OK, now I'm angry.
I apologize to those of you who think of me as a mild-mannered and diplomatic Bruce Wayne, but some recent occurrences have me feeling more like the Dark Knight, ready to kick some butt.
What has me riled is repeatedly discovering people in a position of trust misusing that trust for their own purposes. Pushing me over the edge is the fact a few of these people are called "financial advisers," but are really salespeople in professionals' clothing.
All I'm asking for is full and honest disclosure of all relevant facts, proper warnings when people are taking any form of risk, and no false promises or representations.
A good example is a "wealth management consultant" with a bank who told people they could eliminate their investment management fees by moving from a pension plan manager, who fully discloses fees on every quarterly statement, to the bank's mutual fund family, where the fees are 50 per cent higher, but only disclosed if you read the mutual fund prospectus.
The real irony here is that the adviser is actually doing a good job for these clients in many ways. I believe she has their best interests at heart, but is either ignorant or dishonest. Neither one is acceptable, but I would prefer the former, I suppose.
I'm fed up, so I quit ignoring these occurrences and decided to pursue remedial action through regulatory and legal channels any time I come across such an example. To keep the newspaper's lawyers comfortable, I won't provide any identifying information here.
Please don't get the impression that incompetence is rampant among financial advisers; it is not. The vast majority of the ones I know are honest, hard-working professionals who put their clients' interests above their own at all times.
Part of my anger is because the vast majority of good advisers suffer by losing business to the few liars who make grand promises. They then give us all a bad name when they can't deliver or are otherwise found out.
We recently uncovered a heinous example of an investment adviser with a bank-owned investment dealer who has been churning deferred sales charge (DSC) mutual funds for two clients over a number of years. The unnecessary deferred sales charges that the client has paid exceed $100,000. None of these were necessary, except to generate an extra $100,000 in commissions for the investment dealer.
Here's how it's done, so you can watch out for it in your accounts. The clients' money is placed in a DSC fund. There is no charge to the client, but a commission of typically five to six per cent of the invested amount is paid by the mutual fund company to the investment dealer, to be split with the salesperson.
The fund company earns this commission back over time from the management fees charged to your mutual fund each year. If you redeem your fund before the fund company has been paid back, you pay the deferred sales charge. In the first two years, this is typically six per cent, declining each year for five to seven years, or sometimes less. After that redemption period, the commission has been earned back and the DSC is eliminated.
Good advisers make sure that any money that will be withdrawn during this period (like regular RRIF withdrawals or cash reserves held in money market funds) will not incur a DSC, making a sale on some other basis.
Failure to make this provision is either negligent or greedy.
"Churning" occurs when the adviser puts the client into a DSC fund with one fund family, and then moves the money to another fund family, earning a new commission but hitting the client with the DSC. Sometimes, there is good reason to have to make that switch, but we uncovered some blatant examples of the switch being made for no good reason (for the investor).
It will sound like I'm picking on the banks here, but we come across cases of negligence, incompetence and dishonesty with independent advisers, as well. Other examples include setting up fee-based "adviser" accounts, where you are charged a set amount each year as a percentage of your account, instead of paying commissions on each transaction. That's a great arrangement for many clients, and puts the client and adviser on the same side of the transaction.
The abuse occurs when an adviser then peppers the account with new issues, which might pay an additional four per cent commission on top of the fee. Most firms have policies against this.
So remember, investors, be careful out there. And dishonest advisers, watch your back.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at dchristianson@wellwest.ca
PREVIOUS
