GICs are a dangerous game

Who would have thought that a simple Guaranteed Investment Certificate (GIC) would be in the middle of a controversy that involves the federal government, Parliament, the banking industry, powerful government agencies, privacy law and ethics?

One of the most powerful but least known Canadian government agencies is FINTRAC. Who are they and what do they do?

According to their web site, FINTRAC’s mission is to: “To contribute to the public safety of Canadians and help protect the integrity of Canada's financial system through the detection and deterrence of money laundering and terrorist financing.”

Part of their mandate is to ensure the compliance of reporting entities with legislation and regulations (“Reporting entities” for the sake of this discussion refer to banks, trust companies and credit unions.)

FINTRAC reports directly to the Minister of Finance and their mandate is to enforce the Proceeds of Crime Money Laundering and Terrorist Financing Act.

In the great pecking order of financial things, which government body, agency or regulatory organization, regulates the banks, trust companies and credit unions?

A simple question – but the answer is far more complex.

Some financial institutions say that no, the Proceeds of Crime Money Laundering and Terrorist Financing Act does not apply to them as the bank regulators overrule the Act. In other instances, some credit unions might say they operate under provincial government statutes and federal rules do not apply.

Others have hired risk management lawyers in order to ensure that on-going client data collection can be justified despite the exemptions in the Proceeds of Crime Money Laundering and Terrorist Financing Act.

Although one of FINTRAC’s primary and most important roles is to enforce the Proceeds of Crime Money Laundering and Terrorist Financing Act, they are not enforcing the exemptions regarding registered plans. The Office of the Privacy Commissioner (OPC) has criticized FINTRAC for allowing the over-collection of confidential client data, but FINTRAC’s stance regarding individual Canadian’s privacy rights is that privacy questions are outside their mandate. And the OPC lacks the enforcement powers other than perhaps, moral suasion and fear of audit to force a financial institution to comply. On the public OPC web site, it appears that no financial institution has been brought to task concerning the use of confidential and private information with respect to registered plans.

A minimum of zero?

FINTRAC’s own view of The Proceeds of Crime Money Laundering and Terrorist Financing Act is curious if not contradictory. Although FINTRAC’s mandate is to enforce the Act, they are interpreting the Act by saying that the exemptions regarding registered plans do exist, were passed by Parliament, have force of law, must absolutely be followed but privately, the exemptions in their view are merely minimum requirements.

FINTRAC’s argument that exemptions are minimums makes no sense. What is clear is that Parliament intended RRSPs and other registered plans to be exempt from record-keeping and client identification requirements.

FINTRAC’s role is to enforce that law and to ensure compliance of reporting entities (deposit taking institutions) with the legislation and regulations.

The law specifically states that all registered plans (RRSPs, RRIFs, TFSAs, etc.) are exempted from record-keeping and client identification requirements.

The problem is that most of the banking industry doesn’t like this law and many have largely ignored it as too lenient, too expensive to implement and creates a perceived risk for the banking industry.

These are all valid objections but the law is clearly stated and is the law – no record-keeping and client identification requirement for registered plans like RRSPs.

For almost all deposit taking institutions in Canada, the above Act exemptions are mostly ignored and the banks continue to use and collect record-keeping and client identification information for the opening of registered plans. I only know of one chartered bank in Canada that has a clearly defined policy regarding their RRSP products and they make it absolutely clear that record keeping and client identification requirements are exempted. However, almost all other institutions have redesigned their RRSP applications so that the client or bank customer has to give the extra client information including identification and then the client has to sign the application. Because the client has signed “voluntarily” to give up his personal information, this neatly side-steps the Act’s registered plan exemptions.

FINTRAC, Canada’s financial watchdog, according to the OPC Audit, appears to happily accept whatever unfiltered confidential information financial institutions send them.

Who stands up for the little guy?

Alas, we have a problem or set of unique problems here. We have deposit-taking institutions collecting information they are not supposed to collect. We have FINTRAC that is supposed to be strictly enforcing the Act but may not be. We have the OPC doing a lot of finger wagging at FINTRAC and the banking industry, but not much else.

While the above controversies have been argued about for some time, my view is simplistic. In case of doubt, it is always best to take the moral high road. I do not give client’s personal and confidential information to anyone where it is not required. Bottom line for all registered plans – if is not required, then the information should not be given.

For bank customers who are asked for identification to open up a RRSP or TFSA, I would certainly question the bank as to why they need this information. If the bank or credit union insists or demands that you give up your information and you do not wish to divulge this information, your options are limited. If you refuse, the bank will merely refuse to give you the investment.

As far as I know, no one has filed a complaint with respect to possible FINTRAC violations and/or privacy act violations with respect to registered plans.

Privacy laws are often touted by financial institutions to be very important but in practice, privacy concerns appear to be way down on the priority list. In the view of the OPC, the majority of financial institutions are over-collecting massive amounts of personal and confidential information that is not required.

While the OPC is being critical of FINTRAC and Canada’s financial institutions for the over-collection of Canadian’s personal and private information, the OPC is not totally blameless either. The OPC makes allowances for “know your client” information without defining what “know your client” means. This small hole has, in effect, become big enough to drive a truck through. Financial institutions have interpreted this as carte blanche permission to gather additional information to create their own “know your client” requirements. These internal policies vary greatly from institution to institution resulting in “Babel-esque” confusion about how much or what is required for internal compliance reasons.

Inadvertently, the OPC manages to shoot itself in the foot as financial institutions can use “know your client” rules to over-collect client information as per the OPC’s very own guidelines. From a legal perspective, you have to admire the financial institutions neat end-run around the federal government privacy rules by using the privacy rules themselves as an argument for increased data collection.

One of the basic tenets of Canadian privacy law is that information should not be collected if it is not required. Every day it seems, we hear about or read about millions of customer records being lost or stolen. Information can’t be lost, stolen or misused (even accidentally) if it is not collected. Why bear the risks and enormous costs of acquiring and safeguarding information that does not have to be collected in the first place?

As we all know from the headlines, privacy is becoming an increasingly scarce resource. Information is the new currency and institutions are astonishingly desperate to get their hands on your personal data even if it is not required. It is up to us to safeguard our personal and confidential information as best we can.

Note: The above discourse refers to client name deposits that are held directly by a bank, trust company or credit union. The above mentioned FINTRAC Guideline 6G does not apply to securities dealers (brokerage firms, mutual fund dealers, etc.) as they are exempt.


Proceeds of Crime (Money Laundering) Terrorist Financing Regulations (PCMLTFR)


Paragraph 62.2 (i):

FINTRAC Guideline 6G (exemptions for registered plans):

Office of the Privacy Commissioner (OPC) 2013 audit of FINTRAC:

Privacy concerns with FINTRAC remain:



Fees and Commissions: “To embed or not to embed – that is the question”

Although I have written extensively on the topic and have expressed some concerns about the proposed mandatory use of a fee model in order to replace the traditional commission structures, business writers, journalists (and regulators) think and believe that the new fees will do wonderful things for investors.

I do not share that view.

For instance, I do not think charging a separate fee in order to buy a Guaranteed Investment Certificate (GIC) makes much sense. Currently, a GIC is sold with an embedded fee or commission of 0.20% to 0.25% per year of maturity.

EXAMPLE: a $10,000, 1-year GIC @ 2.0% has an embedded commission of $20 to $25. If my payout is 50% of that amount, I earn a gross commission of $10 or $12.50. My cost to buy the GIC is $15, so in reality, I’ve lost money on this particular transaction. The client gets a great deal - the advisor not so much. But that is the cost of business –you can’t expect to make money on each and every transaction. However, unlike mutual funds where costs are disclosed, the fees and commissions for GICs are not open, transparent or disclosed. They are embedded in the cost of the product.

Wait a minute; shouldn’t we be calling the police or the regulators?!!! The commissions are hidden and not disclosed and I need to know this information in order to make an educated and informed decision! The Globe and Mail editorial columnists would of course, describe this as heinous behaviour on the part of financial advisors taking advantage of the public while lining their pockets with hidden GIC commissions.

Unfortunately, the newspaper may forget to point out that an advisor could easily obtain up to double the interest rate an investor might get from their own bank.

So what is a better system?

  1. Advertise a 1-year GIC rate of 2% (costs all included). This is our current system of embedded commissions.
  2. Advertise a rate of 2.25% and then hand the investor a separate bill for 0.25%.

From a money psychology viewpoint, which of the two above options would you prefer?

I don’t know about you, but I think I would want to stick with the traditional all-in-one final price: Option #1 (all costs included) because what I see is what I get.

Let’s use another example:

You are at Canadian Tire and need to buy a screwdriver. The price sticker on the shelf says $7.77 ea. You grab one off the shelf and proceed to the checkout.

The cashier duly tacks on the 13% HST (for Ontario) and the price is no longer $7.77, it’s really something higher.

While the cashier is ringing up the sale, you are doing some mental gymnastics..let’s see... $7.77 times 1.13 is what...? Damn the new math. The cashier snaps you out your reverie. Her cash register is faster than you are. “That’s $8.78.” she says.

Shoot! You have a five plus a couple loonies. Have to use the new credit card. What is that new PIN number again?

Wouldn’t it be nice to rewind the tape, retrace our steps back to the tool aisle and see the price of the screwdriver priced at $8.78 and when you go the checkout the price you see is the price you get? And yes, for the few of us who absolutely need to know, the tax breakdown on the cash register receipt can give you the detailed breakdown of the taxes that were included in the price.

Does the above example make sense? Of course it does. It is simpler and easier to understand.

Unfortunately in the alternate universe of murky regulatory reform, it doesn’t make sense at all. In that universe, all-in-one pricing even with a detailed breakdown of all included costs is evil incarnate and must be banned permanently. Price plus open-ended variable fees depending what each individual investor can negotiate, is the only way to truth and transparency.

Imagine buying the same screwdriver in that alternate universe. Each one would have a different price.

Most unfortunately, the press and the regulators believe the alternate universe is a better universe.

I disagree.

Embedded costs, fees or commissions are not evil just merely because they are embedded into the price of the product. GICs have always been sold with embedded commissions (fixed and invariable). Does this make GICs evil or the advisors who sell GICs unethical or immoral?

Of course not.

Are mutual funds with disclosed commissions evil because these costs are embedded into the final pricing of the product?

I think you already know what my answer might be.

For mutual funds, exchanging a 1% built-in disclosed commission for a 1% (or higher) tacked-on fee with a conversion cost to the industry of perhaps a couple billion dollars – makes no sense to me.

The current system gives investors a very wide number of choices. Currently you can choose between a traditional commission structure or some sort of fee-for service billing based on a flat fee or percentage of assets. Some individual practitioners might even prefer hourly billing.

If embedded costs are the same or less than unembedded costs, why go through all the agony of changing a system that is fair and equitable and just plain works?

Sometimes the best course of action is to do nothing when nothing is the best thing to do. My advice to the press and regulators is this:

‘Don’t do something; just stand there.’

[1] quote attributed to Jack Bogle –founder of Vanguard funds.

Bad investment advisors

Although TV journalists are often accused of clever editing tricks that can make Mother Teresa look like Attila the Hun, CBC’s Marketplace took some hidden cameras and a “mystery shopper” into some of Canada’s biggest banks and investment firms. The mystery shopper’s role was to pretend she had just received an inheritance of $50,000 and wanted to invest that money. To maximize the effect, the mystery shopper was given a “flash roll” of $50,000 of fake money.

The results as portrayed by the CBC were not pretty.

Some of the staff at these banks and investment firms did not appear to have even a basic knowledge of the investments they were selling and made guarantees of lofty returns. Other so-called advisors or staff bypassed the important and essential risk tolerance questions and questions about debt.

Although the press makes money with their sensationalist “make-them-bleed” type of journalism that is so derigueur today, no doubt the CBC does a very good job of portraying a bad advisor.

Red flags for a bad investment advisor:

-        Poor knowledge of their own investment products.

-        Evasive answers about fees or risks.

-        Guarantees of future performance.

-        Pushy sales tactics.

Flags for a good financial advisor:

-        Excellent knowledge of investments and can explain in plain language; what it is, how it works, what the risks are, advantages and disadvantages, etc.

-        Experience!

-        Open and transparent disclosure of all costs that is associated with an account or an investment.

-        If you are asked “Know Your Client” questions: past investment experience, your investment knowledge, tolerance to risk, time horizon, investment objectives, financial condition, (including debt) etc.

-        Ensuring an investment is suitable and appropriate given a client’s personal situation.

-        A good advisor is never “pushy” or needs to make the sale.

I am sure the major banks and the large investment firms portrayed in the video did not like this CBC report one bit.

We do not know what parts were edited out for effect but what was portrayed in the investigative report implies that the big firms mentioned in the TV program have earned a failing grade. I could only groan while I watched an employee badly fumble a simple question about a mutual fund.

As a financial advisor, I could only watch in horror, the various missteps, lack of basic knowledge and questionable sales tactics that have absolutely no place at all in the industry I work in.

I seriously doubt that all bank employees or advisors are incompetent as portrayed in the video report or that the bigger the firm is – the worse it is. That portrayal would be patently unfair.

I am totally biased of course, but my view based on this investigative report is clear. Yes, do trust your bank with your everyday banking needs but for your investments, it is best to seek out a financial advisor that has been referred to you by a trusted colleague, friend or family member. To ensure the chemistry is “right” between you and a potential new advisor, be the mystery shopper and interview the advisor. However, please leave the $50,000 in cash at the bank!

[Editor’s note: I should point out to CBC’s Marketplace that using cash for investment purposes is prohibited under strict anti-money laundering rules and is not allowed under any circumstance whatsoever.]

Source: CBC Marketplace aired February 28, 2014:



Random thoughts –early January 2014

"Everyone is a genius in a rising market." This has become a sort of ear bug I can't seem to shake. I sense that it is important somehow, but will write about this later.


January - traditional gathering of paper

Investors are starting to receive their annual avalanche of 2013 year-end mutual fund statements.

These statements are important as they summarize the personalized performance (after all costs) of your mutual funds. It will likely include an accounting of your total deposits, total withdrawals and net gain/loss in dollars. Some of the better ones also include a personalized rate of return (ROR) calculation.

Additionally, year-end statements include important tax information such as the Adjusted Cost Base, (ACB) which you may need for some income tax calculations if a fund is sold in a taxable account. Please preserve the sanity of your tax preparer or accountant and give him or her a copy of your statement now rather than wait for the tax deadline of April 30th!

As you peruse your statements, you may want to read my 2013 Review for a short summary of the important investment news items of the year that just passed. Please note the warning about lofty markets!

As mentioned in my review, 2013 was quite the turnaround year for international and global mutual funds. Lest we forget, the U.S. is still considered to be a foreign country. Here is my take on the winners:

Almost anything with the abbreviation, U.S. (as in United States) did extraordinarily well. Many U.S. equity funds earned 30% to 40% returns in 2013[1]. The S&P 500 Index (the primary benchmark of U.S. stocks) did almost 30%,[2] and U.S. dollar appreciation, due to Canada's nose-diving currency, added several more percentage points of return.

In second place, almost anything global did exceptionally well much to the consternation of business reporters everywhere.

[Editor's note: a personal thanks to all the “info-tainement” business news services for supplying me the many contrarian buy signals.]

In third place is a surprise. It is Canada. Despite a "mediocre" Canadian stock market index return of just 9.6%.[3], many Canadian equity mutual funds are enjoying double-digit returns over and above the index.[4]

Although stock markets did very well in 2013, bond markets in North America did not. Many bond mutual funds (funds containing just bonds) were flat or negative in 2013.

All told, 2013 goes down in history as an exceptional year for most stock markets.

[1][2]Sources for TSX and S&P500 data:

[3][4]Sources for Canadian Equity and U.S. Equity :


Cognitive Dissonance Award of the Year (2013)

"Even if it (the fees) were a little more expensive, the advice would be pure, would be tailored to that person and be in their interest."

In order to protect the guilty, no names need to be mentioned but suffice to say, the above quote is attributed to one of Canada's most well-known investor advocates! I must confess that most consumer watchdogs rarely cheer for higher costs to the consumer. But this one does. I have re-read the quote a large number of times - perhaps excessively so. I do a double take each time. 

Although, I have written extensively about adviser remuneration, I have yet to change the minds of the Globe & Mail newspaper, the Financial Post or MoneySense magazine. However, I have not given up yet and 2014 is a new year.

Speaking of giving up, many advisers have reluctantly given up the fight for lower costs for investors and are reluctantly pursuing the fee-for-service model. They have seen the writing on the wall, they said. The regulators and popular press want to eliminate low commissions and replace them with higher fees.  Our local TD mutual fund rep has indicated that slightly more than 50% of the advisers he services in the Kitchener-Waterloo area have already gone over to the fee-for-service model. Given the intense pressures, I really can’t blame them but I will resist charging the higher fees as long as I am able.

[Editor's note: As a recap, the regulators are suggesting that commissions might be eliminated and replaced presumably, with fees. As an example of how this could be done, a bond fund paying a fixed 0.5% commission could instead, be replaced with a 1% fee. Evidently, by doubling the costs to the investor, the advice would, of course, be more pure and be in the best interest of the investor. Re-read quote as stated above.]

Related articles:


Series D Funds and lower MERs

In a conciliatory gesture, a few Canadian mutual fund companies have thrown the regulators a bone. They have introduced a new series of low cost funds (Series D) specifically to the no-help, no-advice discount brokerage channel. I vaguely recall a MoneySense article thanking the discount firm for lowering costs but there was no thank you to the fund company who offered the product to the discount firm. 

As explained to me, the fund company wanted to offer the regulator a concession now in hopes of getting a possible concession from the regulator later.

Hmm... this sort of sounds like hand feeding a shark in the hopes of not getting eaten next time you jump off the dock for a swim.

The first two fund reps in my office after the Christmas break both announced (without much fanfare) lower MERs across the board and lower costs for accounts with +$100,000. No surprise as this continues the long term trend of lower costs in the mutual fund industry.


How do you advertise a mutual fund company?

In the past, you could take out a full page in the newspaper showing some sort of competitive sport team with a catchy byline about teamwork. Expensive ad, nicely done - but entirely forgettable.

If you watch 60 Minutes, you may have seen Invesco's ( U.S.) clever but hilarious TV spots. The commercial says what no adviser would ever dare to say to a client. What a hoot!


Canadian economy lagging?

December's (2013) abysmal economic and employment report was an unpleasant surprise. Canada's neighbour, the U.S., has finally sparked back to life and their economy is gaining momentum.

However, in Canada, we are doing the opposite - we seem to be slowing down. Is this just a onetime anomaly or a sign that our economy is stalling due to spent-out, indebted Canadian consumers?

A year ago, our dollar was at par. Today we are barely at $0.90 U.S. Certainly, cross border shopping trips will thin out somewhat and everything from iPads to winter vacations will cost 10% or more based on currency fluctuations alone. There is hope that a recovering U.S. and world economy will pull Canada up by the bootstraps and the current dip is merely a "soft landing".


Real estate

The Canadian residential real estate market is blithely ignoring the not-so-great economic numbers with remarkable gains approaching 10% year-over-year in some markets with little sign of any imminent crash.[5].

Despite falling sales volumes, prices seem unaffected by the laws of gravity, economics or anything else for that matter.



A short history of mutual fund fees and commissions

I have been reading a lot of articles regarding financial advisor remuneration regarding the purchase of mutual funds in Canada.

I am amazed that so many senior business editors, heads of various trade groups and investor advocates have managed to make so many errors in their attempts to describe what the fees and commission structures are, how they work and how proposed new regulations might affect investors.

Here is some essential background.

Although mutual funds have been around in Canada for several decades, older investors may recall how mutual funds were sold in the early 1980s. There were no deferred sales charge (DSC) funds, low load funds or the various other permutations found today.

If you wanted to buy a mutual fund, you had to pay a commission called a front-end load. The front-end load could be as high as a 9%. The front-end load commission by its very nature is open, transparent and disclosed. The investor would receive a written confirmation detailing what the commission was (in dollars) what the price of the fund was, the name of the fund, purchase date, etc. Not much has changed today and if you choose to buy a mutual fund with an open, transparent and disclosed commission, you still receive the same confirmation details by mail shortly after the purchase date. In any case, no one has ever argued that front-end loads/commissions are not open, transparent or disclosed.

After the mid-1980s, the fund industry introduced a new way of buying mutual funds that neatly managed to side-step the lofty front-end commissions of the time. The deferred sales charge was born. In this unique arrangement, an investor would pay 0% commission to buy a fund and 0% to sell a fund provided that he agrees to one condition: the investor promises not sell his fund within the first seven years of ownership. This is not to say that selling a fund is impossible but early redemption penalties could be severe (up to 6%) if you sold the fund soon after buying it. But if you kept it for the full seven years, you could sell all or part of your fund at no cost plus don’t forget, you escaped the big front-end commission when you bought it. Soon, the DSC way of purchasing a mutual fund became very popular. At the same time, the fund companies introduced the concept of trailer fees. Trailer fees are a fixed annual compensation to the adviser for managing and servicing the account which provides the adviser annual compensation between 0.5% and 1% depending on the type of fund. The press thought this was wonderful – a win-win situation. The adviser gets paid, the investor escapes all commissions and the annual remuneration to the adviser (the trailer) would effectively kill the potential threat of “churning”. Trailers changed the perception of mutual funds forever as advisers no longer had to make a trade in order to make a commission. From now on, mutual funds would not be traded as frequently as stocks.

By the late 1980s, Canada’s banks bought out most of the big stockbrokerage companies and the banks started creating no-load mutual funds of their own. No-load does not mean free as there is still a profit margin built into these products and there is definitely an exchange of compensation from the fund management company to the retail bank side. However, from strictly the view point of the bank customer – bank mutual funds are “free” and they were now in direct compensation with the independent, commission based adviser.

In a free market environment, competition is good and “free” is one of the most powerful market motivators of all. In the early 1990s the competitive marketplace became even more competitive as other no-load funds entered the fray. For instance, during that decade, one no-load firm, Altamira, became a juggernaut of the no-load world. Altamira ultimately, flamed out and crashed and burned during the “tech wreck” as legions of DIY (do-it-yourself) investors piled into their tech funds and then pulled it all out as the tech sector crashed. Altamira went from riches to rags literally, overnight. [1]

In response to an increasingly competitive environment, advisers had to cut commissions and front-end loads went from the high single digits to zero. With commissions at zero who would want to buy a DSC fund that could have a possible exit fee? As a result, DSC funds have greatly declined in popularity and for new purchases, front-end mutual funds at 0% commission (set by the adviser) is commonplace today. Therefore, those advisers living off 0% commissions and the annual trailer (0.5% to 1.0%) are being assaulted by the “make them bleed” press and also by investor advocates that believe (from the press, I gather) that any commission at all (even low ones) is truly evil incarnate.

Certainly we have a wide disparity of views out there.

Therefore, it with some bemusement that I see the media keeps referring to current adviser compensation as excessive and bloated. The DSC fund that was lauded by the press in the 1980s is now vilified by the same press in 2013.

The press indeed does have the regulator’s ear and the Canadian Securities Administration has decided that commissions in general might be, perhaps, possibly, could be, a problem. After extensive study of the subject, I am still trying to find out what problem they are referring to.

Commissions have declined precipitously, churning has all been eliminated, and mutual funds are the cheapest they have ever been. There is far more regulation now and compliance is at the tightest levels ever. So, exactly what is or where is the problem?

Does this mean the press, regulators and investor advocates are yearning for the good old days of the 1980s and 9% commissions – commissions that indeed were open, transparent and disclosed so long ago?

[1] National Bank bought the remnants of Altamira, successfully turned the company around and incorporated the Altamira name into National Bank’s own mutual funds.

I don’t know about you but speaking for my clients, I am not getting all that nostalgic about the good old days of fixed non-negotiable 9% commissions but maybe the regulators may force us to charge front-end loads once again. Talk about things coming around full circle!

Therefore, I find it difficult to believe that the press, regulators, and investor advocates are targeting the current structure of negotiable commissions (now negotiated down to zero) coupled with a trailer fee.

The old DSC method of buying a mutual fund has had its day but with the trend to 0% front-end commissions, mutual fund purchased the DSC way will eventually go by the wayside.

Personally, I prefer that an asset under management fee/service fee/trailer be built in the price of the product rather than force someone to pay a separate bill.

Bottom-line, it is all about choice. If the client needs a fee-based account, we can supply that. If a commission based account works better for the client –we can do that too.

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