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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