Remediation pitfalls to avoid

From time to time, and more frequently lately, investment dealers are obligated to compensate you for undue losses. The losses may be attributable to unsuitable investments, double billing, overcharging, misrepresentation, improper leveraging and the like. 

Typically, you will receive a letter from the dealer advising you of the compensation. However, it seems some brokers can’t miss the opportunity to kick victims one more time. They will ask you to sign off on the planned remediation thereby legally agreeing to the amount provided. So where’s the rub?

There is often insufficient information being provided for an informed consent to be given. The real reason for payment is not given- in most cases it’s because regulators or a Court ordered it. The numbers provided are not verifiable and victims are given a very short deadline to respond, sometimes less than three weeks, or the offer is off the table.  The explanation for the payment may be as deceptive as the sales practices used to deceive you.

You may be told the investment they have "might" not be suitable for you but if you want to stay in it, sign here and if you want to get out of it sign this gag order (referred to a Confidentiality Agreement) and a Release over here indemnifying the dealer who will pay some of the loss and excess costs inflicted on you the last "X" years.

What these brokerages fail to reveal is: "We didn't suddenly just discover this, we have had the regulators breathing down our necks and they have now disciplined us. We were fined for selling unsuitable investments or strategies to a group of people just like you. We didn't follow any of the industry rules and guidelines in setting this up for you, or the other hundreds or thousands or maybe it's even millions of people just like you that trusted us. 

We also used unethical sales practices to motivate and incentivize our sales team that you mistakenly were led to believe were professional advice givers working in your best interests.   We also sold it to you on a DSC basis so we could get a big fat commission right away and I think we forgot to mention that to you as well. “

So instead of something appropriate and suitable in your portfolio, that in a fairly good market you would have made money in, if they had actually cared about you, your goals and what they knew about you, you got this crappy investment instead or were overcharged and lost years of saving for your retirement.

These scoundrels may even take the opportunity to remind you what their website says

“We’re here to help you build your financial future and live a great retirement.”

When you are told the remediation plan is being handled by an independent monitor or an accounting firm you can be reasonably confident in the fairness of the calculations. Note however that an independent party may be given parameters which undermine the appearance of independence.If the disbursal of funds is being managed by the dealer- assume the worst and you will never be disappointed. 

So, when you get a remediation letter, read it carefully. Ask questions. What are the tax implications?How were the numbers calculated? Be skeptical. You may get a better deal via OBSI or civil litigation. Never forget- it’s your money. If the dollars are large, consider getting professional assistance.Know your rights.

What the heck are "Service fees" ?

More fee issues in mutual fund land

The financial services industry has been plagued not only with high fees but with numerous scandals regarding overcharging, double billing, not applying breakpoints and charging for advice and not providing it.

There is also an important issue with trailers in “D” series funds used by DIY investors. The issue of discount brokers being compensated for "services" that they may or may not have provided to investors is one that deserves serious regulatory attention. 

There are no mutual fund disclosure documents ( Fund Facts, Simplified Prospectus) that define what is meant by "services" in the phrase "services and advice" that is the material phrase in the definition of a trailing commissions.  There does not appear to be a common definition applied to services by different mutual fund stakeholders. 

Our general impression is that the term “services” was left intentionally undefined by mutual fund companies so that different dealers can be left to interpret this term as they see fit and to their advantage under differing circumstances. However, the agreement to invest in a mutual fund is one between the mutual fund company and the investor - the definition of services rests with those parties (not the dealer) and most likely with the party that did not draft the mutual fund agreements (the investor). In our view, these D series trailer commissions are actually a redundant charge for services already provided in the Agreement the investor has with the discount broker.

As big a travesty as payments for advice that was not provided is the travesty of hundreds of millions of dollars of Canadian's wealth being transferred to dealers (discount and full service) each and every year for "services" that have never been defined. 

How can a retail investor know if he/she received a service that has no definition?  How can a dealer claim to have provided an investor with services when there is no definition for services?  Can a discount broker charge for a service  through your mutual fund holdings already included under the terms of your Account Agreement with your dealer (e.g. access to quotes, research reports, custody and safekeeping, webcasts, free educational seminars , online tools, real time market data and tax documentation .)? 

And why on earth would such a fee be based on the value of assets ? A small one time transaction fee is appropriate as it is for closed-end funds, ETF's including actively-managed ETF's . 

According to a paper released in January, 2017, by the Canadian Securities Administrators (CSA) that discussed the topic of discontinuing embedded commissions. there are a total of $30 billion held in mutual funds at discount brokers. And $1.5 trillion in other accounts. At a 0.25% rate estimate for services  this translates into about $3.75 billion per annum for “ services”.

Regulators should be examining this charge.