Sound Advice is No Accident

[yielder]

Actually we are discussing advisor risk and MR-0048.

I know. That document comes out of the Portus experience and is aimed at that type of product. You cherry picked a number of items from the regulation and applied them in a way that they were not intended to be applied.

Does that mean they might possibly take a run at him when performance [which I assume is the rational for using 3%+ MER funds] eventually succumbs under the weight of the enormous friction.

This makes no sense. Is the cutoff 3%? What about all those funds with a MER of 2.99% because there will be tons at that level and none at +3%?

I’m not saying that this “must” happen, just that eventually there is a high probability that it will happen.

I disagree. As the industry moves to letters of engagement that include IPSs for all advisors, then there will a clearly defined and agreed upon advisor/client relationship. Once that exists, the regulator has no business asking questions about the performance/MER relationship.

If performance wasn’t the reason for using the 3%+ funds in the first place then what is the reason?

You new to the business?? As long as there's a letter of engagement/IPS in place with regular reviews, I see nothing wrong with the MER being whatever level it is. I see no conflict of interest problem either.

How would an advisor defend themselves in light of MR-0048 where the regulator specifically requires you to document your rational for fund selection with respect to fees, commissions and the availability of cheaper alternatives choices?

MR-0048 won't be used that way without a lot of shit hitting the fan because its purpose is being distorted.

[Feeonly.ca]

That document comes out of the Portus experience and is aimed at that type of product. You cherry picked a number of items from the regulation and applied them in a way that they were not intended to be applied.

..... MR-0048 won't be used that way without a lot of shit hitting the fan because its purpose is being distorted.

.... This makes no sense.

..... You new to the business??

...... Once that exists, the regulator has no business asking questions about the performance/MER relationship.

You have made several unfounded claims. How do you know what the intent of MF-0048 is anymore than I do?

How do you know what the fall out from Mr-0048 and the regulators moves to increased focus on fees will be anymore than I do?

What makes you so right and certain that your personal interpretation is correct and mine is wrong?

Side comment for Yielder only: Gawd, I hate it when the forum moderator joins in a thread and is argumentative, combative and makes unfounded assumptions. It ads nothing to the discussion and potentially your role as moderator may lend undue and unwarranted credence to your personal opinion.

You are not an advisor. If your livelihood potentially depended on this issue you would not be so quick to dismiss a legitimate concern or unjustly criticize others who sees this as a concern. End of side comment.

Once again, we are discussing the topic of advisor risk as it applies to fund selection in light of new regulations that specifically state due diligence needs to be conducted with costs/fees in mind. I quoted the parts of MR-0048 relevant to the topic being discussed in this thread, if in your opinion that is "cherry picking", so be it. I disagree and see no reason for you to describe it as such.

[yielder]

How do you know what the intent of MF-0048 is anymore than I do?

I don't. Although "A basic level of due diligence must be completed on all products considered for sale by the Member before the products are approved. Member procedures should provide deifferent levels of analysis for different types of products. For example, an extensive formal review may not be required for many conventional mutual funds. However, a more comprehensive review should be performed om products that are novel or more complex in structure, the related points outlined on page 2 and "Additional Considerations Regarding Exempt Securities" outlined on page 3 suggests to me that they're talking about Portus type products and nothing more.

How do you know what the fall out from Mr-0048 and the regulators moves to increased focus on fees will be anymore than I do?

I don't. I pointed out why I think that it's unlikely that they would apply this regulation as you suggested they might. But as you point out, anything is possible.

What makes you so right and certain that your personal interpretation is correct and mine is wrong?

Nothing. I was simply disagreeing with you and outlining why I was doing so.

I disagree and see no reason for you to describe it as such.

OK. Bad choice of words because of the built in pejorative history of the term cherry picking. My apologies. I should have said I believe that you are applying the 4 specific points in a way that they were not intended to be applied.

[Feeonly.ca]

Fair enough and thanks.

I went for my workout and feel much better. The speed and heavy bags normally releive any morning crankyness but I was running late today

[yielder]

Fair enough and thanks.

I went for my workout and feel much better. The speed and heavy bags normally releive any morning crankyness but I was running late today

Oh wonderful. I get pummelled because you were running late.

[smelly]

Our company recently did a session showing what it's like to be grilled by the regulators. They even had an actual staff member from the IDA's enforcement department doing the grilling. Scary stuff. Things that defied any reasonable concept of impropriety were used to nail the advisor. Putting cash into a MMF without the client’s ok

Really? 100% literal truth?

Yup. Doing anything with the client's account, even putting cash in a MMF, is discretionary trading and verbotten.

[smelly]

Fair enough and thanks.

I went for my workout and feel much better. The speed and heavy bags normally releive any morning crankyness but I was running late today

Oh wonderful. I get pummelled because you were running late.

And I get to be a spectator because I was busy working. You know, helping clients with their financial issues, the stuff I do for the commission I earn from high MER products.

I just re-read the MFDA document (for the third time) and I'm convinced of two things. One, FWIW by "member" they are talking about the dealer not the advisor, and two, I'm glad I'm securities licensed not mutual fund so I don't have to be subject to vague rules like this.

Fee only, I think we've been down this road before (to be certain, I'd have to check with a couple of our colleagues here who recollect my rants and ramblings in more detail than I do). I'm definitely getting a deja vu feeling here. If you want to have that dance again, please do both of us and our blood pressures a favour and search for the old thread and hit replay.

I believe that there's no right or wrong answer in many financial planning/investment topics including commission vs. fee, passive vs. active, low MER vs. high(er) MER. They're all appropriate for different advisors and different clients in different situations. Segregated funds and Venture Funds have their place as well as ETFs and fee for service. Mr. Fee's clients wouldn't want to use the investment products my clients use and my clients wouldn't be interested in writing a cheque to me for my service.

[Dave P]

From what I understand, the MFDA document refers mainly to the MFDA dealership and not necessarily the individual advisor. The dealership must have a thorough understanding of all products on their shelf. The way I am interpreting this, it is not the traditional mutual fund and other prospectused type products that are of concern, but the more complicated products such as Principal Protected Notes, Hedge Funds, Referral Arrangements, LP’s and so forth.

The dealership must have a strong understanding of what the product is, how it works, what the risks are, the financial strength and operational procedures (custody, audit, legal, etc…) of the issuer, what type of investor it is best suited for, recommended maximum exposure for various investor types and so forth. Gone are the days when the dealership can just blindly add products to the shelf because the advisor wants it.

But I also understand that while the dealership has the responsibility of doing this type of due diligence, it is still the responsibility of the individual advisor to also understand the product and how it is suitable for every client it is recommended for. Just because a dealership allows a product on the shelf doesn’t mean that they are endorsing it, or recommending it, only that they are comfortable with the risks associated with it. The ultimate responsibility will still lie with the advisor.

[Bylo Selhi]

Back to the original dog's breakfast portfolio. What a difference a week makes Rehabilitating an unwieldy portfolio [my emphasis]

Last week we started our examination of this large, complicated portfolio spread over 12 different accounts and maintained — far too kind a word to use — by three different advisers. To be fair, our patients don't seem to have let these advisers know of each other's existence, or the extent of their assets.

To operate in an information void is to invite poor or inappropriate advice. And the absence of any kind of plan means there is no yardstick to judge the performance of these advisers or the suitability of individual purchases. "A common example is high-net-worth investors (like our patients) who say they have an average risk tolerance with a balanced portfolio mix, yet they continually second guess their decisions based on external influences such as scary news reports or the opinion of friends and colleagues," notes our doctor this week, Barbara Ross, a partner with Toron Capital Markets Inc. in Toronto. "They will be their own worst enemies, continually shifting their mix because they are highly emotional personality types who are not grounded in themselves and their values."

Much of this analysis is appropriate to Martin Delaney, who complained to us that his three advisers only want to sell him more IPOs (initial public offerings, which carry high fees for the underwriters). He also said he wants to simplify his portfolio, which has become unwieldy. At the same time he was talked into, or talked himself into, purchasing another group of securities, including at least one IPO, pushing the number of companies held in his portfolios to more than 100...

Still, the prescription [read the rest of the article] offered to someone who wants to "simplify" and who needs help to resist reacting to the constant gyrations of the market seems way too convoluted and way open to "fiddling." Why wouldn't a portfolio of, at most, 10 ETFs do a better job at lower cost (even allowing a 1% "trailer" to the advisor)?

[ModeratorQ]

The fifteen posts after this point have been split into their own separate thread Advice re Charitable Gift Tax Shelters in order to restore this thread to its original theme.

[smelly]

Talk about good advice, this Avner Mandelman is my kind of guy.........

For those who are prone to be attracted by bright shiney things.....

http://tinyurl.com/8htpu

[Feeonly.ca]

Smelly,

If you really believe in the advice conveyed in the article you would never use or recommend high cost funds in any portfolio.

The higher the friction [MER] the lower the probability of the fund matching the index return over the long term.

I think the gist of article you linked is quite sensible. You should try it sometime

[PS. smelly, ignore the PM. I must have hit the wrong button]

[smelly]

I invited feeonly to transfer our PMs here but maybe he forgot, so to close off the topic...................

Smelly says,

Ah, glad you didn't say it eliminates the possibility of matching the index return. Just lowers it. From, what? Even money to 50-50? Certainly is possible, no? We can’t foretell the future now can we? Besides, using the products I use allows me to add value to my clients without them writing a cheque for my services.

But there's no right or wrong answer. I say live and let live. Whatever works for you and your clients. Notice how I never tell you that what you do - charging clients an arbitrary fee without a direct, dollar for dollar benefit and by using this business model you eliminate the likelyhood of serving low net worth clients, leaving them to the dogs at the banks makes you an elitist - is wrong?

Let's just chalk it up to different strokes for different folks, eh







Fee says,

Fee for Service for those without many assets is quite low.

Our plans start at $1800 and provide a positive lifelong compounded effect. The Return on Investment is short especially for young people that would otherwise learn by their mistakes.

Hardly elitist, we are only too happy to work with anyone who can achieve a net benefit from our service [after accounting for the costs].





Smelly says,

So just like I'll have to take your word for it that you do the right thing and offer reduced or flat rate prices and don't turn away small clients, you'll have to take my word for it that we provide good value for our clients via the DSC route.

I still have my doubts that many clients involved with an advisor who uses the DSC model will ever go for the fee option regardless of it's possible efficiency or value compared to DSC. But it certainly makes sense for advisors on both sides to consider giving client options regarding compensation. We certainly are planning for it and you could consider DSC for any clients or prospective clients who are reluctant to write a cheque if that's the only way you economically can provide a high level of advice and service.

But that's just my belief, I could be wrong. Regardless of these issues, it certainly has nothing to do with the integrity of the advisor since either model can be abused.

I think we've flogged this dead horse sufficiently. But if you like, feel free to copy my responses to the forum.

[smelly]

http://tinyurl.com/72oax

Here are a couple of interesting studies.

A study by Scotiabank found that nearly one-quarter of Canadians have tapped their retirement savings for one reason or another. While funding a home purchase was the top reason, with 8% taking advantage of the Homebuyers Plan, more disturbing is that 6% said they had made withdrawals from their RRSP to pay for "day-to-day living expenses."
paying down debt was the third most common reason cited for making an RRSP withdrawal, at 4% of respondents.

Yikes. Now these studies were commissioned by a couple of financial institutions but the numbers a quite large so I’d guess there’s some validity in them.

A separate survey conducted by Desjardins Financial Security found that 59% of Canadians over the age of 40 have a plan in place to finance their retirement. If that sounds too low, there's more bad news: the survey also found half of those who had a plan were unable to stick to it.
Part of the problem may be that many Canadians favour do-it-yourself investing, with one third of respondents saying the managed their own retirement investments. Only 45% of retirees and 50% of working Canadians opted for professional financial advice, and only 12% said they relied completely on the advice they received. Friends and family were cited as helping draft the plan by 9% of retirees and 16% of workers. Ten per cent said they have no method of managing retirement savings.

So, whether or not you make this a DIY vs. Advisor issue, the large amount of RSP withdrawals as well as the lack of planning does show that many people cannot separate logic from emotion when it comes to their RSPs. For the pro-Advisor crowd it provides evidence that there’s a very large need for coaching out there.

[brucecohen]

So, whether or not you make this a DIY vs. Advisor issue, the large amount of RSP withdrawals as well as the lack of planning does show that many people cannot separate logic from emotion when it comes to their RSPs. For the pro-Advisor crowd it provides evidence that there’s a very large need for coaching out there.[/quote]

Yes, indeed.

I was surprised by the number who claim to have a "plan." I don't believe it. Guess it depends on one's definition of plan.

The RRSP withdrawal angle is age-old. Statistcs Canada did a huge study of it about 10 years ago. Prompted Don Blenkarn, then chairman of the Commons Finance Committee, to ask Finance to look into the advisability of imposing an early withdrawal penalty such as they have for IRAs in the US. Finance recommended against it on grounds that it would deter the self-employed from contributing -- and they're the program's primary target. Small business owners are highly averse to tying up their money. Also, many self-employed use RRSPs for income-averaging, putting in money when times are good and taking it out when times are bad.

I think advisors could be very, very valuable as coaches if they can put in the time required. But the economics of the industry are such that most can't -- and won't -- provide the time required by those who most need it, the ordinary folk with low to mid-value accounts. This is a niche the banks could -- and should -- service but they're not. Ditto for most credit unions.