Questionable sales practices

[Norbert Schlenker]

Morgan Stanley received secret payments and offered its brokers undisclosed incentives to sell variable annuities, according to a class action filed against the firm earlier today. Merrill Lynch is expected to face a class action later in the day making similar allegations.

The suit against Morgan Stanley was filed in the Southern District of California in San Diego in the name of William Dornan, a San Marcos, Calif. resident and former Morgan Stanley client, who made similar allegations in a December complaint filed with the National Association of Securities Dealers. His attorney, Ronald Marron, said he plans to file a class action charging Merrill Lynch with similar wrongdoing. Marron also has a complaint pending with the NASD in which Charles Schwab is accused of wrongful variable annuity sales practices and abuse of elderly clients.

A Morgan Stanley spokeswoman said the suit is without merit and that it believes its variable annuity sales practices are "appropriate and have been properly disclosed." The company also maintains a variable annuity client bill of rights outlining the complex products and designed to protect investors, she added. Merrill Lynch spokesman Mark Herr said the company had not seen the suit and declined comment.

Variable annuities are a form of life insurance that includes a lump-sum death benefit and tax-deferred investments, often mutual funds, which are supposed to provide income during a client's lifetime. They can be particularly lucrative for insurers because of high upfront commissions, plus ongoing "trailer" commissions and the underlying fees for the mutual funds included in them.

Dornan's class action alleges that at least since 1990 variable annuity underwriters and Morgan Stanley maintained "secret contingent fee sharing arrangements" in which a portion of commission revenue was paid to the brokerage as an incentive to sell the product. Morgan Stanley has also limited its variable annuity sales to underwriters who participated in fee-sharing deals, it adds. The suit further claims that Morgan Stanley brokers received bonuses based on sales volume.

Under its fee-sharing arrangements, Morgan Stanely has received 10% of first-year commissions back from underwriters as contained in an "override addendum" on variable annuity policies, according to information Marron says he received from Morgan Stanley during the discovery process for Dornan's NASD complaint. That is in addition to half the 7% first-year commission on such policies, he said. Morgan Stanley brokers further received volume bonuses entitling them to up to 15% of first-year commissions for booking over $100,000 in "eligible production" on variable life insurance products, Marron said. The attorney further charges that the prospectuses Morgan Stanley provided clients included "misreprentations and omissions" of its financial interests.

Revenue-sharing by underwriters and brokerages is legal if properly disclosed. However, the class action claims the arrangements enabled Morgan Stanley to "receive a higher amount of compensation from the annuity transaction than disclosed to the client in the annuitiy's prospectus and related materials." ...

Neil Weinberg, Forbes

[advocate]

good post

i too found it on my forum

many other questionable sales practices out there, but most still hidden under the indstry "code of silence".

Should an industry based on integrity and trust be able to use a mafia-like code as an everyday tool?

[Feeonly.ca]

Does anybody know what's happened with Robert Kyle's excellent site: www.regulators.itgo.com ?

[Bylo Selhi]

Does anybody know what's happened with Robert Kyle's excellent site: www.regulators.itgo.com ?

It's been unavailable for at least a day. His host is "Free Servers Premium." Perhaps he failed to renew the "premium" for his "free" server?

[advocate]

it would be a great loss if Robert Kyle's site is no longer available

it was the best library of industry practices in Canada

I have not heard from Robert in some time, and I am hoping he is doing fine,

I will let you know if I hear anything
the advocate

[Bylo Selhi]

Does anybody know what's happened with Robert Kyle's excellent site: www.regulators.itgo.com ?

Received by e-mail from Mr Kyle: Investor Advocate Says "Mere Threat" Kills Web Site

[moonman]

And it looks like advisor.ca has picked up on the story.

Investor advocate in website battle
Doug Watt

(July 21, 2005) Investor advocate and regulatory crusader Robert Kyle's website has been shut down by his American service provider.

The move follows legal threats from a Canadian law firm regarding some of the content on the site, Kyle has been told.

It's believed MacPherson, Leslie & Tyerman want all court documents related to legal claims involving advisor Brian Mallard and former employee Kent Shirley removed from the site since the matter is still before the courts.

Kyle did take down those particular documents and has set them up on a separate server. Still, the U.S. provider, United Online Web Servers, refuses to restore the main site, which has been down since last Friday.

"I think this is a freedom of speech issue," Kyle says. "And if we have Internet service providers being threatened by people who just don't like what is already circulating in the public domain, that's no justification for not publishing it. I think this material needs to be public."

United has not provided a written explanation to Kyle for closing his site. And it is under no obligation to do so. The company's service agreement says that United reserves the right to discontinue service for any reason.

Kyle's site contained hundreds of news articles, documents and court cases all related to self-regulatory organizations and the Canadian securities industry. "It took me seven years to build it, I can't do it overnight."

In addition, Kyle is worried about how this case will affect other investor sites. "If they can squelch all of this just by threatening the web hosts, then we're not going to have a voice in this country."

Kyle, a former derivatives trader, has been engaged in a long-running fight with Canadian regulators after his firm was shut down in 1998. He refused to cooperate with the IDA's investigation, challenging the brokerage industry association's regulatory powers. To date, his numerous legal efforts have been unsuccessful.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(07/21/05)

Perhaps Rogers got pressure as well - http://ca.geocities.com/robertkyle@rogers.com/index.htm

Or maybe not since advisor.ca is a Rogers site.

[worthy]

Not much different from my experiences with Canadian business publications that would crumple at the first Notice of Intent to file.

[Bylo Selhi]

Perhaps Rogers got pressure as well - http://ca.geocities.com/robertkyle@rogers.com/index.htm

Or maybe not since advisor.ca is a Rogers site.

Try "not." http://ca.geocities.com/investoradvocate@rogers.com/ works fine.

P.S. The "********@rogers.com" is the name of the free webspace allocated by geocities to Kyle. It's not the domain name nor is it under the control of Rogers. Geocities is part of the Yahoo empire. AFAIK Teddy still doesn't own Yahoo (yet.)

[Norbert Schlenker]

Link cadged from M*.

... there are good people in the financial services industry. They're not all "thieves" and "criminals" -- an impression the emailing insurance agent accused me of propagating. From our brief email exchange, I think this particular fellow is one of the good guys.

Beware of the sharks
But then there are others. Generally, a broker or agent receives a much higher commission on an annuity than he/she would get from selling mutual funds, stocks, or bonds. This creates an incentive to oversell them. Consider these recent developments:

* Bank of America (NYSE: BAC) has agreed to return the money of anyone who purchased an annuity in 2003 and 2004 and was age 78 or older. The action is a result of an investigation by the Massachusetts Secretary of Commerce, William Gavin, who said, "My office has received several complaints from seniors and their families of high-pressure sales tactics used to sell an annuity to people for whom it was not an appropriate investment."

* Citizens Financial Group, acknowledging "'unethical or dishonest conduct," agreed to offer refunds to all its elderly customers who bought variable annuities in the last two years and will pay a $3 million fine.

* In April, Waddell & Reed (NYSE: WDR) paid $18 million to settle charges that it pressured customers to exchange their annuities (i.e., switch from one annuity to another, generating a commission).

* A company that sold 202 annuities in Florida was placed into receivership because it wasn't properly licensed. The investors will not be able to get all their money back.

And then there's the way they're marketed. In 2002, the Wall Street Journal wrote an article about "Annuity University," where agents are taught how to sell annuities to the older crowd. "They [senior citizens] thrive on fear, anger, and greed," the instructor exhorts. "Show them their finances are all screwed up so that they think, 'Oh, no, I've done it all wrong.' This will make you money. ... Toss hand grenades into the advice to disturb the seniors. You're there to solve their problems, but you have to create those problems first. No problem, no sale." He later adds: "Tell them you can protect their life savings from nursing-home and Medicaid seizure of assets. They don't know what that is, but it sounds scary. It's about putting a pitchfork in their chest."

That might be an extreme example -- but not that extreme. As I've written before, because I subscribe to many financial periodicals, I regularly get spam targeted toward brokers and agents. Here's a solicitation I just received for a marketing program targeted toward seniors: "[The system] attracts affluent prospects like bees to honey ... it prescreens them for you ... and then it puts them in front of you prepared to move assets -- mammoth-sized assets -- at your direction! ... [The program shows] how to find and acquire the PERFECT, affluent senior prospect (then instantly convert them for easy profits for the rest of their life!)."

Finally, there's this, from none other than Fran Tarkenton: "There are 38,000,000 Seniors in America. Do they know who you are? Seniors know and trust an American Classic, NFL Hall of Fame Quarterback Fran Tarkenton. If you are a professional in the insurance industry focused on the Retirement and Senior Market, Tarkenton Financial can help you build your business."

Nowhere in these ads will you find anything even vaguely along the lines of "we'll help you help your clients achieve their financial goals." Because, for some of these people, it's more about building their own net worths, not their clients'.

Seek advice, but be careful
Intelligent, informed, and ethical financial advisors provide a great service. I've met many, and I know their clients are better off because of their services. Some of these good advisors even sell annuities -- but only in the limited number of situations for which they're appropriate. If you're looking for an advisor, or looking at an annuity, take extra time to make sure you're getting a good one.

Brokamp, TMF

[Bylo Selhi]

For internal use only [Financial Post, 08Aug05]

The nasty big secret of the retail full-service business is that the payout policies of most firms still reward production more richly than any of the other things the industry talks about: portfolio management, financial planning, or plain good service. Rookie brokers quickly learn that the way to stand well with the branch manager is to qualify for the list of top producers published monthly in the branch, not by helping clients get the best possible return on their investments.

[Norbert Schlenker]

Link provided by a friend.

What's the difference between the average advisor and a top-performing advisor?

An average financial advisor in Canada generates annual revenues of $643 per client ($250,000 ÷ 389 clients). Top-performing financial advisors generate annual revenues of $768 per client ($400,000 ÷ 521 clients).

Standard Life

Now you know what "performance" really means.

[Shakespeare]

Where are the customer's yachts?

[nadreck]

Link provided by a friend.

What's the difference between the average advisor and a top-performing advisor?

Wow I would love to see the same figures for active fund managers.

[Brix]

Where are the customer's yachts?

There's not much in the way of reliable data on the distribution of Canadian yacht-ownership by occupation. Information is especially scant for the prairie provinces.

[scomac]

Where are the customer's yachts?

In the marina....registered in the names of all those financial services industry executives. John Hunkin anyone....

An average financial advisor in Canada generates annual revenues of $643 per client ($250,000 ÷ 389 clients). Top-performing financial advisors generate annual revenues of $768 per client ($400,000 ÷ 521 clients).

Hmmm.... It would be tough to supply anything more than lip service with a 500+ client book of business.

Gee....no wonder I'm doing sooo much better as a DIYer. My advisor actually works for me and not the firm.

Scott

[Springbok]

For internal use only [Financial Post, 08Aug05]

The nasty big secret of the retail full-service business is that the payout policies of most firms still reward production more richly than any of the other things the industry talks about: portfolio management, financial planning, or plain good service. Rookie brokers quickly learn that the way to stand well with the branch manager is to qualify for the list of top producers published monthly in the branch, not by helping clients get the best possible return on their investments.

In today's Globe, there is a column by Harry Koza - the Bond Jungle: You are what you make. It is about bond traders and what they make.

http://makeashorterlink.com/?O338525CB

What struck me about his column was that he was complaining about the way the booty that the traders and portfolio managers generate gets divied up. He feels that the traders should get a 50/50 cut and that portfolio managers should be rewarded by a bonus on the amount by which they exceed some target.

No mention on basing renumeration on how well they do for their clients!

Have you ever though about out how much of an average retirees life savings ends up in the hands of the financial instititutions? I suspect at least one half as a result of fees etc.

This is one area where the government should perhaps step in. Members of this forum may be able to do their own investing, but 90% cannot.

There should be a no-fee alternative of earning income from RSP savings so that the full benefit is enjoyed by the retiree.

[nadreck]

This is one area where the government should perhaps step in. Members of this forum may be able to do their own investing, but 90% cannot.

There should be a no-fee alternative of earning income from RSP savings so that the full benefit is enjoyed by the retiree.

I am hesitant to have the government involved for fear that in the name of reforming things they make regulations that might hurt individual investors freedom of choice.

As well I would dispute the 90% cannot. I would say that 90% of the general public have the ability to learn to manage their own investments (and a slightly different 80% at least have the ability to live within their means and generate the funds to invest). And certainly 90% of the people who have money to invest could learn to manage it themselves. However, they don't choose to learn for a variety of reasons.

If we can afford to spend money telling people how to reduce CO2 emissions, quit smoking, keep our children from doing drugs, etc. Then maybe we could afford to try to educate the public on how to manage their money and their investments. It might be a better direction for the government to expend efforts.

[Springbok]

This is one area where the government should perhaps step in. Members of this forum may be able to do their own investing, but 90% cannot.

There should be a no-fee alternative of earning income from RSP savings so that the full benefit is enjoyed by the retiree.

I am hesitant to have the government involved for fear that in the name of reforming things they make regulations that might hurt individual investors freedom of choice.

I was thinking about not too much government involvment - Just some low entry cost alternatives to going with brokers or banks in order to keep the brokers & co honest (Fat Chance!)

CSB,s used to provide some of that. We do have CPP but not everyone can participate - this is where GOC could help - Open CPP so as to allow investment by those who do not now qualify such as new imigrants, homemakers, etc.

If a financial organization takes 1 to 2.5% per annum, a government sponsored plan could offer safe investments earning say 5% at present for retirement savings and they would be snapped up.

[nadreck]

If a financial organization takes 1 to 2.5% per annum, a government sponsored plan could offer safe investments earning say 5% at present for retirement savings and they would be snapped up.

It depends what you mean by safe. If they invested like a sensible pension fund, certainly, but they could not guarantee 5% even though they were likely to manage 6% to 7% without fees.

It all comes back to risk. No one takes risk for the investor and offers them the returns you get for risking money. Even the government can't cope with doing that and shouldn't in my mind.

What I hate about the actively managed fund industry is that they take their clients money and they seem to take more than the risk premium that they earn by risking their clients' money while leaving all the risk with the clients. I also suspect the motives of mutual fund management when the mutual funds are owned by the same entity that owns investment banks that underwrite share offerings that these funds subscribe to. Call me a cynic or paranoid, but it seems to me a very convenient relationship for every one: the investment bank gets 5-10% of the money raised by offering the shares, if they have trouble placing the shares their funds can buy some and take 2.5 - 3% MERs on the funds that the other arm got 5 to 10% on.

I have never once heard of a mutual fund manager in trouble for buying shares of a company that the parent companies investment bank underwrote shares for. I don't think it is an area that is policed in the slightest.

[Moe Mentum]

Where are the customer's yachts?

There's not much in the way of reliable data on the distribution of Canadian yacht-ownership by occupation. Information is especially scant for the prairie provinces.

I suppose that you will have to contact Pontiac or John Deere for details on prairie yacht ownership.

[Shakespeare]

Prairie Schooners

[dakota]

Prairie Schooners

I'm a bit of a pioneer book fan and found the illustration and article very informative. Thanks Shakes

[yielder]

Just some low entry cost alternatives to going with brokers or banks in order to keep the brokers & co honest (Fat Chance!)

There's a reasonable and increasing range of low cost products available right now from iunits to low cost managers such as PH&N, Saxon, some of the bank products, and CEFs such as those from Scotia Managed Companies and Brompton. For foreign content, you can get even lower cost products.

a government sponsored plan could offer safe investments earning say 5% at present for retirement savings and they would be snapped up.

Where do I sign up? The best that I can get right now from the gov't is 4.14% on a GOVERNMENT OF CANADA BND 8.00 2027/06/01. The only way for the investment to earn 5% would be to have the return subsidized in some form.

It might be a better direction for the government to expend efforts.

Not if they are as effective as the examples you cite. If you want to increase the amount that people save for their retirement - it's a savings problem not an investment problem, you might be better off to take it out of their hands entirely. Eliminate RRSPs and increase the CPP contribution to a level where CPP benefits are enough to live on. Eliminate OAS which is an opened end time bomb and roll current OAS tax requirements into CPP. Savings for retirement becomes mandatory. People will scream bloody murder because their consume now/screw tomorrow life style will be eliminated.

Or maybe you change the tax consequences of not saving. Right now you get a break for making an RRSP contribution. Maybe you should go into a higher tax bracket if you don't make an RRSP contribution. Take the extra revenue earned and dump in it the CPP pot not general revenues. Maybe the carrot needs to be supplemented with a stick.

These are complete non-starters because no gov't intentionally commits suicide.

the investment bank gets 5-10% of the money raised by offering the shares, if they have trouble placing the shares their funds can buy some and take 2.5 - 3% MERs on the funds that the other arm got 5 to 10% on.

Yep. Very possible. But the fund manager might kick up since he is personally being affected by being forced to eat something that no one else wants. The juicy part of his compensation is tied to his fund performance. Speaking from painful experience , I can say that these guys can get quite nasty when their wallet is getting hit by something with which they had nothing to do. I'm not saying that it doesn't happen only that it doesn't happen very often or in very significant amounts. If the market doesn't want an issue, it gets pulled or sweetened or reduced in size.

[nadreck]

But the fund manager might kick up since he is personally being affected by being forced to eat something that no one else wants. The juicy part of his compensation is tied to his fund performance. Speaking from painful experience , I can say that these guys can get quite nasty when their wallet is getting hit by something with which they had nothing to do. I'm not saying that it doesn't happen only that it doesn't happen very often or in very significant amounts. If the market doesn't want an issue, it gets pulled or sweetened or reduced in size.

While I don't dispute that an issue gets pulled or changed from time to time. However I don't see statistics (and would love to if you know of ones) that show me the difference in compensation between fund managers for individual funds that they manage and the statistics on performance on those funds. I see little difference in MERs between funds with gains and funds with losses. MERs represent compensation for the team that manages and administers the fund and profits for the firm that runs it. If a major part of management compensation is based on performance, does that mean that the managing firm gets less profit when the fund performs well?

One other issue that may complicate this, if a fund manager is involved with several fund, and many are, if they have one that is not performing well this quarter/year/3 years or whatever period contributes the largest share to the bonus, then he has no bonus disinsentive to make that fund perform a little worse.

Another issue of managing more than one fund, is if the manager deliberaty invests with a strategy that gives him a high probability of success of one of his funds to the detriment of the group of all of those funds as a whole, then he gets a bonus for one but not others and regular pay for all. Is this 100% the case? certainly not, I doubt if it is even 50%. The problem is the compensation seems to allow for that. Though I don't have accurate figures on the break down of compensation and would love to add that to my perspective.

Finally you used the expression "forced to eat" and I have often thought it would be nice if fund managers were truly forced to eat their own cooking. Imagine if fund managers had to invest their personal funds proportionally in the funds they manage (proportionally to the size of the funds).



As well consider that many fund managers man