30. August 2009 by Dan Walkow, CFA, CMT.

Wall Street finally has agreed to put its brokers under the tougher fiduciary standard for their dealings with customers. Now a fight looms over how tough that standard will be.

As part of its regulatory overhaul, the Obama administration proposed holding brokers who give investment advice to the higher fiduciary duty — a legal standard that would compel them to act in their clients’ best interests. Currently, brokers are held to a more lenient “suitability” standard, which means they can’t put clients in inappropriate investments. Many investment advisers, by contrast, have operated under the fiduciary standard for nearly 70 years.

Most investors do not understand the difference between a “broker” and an “investment advisor” lumping most persons who advise or manage investments as “financial advisers. What is the difference?

Most brokers and financial advisers are only required to meet the “suitability rule” that is they can sell you just about  anything as long as it can be classified as within the broad context of your overall goals. There is no requirement to act in a client’s best interest as to seeking the best investment, lowest and most reasonable cost nor is there any requirement to be objective and offer competitors products even though they may be better than the “in house” products the broker sells.

Registered Investment Advisers (RIAs), Investment Councillors and Portfolio Managers on the other hand are held to a higher standard of care, the fiduciary standard. By law they are required to “act in the clients best interest” all the time.

This means seeking, not just suitable, investments, lowest and most reasonable investment management costs and commissions and more but must act solely in the clients best interests.

This is why RIAs can only work for a fee and not commissions which is paid by the client. There can be no incentives to push a service or product and costs to the client must be transparent.

Read more at the WSJ here.

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12. July 2009 by Dan Walkow, CFA, CMT.

The new rules do not go far enough. Charity fund-raising has had a bad smell for some time now where fund-raisers get the bulk of the take with little actually getting to the underlying charitable cause.

A targeted maximum rate of 35 cents on the dollar to go to the fundraiser for fundraising costs is ok but as the rule states, a charity can exceed the 35% up to 70% but must explain why on an audit. Over 70% the charity will be hauled before the watchdog.

The increase in scams has been a result of the more favourable tax treatment given charitable donations a couple of years ago. Are we surprised at the abuse? No, it would seem anytime “tax loopholes are created” scummy operators come out of the woodwork offering deals.

Bottom line is check out the charity you want to support carefully.

More here.

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11. July 2009 by Dan Walkow, CFA, CMT.

It’s about time. Most investors are trusting souls who believe that the regulatory framework protects them from excessive investment management fees, commissions and financial advisers from self dealing. Self dealing is where a bank or broker directs clients to their own products which often have higher fees or commissions that competing services or products.

These legal but punitive fees and commissions have been going on for a long time both in Canada and the United States. Over the course of my 30 years in the investment business I can attest to having pretty much seen it all.

That may be about to change and its about time. From Bloomberg:

The U.S. Securities and Exchange Commission would gain power under an Obama administration proposal to ban pay practices at brokerages and investment advisers and prevent individuals from working in the industry. 

The Treasury Department sent Congress legislation yesterday that would let the SEC prohibit “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure lets the agency remove individuals who violate rules from all aspects of the industry, rather than a specific segment such as selling securities or managing money.

Types of compensation practices the SEC may deem improper might include banks paying brokers more to sell “in-house” investment products, rather than those offered by competitors, he said.

“There has always been a concern that because these people are acting in an advisory capacity, they might be operating under pay practices that are in their interest, not those of their clients,” said Mark Borges, a principal at Compensia Inc., a San Francisco-area pay consultant.

There is no movement afoot in Canada yet but, in my opinion, if the bill passes in the USA I suspect pressure will build for Canadian authorities to take similar action. In fact we need it more in Canada as fees and commissions in Canada tend to be much higher than the USA. For example mutual fund investment management fees tend to be almost double that of the USA. Why? You have every right to ask.

This brings me to the insurance industry and products such as variable annuties, segregated funds and other products such as life, critical illness and similar products.

Fees and commission disclosure in the insurance industry is muted at best and hidden at worst. If you ask you will be told that it is all included in the policy and is not an “on top” charge. However, just for fun, if you intend to buy one of these products ask for a disclosure letter outlining exactly what fees, commissions and administrative charges you will face and how much compensation your advisor will receive.  Do not rely on the companies information in their documents but ask for a letter specific disclosure letter regarding the products you are contemplating.

You may not get a letter, and if so you know what you have to do! If you succeed I suspect the numbers will give you pause…

See the Bloomberg article here.

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8. July 2009 by Dan Walkow, CFA, CMT.

Why do so many stock market analysts and economists get it so wrong?

According to the Pragmatic Capitalist ” At the beginning of 2008 the average analyst was calling for $90 in total S&P 500 earnings.  The final figure came in at $49.51.  They missed by nearly 50%!   As I’ve mentioned repeatedly here at TPC, the entire analyst community on Wall Street is flawed.  Most analysts are selling a service or pushing a specific firm’s long-term investment beliefs.  This was well displayed in the 90’s and despite regulatory changes, continues today.”

The value of technical analysis is that the charts don’t lie. What you see is what is. Yes you can read a chart wrong and that is your problem but on balance and over time technical analysis provides ” another view” and a check against runaway wall street fodder.

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20. June 2009 by Dan Walkow, CFA, CMT.

Manulife revealed that a  probe by the Ontario Securities Commission on whether Manulife provided appropriate disclosure on it guaranteed funds also also known as segregated funds and variable annuity guaranteed products has been initiated.

The probe has to do with whether Manulife provided full and continuous disclosure regarding market risk during last years stock market meltdown but I will take this one step further.

Point one is that even if full and continuous disclosure was provided most investors and one could argue many investment advisers did not and do not understand how these products work. A long-dated “guarantee” 10 years out gives small comfort to a 40% draw-down in the value of the  underlying funds held in some of these investment products.

Point two is that these products are very expensive both in terms of ongoing expenses, which are embedded in the fund itself so you do not see them and the commission paid to investment advisers to sell them which is large and I mean LARGE.

Point three is how tying up investment capital in these products severely limits your flexibility if you want to change your investment mix.

In the United States variable annuity products which lure investors in with the “illusion” of safety have been subject to strong criticism for all the above reasons noted.

Caveat Emptor!

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19. June 2009 by Dan Walkow, CFA, CMT.

Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.

Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.

This will be a sea change for the brokerage industry who will be forced to be held to the same standard as Investment Advisors if this legislations gets past.

Read more on what the difference is between a broker and an investment advisor.

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