Self-Protection Checklist for Seniors

We're pleased to provide a Checklist that should help you protect your savings nest egg. Once you retire or stop working full time, there is little room for error when it comes to your investments. A loss when you are 35 years old gives you years to recover—and leaves you the opportunity to delay retirement if you must-but a mistake when you are 65 or 70 years old can be devastating and irrecoverable. Elderly investors are disproportionately targeted by unscrupulous brokers (aka “advisors”).The Investment Industry Regulatory Organization of Canada has published Guidance for dealers on how senior investors should be treated and protected. http://www.iiroc.ca/Documents/2016/87c0e6d5-8054-4e88-9b56-9a079b8c35aa_en.pdf

Here's a Checklist you can use to assess the actual treatment you have received:

Communications

·         Does your broker use a title that truly reflects his/her qualifications? Be aware many brokers use made up titles like VP that are unrelated to their qualifications or registration. His/her actual registration is Dealing representative or salesperson. Check for any limitations or disciplinary actions.

·         Does your broker routinely explain products, costs and associated risks before selling them to you?

·         Ask your broker regarding his experience in managing a RRIF account that requires a minimum annual withdrawal and special skills.

·         Ask your broker if you have been sold any product ( like a mutual fund sold on a deferred sales charge basis) with early redemption penalties or minimum hold periods? If so, ask why.

·         Ask your broker to demonstrate with comparative mathematical calculations that your account type is the most appropriate and cost-effective for you. ?

·         Do you receive confirmation slips from your dealer for each transaction?

·         Do you receive a Monthly account statement? Do you check it for errors or unexplained or confusing transactions?

·         Has your broker provided you with a report detailing your rate of return for each account and the annual fees you have paid?

The relationship

·         Do you have a well-articulated Power Of Attorney specific to investments filed with your dealer? (as applicable)

·         Did your broker develop a documented Investment Policy Statement with you?

·         Did your broker ask you to provide a trusted person contact?

·         Did your broker tell you that he/ she works to an advice standard that is not required to be in your best interests? i.e. it is not a fiduciary standard.

·         Were you informed as to how your broker is compensated?

·         Were you informed by your broker of any conflicts-of-interest

Know-Your Client

·         Do you and your broker have a common understanding regarding the objectives for each investment account?

·         Do you and your broker agree on the time horizon for each account?

·         Are you comfortable that your broker understands your risk tolerance and capacity? Your true level of investment knowledge and experience?

·         Are you and your broker clear as to the composition of your net Worth?

·         Has your broker asked about your cash flow needs?

·         Has your broker asked as to the composition of your annual income? If not, consider informing him/ her.

·         Has your broker asked about your debt obligations? If not, consider telling him/ her.

·         Has your broker asked about your insurance coverage? You decide if he should know this.

·         Have you informed your broker of any medical issues that may be relevant to his/ her provision of advice?

·         Do you have a signed/ dated copy of your Know-Your-Client (KYC) form?

·         Has your KYC been updated at least annually?

Red Flags

·         Ask your broker whether he/she is licensed to sell other products like annuities or Segregated funds? If so ,be aware you might be sold a product that is not processed through your dealer and could be unsuitable for you .

·         Has your broker asked you to sign blank forms? If so, raise a Red flag.

·         Has your broker tried to borrow money from you? If so, raise a Red flag.

·         Has your broker attempted to get you to make investments not processed through the dealer? If so, raise a Red flag.

·         Has your broker attempted to have you assign them as a trustee or executor? If so, raise a Red flag.

·         Are you being pressured to take out a Home Equity Loan or establish a margin account? If so, raise a Red flag.

·         Have you been asked to write a cheque in the broker's name or the name of an entity other than your dealer? If so, raise a Red flag

·         Have you been asked to increase your risk tolerance for no apparent/valid reason? If so, raise a Red flag.

Complaint handling

·         Were you informed on how to file a complaint?

·         If you have filed a complaint and are not satisfied with the response, escalate the complaint within the firm. Consider getting some help in articulating your complaint.

·         If you have a complaint or issue with your account, act quickly. If your dealer is bank-owned do not allow the dealer to nudge you to the internal:” ombudsman”.

·         Has your dealer informed you that if you are dissatisfied with their handling of your complaint, you can refer it to the Ombudsman for Banking Services and Investments (www.obsi.ca), an independent and free dispute resolution service?

NOTE: For seniors, many investor advocates consider a fiduciary duty as an important consideration in the client-advisor relationship. Tell your broker IN WRITING, that you are relying upon them 100% for fair, honest and professional investment advice that is entirely in your interest and in the interests of none other…..in other-words, you are assuming that your financial relationship with the broker is one of a fiduciary level of care, as it is understood in law. Ask them to confirm this in writing to you and to reply if they cannot confirm this standard of care to you in writing. If not a fiduciary, you may be sold products and services that, while not unsuitable, may not be optimum for you and may be more expensive than other available alternatives.

Be Vigilant. CAVEAT EMPTOR

Investor ALERT: The Compensation Grid vs trusted advice

Investor advocates always suggest you inquire as to the method of compensation of "advisors" (actual registration category is Dealing representative or salesperson). This is because most “advisors” work to the suitability standard. Under this standard these advisors are not required to act in your best interest. They need only recommend investments that are suitable; not the best or cheapest or least risky. Knowing the method of compensation gives valuable clues as to how they will behave and how you might be able to interpret their recommendations.

In this ALERT we look at the compensation grid, a grid that depicts what percentage payout advisors will receive based on sales in a certain period of time. These complex grid structures are designed by the dealer to skew the recommendations made by investment advisors. The grid clearly puts "advisors" in a conflict-of-interest as the more they sell, the higher percentage commission rate they will receive. 

Here's an illustrative sample :
 

Source:http://blog.getsmarteraboutmoney.ca/preet-banerjee-commission-grid-for-investors

Generally speaking, advisors will be compensated more richly for producing higher overall annual commissions (as seen by the general increase in payout as you move down the columns). They will also be compensated more richly for generating higher commissions per transaction (as seen by the increasing payouts from left to right). This could be done by trading larger positions or by selling higher commission generating products (like the 5% upfront payout for Deferred Sales Charge mutual funds).

Notice how a Reps “recommendations” can be modified based on how the grid is structured. In this example, high “producers” are highly rewarded and Reps with low sales volume are given little incentive to retain the status quo (that could mean incentive to sell more product , or they resign due to lack of income). Further, incentive is given to placing trades that generate higher commissions as well (either by looking for more money to get the client to invest,recommend leveraging , putting them into a higher allocation to equities which generally generate higher commissions than fixed income products, or charging higher commissions on stock trades).

Some dealers have creative exceptions to the grid, with sales of certain types of products given special payout rates. For example, a dealer may give special incentives to sell proprietary actively-managed mutual funds, new equity issues that it underwrites (IPO’s), or securities of which it has excess inventory that it is eager to reduce . These exceptions and bonuses can be permanent or temporary. All can be harmful to the unsuspecting investor.

The full-service brokerages all have different grids. Fixed payouts can vary with some paying higher than 70% and some paying lower. And not all flat-fee dealers charge the same flat fee to their advisors. The dealers are free to structure the commission payouts as they see fit, and there are no specific rules or regulations which they have to comply with other than certain disclosures.

According to http://wheredoesallmymoneygo.com/the-grid/ another by-product of some grids is that by the end of the year, if a Rep is near the next production level (i.e. He/she has generated annual gross commissions of $375,000 for the year), then by finding a way to generate another $25,000 in commissions in the final month moves the Rep up a grid level. The new payout may apply retroactively to all commissions for the year. For example, let’s assume that our broker has $399,999 in gross commissions for the year. If they ended the year at that level (and assuming all tickets were at the $500+ level) then they would have earned $195,999.51 in net commissions. If they made only one more dollar of commissions (gross) then they jump up a grid level and their net commission jumps to $204,000. So that $1 dollar in extra gross commissions was worth about $8,000 (net) to the advisor. Imagine the incredible motivation to sell that $1 to an unsuspecting retail investor.

Temporary sales bonuses traditionally have been referred to as "flavor of the month" promotions. The concept of offering special sales incentives for certain products, especially in-house products, has come under increasing fire since they can put the financial advisor's interests at odds with those of his or her clients. As a result, a few firms have done away with such special incentives, and tout their "open architecture" approach that leaves the financial advisor undistracted in seeking the best investment vehicles for the client. Calls for securities firms and financial advisors to be subject to the more stringent fiduciary standard, as opposed to the looser suitability standard that traditionally has bound them, often have cited practices such as "flavor of the month" promotions and trailer commissions as evidence that regulatory reforms are necessary.

Compensation grids and sales targets are coming under greater scrutiny as the Investment Industry Regulatory Organization of Canada (IIROC) steps up an assessment of how the country’s investment dealers handle compensation-related conflicts. Investment dealers will be required to turn over their compensation grids as a standard item in every upcoming business compliance exam, so the self-regulatory agency can “better review dealers’ treatment of compensation-related conflicts,” IIROC has said. The grids will help determine whether clients are being put into investments that trigger richer rewards for Reps and dealers. A 2014-2016 IIROC review, which looked at how well investment firms are meeting a requirement to manage compensation-related conflicts in the best interest of the client, found that firms were relying too heavily on disclosure of conflicts without first addressing them with clients in another way. In other words, CAVEAT EMPTOR- the grid is after your money .