Tuesday 8 May 2018

Vulnerable Investors / Elder Abuse report proposes Walrus Should Help the Oysters

FAIR and the Canadian Centre for Elder Law should have taken the advice of the eldest oyster in the Walrus and the Carpenter poem from Lewis Carroll's timeless classic book Alice In Wonderland. Instead of listening to elders however, they have adopted the role of busybodies delivering investors further into the hands of the main perpetrators of elder abuse, the financial "advisor" industry.

Why is their report on Vulnerable Investors so problematic? What could be bad about asking securities regulators to force the investment industry to prevent abuse of "vulnerable" investors?

#1 Absence of fiduciary duty by financial advisors - For the vast majority of investors (the exception being the minority who have turned over discretionary trading power to Portfolio Managers), financial advisors do not have to put the interests of investors only and strictly above their own interests. Almost all financial advisors are in effect salespeople who only have to abide by the weak suitability standard. Why would we want to trust them to suddenly begin acting for the best interest of investors who in addition happen to be vulnerable? It's a bit like being worried about foxes (untrustworthy family members or false friends) abusing the chickens and asking the wolves (financial advisors) to do the protecting. Is it not the case that there are far more instances of investors being hard done by the investment industry than by family members abusing their Power of Attorney (who do have a fiduciary duty)?

#2 Can of worms definitions for "vulnerable", "exploitation", "diminished capacity", "undue influence" and "abuse" - Beauty is in the eye of the beholder, goes the expression and what these terms will mean in practice will depend on the interest and intent of those taking action, in this case investment firms. Regardless of whether this motivation is well-meaning or not, instituting powers recommended in the report will launch a whole new legal cottage industry of interpreting those terms. First the lawyers create a problem, then they solve it.

Take the word vulnerable, for instance. It isn't being pedantic to say that everyone truly is vulnerable at all times regarding investments. Despite my years of financial blogging, my formal education in finance, my considerable (my wife probably would say excessive) interest  in investing and my decades of experience self-managing my own portfolio, I am keenly aware of holes in my knowledge and weaknesses in my character that have the potential to cause me considerable financial harm. Others in my family, intelligent people and quite competent in their occupation, are consciously completely ignorant of the most fundamental aspects of investing. They are highly vulnerable to financial foxes and wolves.

Investing is complicated enough already. Why then make it even more so by adding a whole new domain of legal considerations, nominally well-intentioned though they may be? The clearest kinds of abuse such as stealing or fraud are already covered by laws that apply to everybody, vulnerable or not. The financial industry is already free to report suspected cases to police. The police are also more likely neutral than the conflicted broker industry. It is disingenuous to say that the police are poorly-equipped or under-resourced to deal with abuse cases and that therefore there should be a big additional resourcing effort in the investment industry. Keep it simple - put the resources and the task on the police who people know are supposed to stop or catch the bad guys.

#3 Nefariously under-mining individual responsibility and expanding the culture of victimhood - The whole philosophy of labelling elders as weak, fragile people that the nanny state must step in to protect insidiously undermines the message that every adult must take prime responsibility for his or her life. That includes planning ahead for potential incapacity e.g. i) by re-structuring investments to be ultra simple or by setting up automatic annuities for income in place of investments, and ii) by putting in place powers of attorney in the hands of individuals who are both competent and trustworthy. It means cultivating family and friend relationships so that someone is actually willing to take on a job that is often onerous and time-consuming (sometimes the real elder abuse is the elder doing the abuse of younger people making unreasonable difficult demands - one of my relatives comes to mind, someone who refused for over fifteen years to accept sound financial advice, spent all of her liquid investments to fund her chosen lifestyle and then went to the bank for a loan - really! in terms of her best financial interests this was clearly abusive for a woman over 90 - and then refused to grant power of attorney to anyone while still mentally competent but now is incompetent, complicating things for my sister who is trying to help her, while being accused of stealing things by my aunt!).

A person must take time out from planning the next holiday or researching the best car to buy to think of the future. Understanding that if you do not plan ahead bad things are likely to happen. In that regard, several of the case studies of abuse in the report display elements of people failing to mind their future when they were of sound mind and had the chance. Other examples smack of people being stupid and wasting their money .... but everyone has the right to spend their money wastefully, no? Who is to say whether it is wasteful, anyway?

Being now officially a senior, allow me to repeat, the eldest oyster's comment (sourced on the Alice in Wonderland wiki),
"The eldest Oyster winked his eye,
And shook his heavy head--
Meaning to say he did not choose
To leave the oyster-bed."

Friday 13 April 2018

IIROC - Shafting Self-Directed Investors by Fixing What Ain't Broke at Discount Brokers

Grrr! IIROC, please leave us alone! With friends like you, self-directed investors don't need enemies. Despite receiving many objections and warnings from both investors and discount brokers (such a convergence of views sure doesn't happen often!) against measures that will make the discount broker business more complicated and costly to the detriment of investors, the regulator IIROC is ploughing ahead with a revised Guidance.

What kind of bad things for investors are likely?
  • disappearance and future restriction of many useful useful tools like model portfolios under the pretext that this is making recommendations aka providing advice, which the discount brokers are not allowed to provide; I would dearly like to see a (good) risk assessment module attached to the model portfolio selection tools but this probably won't happen now
  • rising fees or commissions charged to investors as the brokers are obliged to provide more complicated vetting procedures to ensure investors are only allowed to open "appropriate" accounts
As I said in my own comments to IIROC over a year ago, the history of the discount brokers over the two decades during which I have been an active investor with a bunch of them (BMO InvestorLine, TD Direct Investing, Questrade, RBC Direct Investing) has been pleasingly positive - low trading and administration costs, broad and steadily expanding product availability and services, responsive people when when a few administrative issues arose, impressive and widening range of useful tools, reports and educational material. In all those years I have been a client, the worst negatives have been the too-high rates charged for foreign exchange conversions to invest to or from US markets; the not-great pricing, and inventory at some brokers, of bonds; the restricted choice resulting in the not-best-in-market rates on high interest savings accounts for idle cash and; for those who unlike me bought certain classes of mutual funds, the embedded fees for advice collected by the brokers despite not providing any advice.

Overall, the discount broker business has been a shining bright spot for individual investors unlike too many other sectors of retail financial services where high costs and abusive business practices have severely gouged into the savings and investments of ordinary Canadians.

The treatment of investors by discount brokers (termed Order Entry Only / OEO by IIROC) is not broken. It is very suspicious to say the least that IIROC has steadfastly refused to release its own research of 2013 (yes, they have taken that long to look at this) and 2015 into the investor experience with discount brokers. Where's the abuse, where's the damage to investors? So why try to fix them? One wonders what is going here - bureaucratic empire-building within IIROC with un-necessary make-work regulation based on a theoretical issue that is not one in practice? a put-up by costlier advice-based services to cut out a very competitive channel and drive investors back to the fold? I don't know but the purported investor-protection motivation doesn't wash.

The nub of the issue is simple: due to the transparent fundamental relationship established at the outset that discount brokers do NOT provide advice (which is manifestly clear in the term Order Entry Only), anything that they provide is to be considered marketing or sales promotion. Some of it is junk but much of it is useful and we are all free to take or leave what we want. The notion of IIROC trying to protect me when there is not a problem is patently ridiculous and worse, likely harmful to me as it pressures discount brokers to restrict future services and to charge me more. I'm just fine, so get lost, IIROC!

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