them. They rile the giants and annoy the heck out of the pretenders in the industry. They just do not give up no matter the odds, the lack of power, and the lack of clout!....and of course, lack of money!

If you look at the sites noted, you will understand that the power of the collective efforts is leveraged by the exposure provided by the internet. The internet however is unfocused and hard to motivate for a single cause. (Unless United Broke Your Guitar of course). So what are advocates to do?

FIGHT MONEY WITH MONEY: The Political Solution is "Money=Power=Money"

The key, if not yet obvious, is to follow the money! Politicians get elected by fanning the flames of issues to motivate voters, who in term vote for the politician and thus give them access to the money! Most voters are totally disillusioned by the investment world and how it operates.GREAT! That makes it a top of mind issue for politicians!
Our only hope of making meaningful change is to have a political solution.....why? Because politicians trade power for money! And the only way to deal with the powerbrokers is to have more power.... and the only one with more power than the investment world is the political world. And they will only use the power in return for THE MONEY!
In short, the message to all advocates is focus on the politics (as disgusting as it may be to many) because the regulatory approach just does not work! Instead of bringing our dull knife to the gun fight, we need to borrow a tank from the government and resolve this issue for good!

You’re “not likely in my lifetime” author....SOIS MIKE

Sunday, July 5, 2009

Investor Hopes: Canadian Security Institute or Investor Advocates

Grey Knights and Mixed Messages: The Canadian Securities Institute or Investor Advocates

As I look through the massive reams of media commentary on Investor Education and the flurry of activity from so-called SRO’s and other industry shills, two questions come to mind?

1- How did Canada, a well educated, conservative, rational nation of mostly honest people end up with such poor consumer protection and awareness in the area of investing?

2- Who is going to be the white knight that will expose the flaws in a multi-billion dollar industry that does not want to change?

The questions are quite simple; the answers a lot more vague than I would have thought. To set the scene lets first acknowledge that much of what is wrong is the result of entrenched financial interests. Things do not just happen....people have agendas and set out to make things the way they are.

Having said that; it also appears that some people with great intentions have added to the problems they were trying to fix. A primary reason seems to be that the white hats always focus on changing the consumer behaviour while remaining either helpless to deal with the industry or unable to find a strong regulatory body to act for the consumer against the industry.

So, on to question number one; How did we get here?

Since investor education is considered a current buzz word, let’s focus on the body that claims to educate both the advisors/brokers/salespeople as well as the public. The Canadian Securities Institute is a company that sells courses required for people to enter the financial securities industry. They also provide courses on securities and investing for the average investor as well as financial planning courses. There is a very good chance your investment advisor and insurance agent have taken a CSI course to get licensed. Thus we have the source of much of the training that has given us the advisors of today in one spot, managed by one firm with a pure education mandate! So that appears to be strength, right. But when you scratch the surface things are more grey than black and white.

The Canadian Securities Institute makes more money by attracting more people to the industry and thus providing more courses. They also make more money if the mutual fund firms are happy with the process and send all the new recruits to the courses. Thus the courses are “mutual fund friendly”.
Sample from a wealth management course: “An investor is looking to invest money for two years and is offered a 10% return by a mutual fund....” . Let’s stop right there! This is a course for wealth managers (Wealth Management Techniques) and it uses an example of a 10% mutual fund return over a 2 year investment horizon! That might seem like a moderate return to a hedge fund like the one that financed the privatization of the CSI, but a couple planning on using the money in 2 years should never be in a hedge fund. The assumptions are clear; mutual funds offer options such as guaranteed 10% returns and clients with a 2 year time horizon before a major purchase should look at mutual funds. The course does not clarify what type of fund offers such a deal of course! It is little wonder new advisors think funds are a bullet proof way to get rich when the advanced planning courses they take teach them just that!
As stated, nothing in the industry is ever all bad or all good. .The CSI does teach ethics and does a good job of teaching the benefits of diversification and of explaining the workings of many securities The main challenge is that the educational industry is intricately tied to the fund industry and is not in an independent position to expose the issues and challenges that come with funds. In many subtle ways (as in the above example) the institute has given in to the fund industry and abdicated the educational independence required to provide critical comparisons of competing strategies. That's why our education system has public funding and not corporate ownership; otherwise Coca Cola would be taught to be health food!

Question 2: Who will be the white knight!
Independent consumer advocates are our only current hope! Amazingly, it is refugees from the fund companies who are its biggest critics and who are opening the doors on the industry’s activities. Warren MacKenzie, an ex-insider, wrote the Unbiased Advisor which is an expose on how advisors exploit investors. (Disclaimer; I work with Warren)

As the likes of hardline investor advocates Joe Killoran and Ken Kivenko rattle the chains of politicians and the regulators; small parts of the industry are being exposed to light. The media plays a big, if somewhat conflicted, role as well. Consumer advocates like Ellen Roseman, Rob Carrick and Jonathon Chevreau tread the line of exposing the bad parts of the industry while realizing fund companies advertise a lot in their papers. William Hanley from the National Post has written very direct articles on the industry shortcomings as well.

Unfortunately, I suspect the above advocates will never be in the same room together due to some strong personalities and significant differences of opinion. Nonetheless, they will continue to push the envelope (Ken and Joe) and build on the small gains (the media folks) and collectively they will move investor advocacy forward. As for Warren, he is trying to change the industry from the inside with a radical new advice model that may or may not gain traction.
Where will F.A.I.R. land in this mix? Too early to say as they have not really shown their true colours yet, just the tangle of connections to the industry money that makes me so nervous.

Are we winning? No.

Will we win? I do not know.

Will the above folks quit the battle and surrender? I hope not!
Tilting at windmills.....sois mike

Thursday, June 11, 2009



The Canadian Foundation for the Advancement of Investor Rights was launched in September of 2008. Undoubtedly you have been as overwhelmed with their good work as I have!

Mr Pascutto, the Executive Director, has raised the funds necessary to launch the Foundation from IIROC ; and of course IIROC is a merged entity created by Investment Dealers Association (IDA) and the Market Regulatory Services organization (MRS). We are delighted to see that such distinguished investor advocates are willing to back this venture!

For those of you without a sarcasm detector, the Investment Dealer Association and MRS are two of the very good reasons we need an advocate for the investing public. Both are “self regulatory bodies”, which in the investment industry seems to mean they help ensure the big players run the industry without having to worry about real regulatory bodies constantly demanding they do what is right for investors!

The goals of an organization often provide some insight into how they will carry themselves in the process of assisting you and me. As an investor advocacy group I would expect that the foundation would “provide clear policies for immediate implementation”, “demand action on outstanding issues”, “fight to ensure investors are treated fairly”! In fact the primary goals include such hard hitting items as “making reports”, “proactively identifying trends”, and when bad stuff happens to investors they will “encourage action”!

So, you just lost your pension money in the market, discovered the advice you received was suitable for either an 18 year old with $40.00 to invest or a gazillionnaire looking for losses! You are mad, frustrated and most importantly broke! Your Advisor referred you to his boss, the Investment Dealer , who said tough luck buddy. You complain to the ombudsman for the dealer (if they even have one) but again, tough luck! ! You can go to the Ombudsman for Banking Services and Investment (OBSI) , again good luck! The IIROC folks appear to have no interest in the matter and the local paper agrees you got shafted but it is so common it’s not even news. So you head to the FAIR folks and say THIS IS NOT RIGHT!

So what can we expect? Based upon the goals of the foundation it may look like this:

Yes, we have identified that a trend that appears to be emerging is that you and your fellow investors are getting shafted on suitability. As a matter of fact we are preparing a report as we speak outlining this trend and also encouraging the IIROC to review their files and see if they are seeing a similar trend. If so we can assure you we will suggest they take some action at an appropriate time to make things somehow better. We want to be careful of course not to do anything drastic that might imply our “one time “funding (nudge, nudge, wink, wink) was being utilized to serve the one sided needs of the powerless investor at the expense of the well funded industry big boys!

What do we need? A great response to an investor would be something like this: You are right, you have been shafted along with hundreds of others who have called and emailed us with their concerns. We are preparing a press release naming the major offending firms and demanding a meeting with the Presidents within the week. If it does not happen we are launching a media blitz and a letter/email campaign to all MPP’s and MP’s. We are also going to be sending registered letters to the independent members of the board of the firms who are the greatest offenders based upon our data. We have begun to raise funds to support a class action suit against the major brokerage firms and mutual fund firms for return of hidden fees and lack of disclosure of fees in plain English/French. The advisors have been knowingly selling funds without ensuring the investor is aware of and understands all the fees and risks and alternative investments they should be aware of! In short we are going to be the worst nightmare for the IIROC and every other SRO who has let the investor down!

Okay, maybe I am looking for more than any foundation sponsored by the industry can offer. My point is that no group who accepts funds from an industry SRO can truly reflect the average investor. We need an Eliot Spitzer (the lawyer not the politician) who can hold large dollar penalties over the heads of these firms. Money talks and no investment firm is going to voluntarily give up easy money just to do what is right!

MY POINT: The situation is a crisis for small investors and a bump in the profit trail for major investment firms. Until the issues of the average investor can threaten the bonus of the big bosses NOTHING will EVER change!

Let me by very clear, FAIR are great people and I do not in any way doubt the integrity of the directors of the foundation. However, they set a dangerous precedent because they are toothless watchdogs; but they give politicians and the investment firms the ability to point and say “ the interests of small investors are being met” by this august body of advocates.

Simply put; the best intentions of the FAIR foundation is no match for the fire power of the investment firms. In real life David gets pounded to a pulp by Goliath!
Reality sucks, eh!

Sois mike

Monday, April 27, 2009

The Truth About Canada's Banks & Their Success

A lot has been made about the relative strengths of the Canadian banking system. The newspapers are filled with stories about how the focus on "retail" has lead to lower risk profile for the Canadian banks. You have also been reading recently about the superior risk management focus of the Canadian banks and the superior compliance regime of both the banks and the Canadian regulators.
That's pretty neat stuff for us Canadians; hey we're number one! It was all pretty reasonable to the average bloke who has not worked inside the machinery of a big Canadian financial institution.....but I have and I can assure you it is all CRAP!

The reason Canadian Banks are so successful is quite simple. They have an oligopoly structure that lends itself to high margins through low competition strategies. In short, they make tons of profit by over-charging for virtually all domestic services! Need convincing? The evidence has been sitting staring at us for years so lets point out a couple of obvious situations to get us started!

High Interest Savings Accounts: For years the Canadian Banks have made a fortune by offering little or no interest on your savings account. In fact the situation got so ridiculous that a foreign bank figured out that they could pay for their whole expansion into Canada by exploiting the fat margins that existed on savings accounts. Thus that annoying ING guy made his appearance and told Canadians the ugly truth! Your banks are not paying you interest you dummies! Of course the banks were not about to fight back over one measely foreign bank offering fair interest rates.

Think about it.....if Royal has ten billion in savings accounts earning 0.25%, they are not about to start paying 2.25% and give up $200 million in profits. They( and all the other banks) just sacrificed a few hundred million in deposits each, that would drift to ING, counting on Canadian apathy to keep most of the money in their accounts! The Canadian banks did not react at all until the credit unions followed ING's lead; at which time they created a high interest saving option that was not as high as ING and the credit unions, but was enough to stem the flow of apathetic money from the big banks!

Credit Cards: Foreign credit card companies also noticed that Canadian rates were very high, even though losses were quite low. In the hyper competitive card market south of the border, aggressive credit granting and extreme marketing competition pushed card companies into high risk credit granting, expensive rewards programs, and aggressive direct marketing campaigns. No wonder the card interest rates were 19% to cover the losses and expenses. In Canada that was not quite the case. Rates were 19%, but marketing was through the branches to existing customers. Credit standards were still very reasonable and losses were consistently below the U.S. experience. Even better, the banks owned the card processing firms and could screw both the customers (think 19% rates) and the merchants who had to pay outragious fees for the privelege of accepting the cards! Again, the Canadian banks took it to the extreme and again foreign banks eventually stepped in. Check your mail box and see how often a U.S. monoline (sells only one product) firm has sent you a pre-approved card at a low teaser rate. Again, the banks are not about to match low rates and sacrifice the profits from tens of billions in outstanding card balances at 19%, or 24%, or 27%. Let Capital One or some other company steal the crumbs from the table, but never give in to the temptation to be competitive!
Need further proof? Canadian banks are paying huge class action fines for illegal foreign exchange fees on the credit cards! Canadian banks are the leading broker and mutual fund firms in Canada.....and Canadians pay the highest mutual fund fees in the world! Ask the small business guy about the cost of banking services in Canada!
So how does that make our banks the best in the world? How do you explain the lower risk profiles and the lack of idiotic leveraging? Simple actually; Canadian banks just were not willing to pull their capital out of Canada and forego the huge domestic profits to chase U.S. sub prime assets, or expand aggressively into the U.S. capital markets. While foreign banks greedily schemed and took risks to gain any slight advantage in terms of profit, it was a totally foriegn concept to the Big Five! Compete for profits? Surely you jest! Stay home; stay fat and happy!

So now you know! The success of the Canadian Banking System rests with us! If we were not suckers who overpay for all our banking services, then the big banks could not have been nearly so clever! Lets give ourselves a hand! Of course don't forget to thank the government, who through the weakest banking regulations in the free world, continue to let the oligopolies thrive!

Keeping with this fine Canadian tradition; you can apply the same logic to some of the worlds wealthiest civil servants, dairy farmers, and financial planners! Low competition, poor regulations and consumer apathy! I am Canadian!

sois mike

Saturday, April 4, 2009



I have poked a sharp stick at some Advisor behavior in past blogs. But it may be time to show my more mellow side; after all, most Advisors are just good folks following the direction of their employers! They do not often intentionally destroy portfolio and kill retirement dreams, it is just an almost unavoidable result of how they make a living.

Fiduciary: What is a fiduciary and who is a fiduciary?

Definition from Investopedia is as follows: “The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.”

Fiduciary 360 defines a fiduciary as “Someone who stands in a special relation of trust, confidence and/or legal responsibility”

Since fiduciary comes from the latin fiducia which means “trust”, one would think an Advisor would naturally be a fiduciary but, alas it appears they are not all up to the task. In fact for most, being a fiduciary would make life much more difficult. Simply put, if an Advisor puts the clients interest in front of their own interest they will find that their real employer is not very happy!

Compensation: Advisors, in general, need a firm where they can hang their cap, gather research, find admin support, and benefit from the marketing packages of large securities firms. The advisor works on an income split with the parent company for the most part. The quality of office, support, income split, and even job title is dependent on the Advisor making the firm happy by bringing in big revenue!.

Double Dilemma: Advisors face a double dilemma; doing what is best for the client will often mean doing what is NOT best for the company that employs the Advisor and it will also reduce the income the Advisor makes from both the investor and the company. So what is an Advisor to do?

The 10% Who Are Fiduciaries: Okay, I made up the number! I am optimistic that perhaps 10% have got it figured out! They actually just do not care all that much about titles, internal recognition, or the fast buck approach to wealth. Any Advisor can act as a fiduciary by just putting the customer first!

How do I know if I have a fiduciary:

I am blessed to have an Advisor Fiduciary who handles my security selection. G.G. and his team came from the pension and investment counseling side of the world where a fiduciary, discretionary approach is much more the norm. In short, he was trained as a fiduciary, hired his team as fiduciaries, and has enough clients to be able to dictate his approach to his bosses without repercussion.

The Fiduciary Difference: Here are some of the clues that an Advisor takes the fiduciary duty seriously!

When income trusts were all the rage and paying fantastic fees my Advisor watched his peers earn fat pay days selling every new issue they could get their hands on. His stature (think total revenue to the company) took a hit but GG felt over exposure to income trusts was a bad move in what was really a tax dependent strategy. We all know how that ended!
The next Fiduciary difference came with Index Linked Notes (PPN’s) that were sold at the top of the market and earned huge fees for Advisors. GG’s approach was that people too nervous to invest in equities should just not invest as much in equities! Wow, what a novel approach! Getting your own money back in 10 years with no inflation protection just did not seem to be worth a huge fee, never mind the “protection event” clauses that most Advisors forgot to read!

An ongoing sign that my Advisor acts as a fiduciary is the fact he has never sold me a fund with a back-end load ( DSC). The DSC hinders your ability to manage your investments on a going forward basis. Any penalty that restricts your ability to move in and out of investments will eventually cause you to face a choice between the right strategy and the cheapest strategy.

Why so few fiduciary Advisors: The security firms that employ Advisors pay big money to Advisors who can attract large amounts of money and keep it invested in expensive securities. They run the industry and that includes the Self Regulatory Organizations (SRO’s) that provide oversight to the industry. They have a lot of political clout and can ensure the Advisors who play ball will have an easy ride from the legal and regulatory side of the business.


The industry has created an environment where just about anything goes. The fox is not only in the hen house, they are running the joint.

1- Advisors are not likely, nor encouraged, to disclose the commission they receive from selling a security. They also will not disclose the various sales options available on the same product with investor costs directly linked to which option is chosen.

2- Advisors are not to provide alternative investment options and the comparative prices and fees on the comparative security. For example if you are sold a Canadian Equity Mutual Fund you are not to be told the relative price or performance of the equivalent Index Fund.

3- Ever notice that you never receive the cost of your investments each year on a statement? My apology to the 1% of you who do! Fees should be tax deductible on your non-registered accounts but it is not if you own mutual funds. Of course if you could deduct the fund fee you would actually know what you paid in fees and that is not the way to make big commissions going forward. Best to let dormant clients remain dormant.

4- Point of Sale disclosure: After significant lobbying, the industry had two small parts removed from the document: Fees earned by your Advisor and the benchmarks to measure performance. Sound like the fox just swallowed a couple of more hens? (P.O.S. Profits Over Service)

5- Ever buy something and not have the vendor disclose the GST ? Funny thing about investments in Mutual Funds; you never see any tax info that might provide a hint to the total fees being charged. Hmmmmmmm

Solution: Ask the tough questions! The best of breed Advisors will love the questions and the average Advisor will have a snit about how you can ask such harsh questions after all you have been through together! You might remind the Advisor that what you have been “through together” is about 30% of your total savings!!!

There are good Advisors out there but you need to ask the tough questions if you are going to find one!

Thankful for GG, but still a skeptic,

Saturday, February 21, 2009

Ignorant Money


We hear a constant stream of discussion about what the “smart money” is doing? So I ask myself, given the mess the MBA’s and PHD’s have got us into, who exactly is ‘the smart money”?

According to the mainstream media and the talking heads on T.V., the smart money folks are exactly the same people who are currently wrecking our retirement and destroying our banking institutions.

Amazingly enough, these same folks are now suggesting the way to a renewed investment strategy and healthy retirement is to ask these same investment guru’s for a “second opinion”. (Anyone who knows the firm I work for will understand how much the “second opinion” ads grate on my nerves.)

The concept seems to be that retail investors bought our crap once so why not stick with it and screw the retail investor one more time! will work because confused investors are blindly seeking somebody, anybody, they can trust! Thus the “smart money” folks will lead the “ignorant money” into a grab bag of garbage products.

Ignorant Money: I use the term “ignorant in its truest sense to reflect “lack of knowledge”, not in the pejorative sense of ill mannered! Investors have been lead into high risk, over-priced, and in many cases totally unsuitable investments. The reason that happened was because Canadian investors are trusting when they should be dubious. Most lack the understanding of how advisors make money, and are exposed to the shifty investment industry. Without the quality regulatory oversight they mistakenly believe is provided by the self regulatory ‘boys club’ investors are unaware the regulator hides a corrupt/lazy/incompetent investment community from the light of day!

I pilfered the term “ignorant money” from a university professor who was speaking on BNN. He used it to explain the mass movement of money to poor quality investments. In short (my interpretation) he was talking about the money that blindly follows the marketing advice from the big banks and investment firms.
“Come and get a free retirement assessment from BIG Bank and you can rest easy!”, “Come and get a second opinion for free! From BIGGER Bank”, and my absolute favourite “It's time to look forward not backward and take advantage of the low market prices”.

I actually have a fantasy about honest ads from the big banks: “ Come and get a free assessment that will do you as much good as the last one you got from a bank for free!”, “You were stupid enough to trust us before, how about double or nothing on whatever money you have left”, “Don’t look back, we can’t afford to have you learn from your past mistakes!”.

THE FORECAST: In the next 6-12 months you will be overwhelmed with ads for the following products or products very similar to them.

Product: Segregated Mutual Funds: You will be told that getting your original investment back with no gain in 10 years is the best way to protect your money. For this privilege you will pay about 3% per year.

Ignorant Feature: With markets down 30-40% the guarantee is virtually worthless now. This makes some sense at the top of the market and absolutely no sense after a major market correction. Also most investors don’t have the 10 years to wait for the return of capital.

Product: High Yield Bonds: With government bonds paying next to nothing and investors too nervous to buy equities, advisors will focus on the corporate high yield bond market. You can get much higher yields and the protection of security with the bonds versus the common stock.

Ignorant Feature: People need to ask the big question, why is this bond paying such a high return? The answer is because the underlying firm is likely to go bankrupt, renege on its bond payments, or be unable to pay you back when the bond matures. High Yield means JUNK. A small amount in the portfolio might be acceptable for some, but look for major whacks of this stuff to find its way into portfolios of vulnerable seniors.

Product: Leveraged Loans: With stocks “on sale” it will be an absolutely amazing opportunity for investors to make a quick killing on the recovery by utilizing the brilliant strategy of leveraged investment loans.

Ignorant Feature: What could go wrong? I don’t know.....maybe we should ask Lehman Brothers or AIG, they are the most recent experts on leveraging. The key point to remember is that your advisor will make roughly 5% up front on your leveraged investments and have no monthly payments. The only way to make this work for the average investor is to write your CSC exam and become an advisor. Now the strategy is brilliant!

Product: Market Linked GIC’s (PPN’s): While these products have been a real mess, the banks just make too much money selling them. Confused seniors are still available and untrained bank staff can sell them with great sincerity since they do not actually understand the risks.

Ignorant Feature: Similar to seg funds, the guarantee is somewhat useless at the bottom of the market and the fees are ridiculously high. Most investors got killed on the “protection event” but in the next round it will be a straight fee grab.

Product: Lifecycle Funds: OK, your advisor was asleep at the switch and forgot that you might want to reduce your equity exposure as you approached 80 years of age and had only a small RIF to help sustain your meagre lifestyle. No problem, your advisor can buy a fund that will pay somebody to automatically rebalance and adjust the asset allocation as you get older. Phew, that’s a relief!

Ignorant Feature: About that lazy advisor you had? What is it you are paying them for again? In short, you are paying a premium to have your advisor fir e somebody to do the work you hired them to do, and you pay both parties.

Well, there you have it, my forecast of what you can expect to see on the shelf at your local investment market. The two things required to keep the markets alive are fees and uninformed investors to pay the fees. Inspite of the painful lessons of 2008, I predict 2009 will be a great year for advisors. They make money on greed, fear, and ignorance and all three are in abundant supply.

Your jaded blogger, SOIS MIKE