Be Wary Of Thieves And Bandits
David Christianson, CFP, R.F.P., TEP
Okay, now I’m angry. I apologize to those of you who think of me as a mild-mannered and diplomatic Bruce Wayne. 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 that a few of these people are called “financial advisors,” but are really salespeople in professional’s 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.
Today’s example was a “wealth management consultant” with a bank who told people that 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% higher, but only disclosed if you read the mutual fund prospectus.
The real irony here is that the advisor 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 advisors; 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 based on the fact that the vast majority of good advisors 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 they are otherwise found out.
We recently uncovered a heinous example of an investment advisor 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 5-6% 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 6%, 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 advisors make sure that any money that will be withdrawn during this period of time (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 advisor 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 the examples we uncovered were as blatant as moving from Fund Family A Canadian Bond Fund to Fund Family B Canadian Bond Fund. In that example, there is no way a 6% DSC will ever be earned back.
It will sound like I’m picking on the banks here, but we come across cases of negligence, incompetence and dishonesty with independent advisors, as well. Other examples include setting up fee-based “advisor” 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 an advisor on the same side of the transaction.
The abuse occurs when an advisor then peppers the account with new issues, which might pay an additional 4% commission on top of the fee. Most firms have policies against this, and will rebate the commission in instances where one has to be paid. However, some rogue advisors still seem to get away with this.
Remember, investors, be careful out there. Dishonest advisors, watch your back.
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This article originally appeared in the Winnipeg Free Press on Friday, August 1, 2008.