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