: Kenmar Associates - Submission

Ontario Ministry of Finance                                                           
Fin.Adv.Pln@ontario.ca

April 15, 2016

COMMENTS ON PRELIMINARY POLICY RECOMMENDATIONS OF THE EXPERT COMMITTEE TO CONSIDER FINANCIAL ADVISORY and FINANCIAL PLANNING POLICY ALTERNATIVES http://www.fin.gov.on.ca/en/consultations/fpfa/fpfa-policy- recommendations.html

Kenmar Associates is an Ontario- based privately-funded organization focused on investment fund investor education via on-line research papers hosted at www.canadianfundwatch.com. Kenmar also publishes the Fund OBSERVER on a bi-weekly basis discussing investor protection issues primarily for investment fund investors. An affiliate, Kenmar Portfolio Analytics, assists, on a no-charge basis, abused investors and/or their counsel in filing investor complaints and restitution claims.

Kenmar Associates welcomes the opportunity to comment on the Proposed Policy Recommendations.

OUR COMMENTS On PRELIMINARY POLICY RECOMMENDATIONS

Financial advice is a huge matter. Canada’s retirement income system differs from that of most OECD countries in that, in Canada, the financial well-being of retirees relies much more on their individual and voluntary private and personal initiatives. This feature is accentuated by the structural changes brought to the Canadian retirement income system and the shift in the proportion of the labour force covered by defined benefit pension plans (DB plans) — which offer a guaranteed income stream in retirement- to defined contribution plans (DC plans) - which do not. Of great significance is the fact that between 2000 and 2015, the proportion of private sector employees covered by a DB plan dropped from 22.4 % to 12.2 %.

The OECD warns poverty among seniors is rising in Canada providing yet one more good reason to introduce a Best interests standard and ensure systemic issue complaints are promptly investigated  http://www.theglobeandmail.com/report-on-business/top- business-stories/oecd-warns-poverty-among-seniors-rising-in-canada-points-to-public-pensions-gap/article15600342/ Report at http://www.oecd.org/canada/OECD-PensionsAtAGlance-2013-Highlights-Canada.pdf

Canadians face a triple storm as regards their financial needs; (1) Less Canadians than ever are covered by a Defined Benefit pension plan ; (b) There is an increasing number and percentage of Canadians 65 and older and (c) Canadians are living longer. The aging of the investor population gives rise to issues of investor vulnerability creating new challenges for the advice business. Also, the financial literacy of and understanding of the true client-advisor relationship by Canadians is poor according to numerous studies, opening them up to financial exploitation. The Expert Committee 's work and timing is critical to the financial health of Ontarions.

We define “ Best interests” to mean that the Advisor and Financial Institution act with “the care, skill, prudence, and diligence under the circumstances and information then prevailing that a prudent person would reasonably exercise based on the investment objectives, risk tolerance, financial circumstances, and the needs of the Investor “. An excellent operational definition can be found in Future of Financial Advice: Best interests duty and related obligations http://download.asic.gov.au/media/2125918/rg175-ris.pdf

Our comments on the recommendations are as follows:

1. Regulation of Financial Planning in Ontario

Subject to agreeing on the definition of financial planning and financial planner ,we concur with the recommendation that Financial Planning in Ontario be regulated as follows:

  1. a. Regulation should be required of any individual who or firm that provides Financial Planning services either expressly or implicitly through Holding Out by way of titles, described services or otherwise;
  2. b. Individuals who and firms that provide Financial Planning and whose Financial Product Sales and Advice activities are regulated by the existing regulatory framework for securities, insurance and mortgage brokering should have any associated Financial Planning activities regulated by their existing regulator or regulators for those who have more than one licence; and
  3. c. Individuals or firms performing Financial Planning activities outside the current regulatory framework should have their Financial Planning activities regulated by the proposed Financial Services Regulatory Authority (FSRA).

Kenmar agree that the constructive approach is to effect regulation of Financial Planning as a discrete activity within the existing regulatory framework. An Ontario-based integrated regulator of financial services, such as the proposed FSRA, is well-suited to bring stand-alone providers of Financial Planning services into the regulatory fold and work with other Regulators to achieve the harmonization of standards outlined in the ensuing recommendation. A key aspect of this regulator will be its ability to enforce its rules and apply sanctions as appropriate. We do have some concerns about the regulatory model being proposed by the Committee as it relates to the enforcement and oversight of financial planners. With potentially four different regulators, there exists a potential for uneven enforcement of standards depending on which regulator the financial planner falls under. From the consumer’s perspective, the protections afforded to them should be the same regardless of what license(s) the financial planner holds and who they are registered with. Some safeguards will have to be built in to ensure consistency.

2. Harmonization of Standards We agree that the education, training, credentialing and licensing of individuals engaged in the provision of Financial Planning be harmonized and subject to one universal set of regulatory standards. Rep proficiency, especially for retirees with de-accumulating accounts, will need to be dramatically enhanced to satisfy investor needs and demands. Kenmar suggest liaison with Quebec authorities to avoid duplication of effort . Regarding liaising with Quebec authorities, FPSC and IQPF ( FPSC sister organization in Quebec) released last year a joint publication Canadian Financial Planning Designations, Standards & Competencies which are the first set of unified, and definitive source on financial planning definitions and professional financial standards in Canada. http://fpsc.ca/canadian-financial-planning-definitions We recommend that consideration be given to adopting these standards to avoid duplication of effort and accelerate implementation. The UK FCA also have established robust proficiency standards for advice providers. Any standards developed should, as applicable, be binding on so called robo-advisors providing investment advice.

It should be clarified what constitutes financial advice and what is considered a financial product e.g. Are Segregated funds a financial product ? Annuities? Index- linked GIC's? In particular , it is critical that the FSCO arrange itself so that it can effectively work with the OSC , MFDA, IIROC and other regulators to eliminate regulatory arbitrage. The challenge, of course, will be effective and expeditious implementation. IIROC, MFDA and FSCO, or its replacement, will need to collaborate or be subject to FSRA direction. If both the recommendations of the Expert committee on financial planning and the Expert Panel's proposals for a new Financial Services Regulatory Authority were to be accepted, FSRA would then become responsible for regulating, those financial planners licensed to sell insurance, mortgage investments, and no financial products at all.

One issue that must be made clear- what exactly is Best interests? For example , Canadian active fund managers routinely fail in beating their benchmark yet are marketed as market beating. Such mutual funds are a dominating investment by retail investors . In fact,just 39.62 % of actively- managed Canadian equity funds outperforming the S&P/TSX Composite over a one-year period (ending June 30, 2015), according to the midyear 2015 SPIVA Canada Scorecard .Even more disappointing is that number drops to nearly 23 % when looking over a five year period. Other fund categories have similar results,These statistics are shocking yet Canadians hold about $1.2 trillion in actively-managed mutual funds .

Does that mean actively management funds are NO GO? Of course not. Mutual funds also have a number of unique features that are attractive to small investors. But any advisor acting under SBID will have to convince both her/his clients and potentially a judge that she/he can justify recommending actively-manged mutual funds. Because if advisors can’t convincingly make that argument, how can they claim they are acting in their clients’ best interests? They can if the goal is not the highest rate of return for the lowest possible cost. It is economically meeting the investor’s personalized goals and financial objectives considering the investor's KYC parametrics.

The term “Best Interests “ is not operationally defined at this point in the consultation. Best interests is a process that leads to advice that is in the best interests of the client. If the process is followed using time proven tools such as an IPS , the client will be well served. Advisor proficiency and an absence of a conflict-of-interest is the bedrock for this standard of advice giving. A document worth reading is the Proposed Best Practices Institute for the fiduciary standard  http://www.thefiduciaryinstitute.org/wp-content/uploads/2015/02/BestPracticesFinal-copy.pdf which provides an overview of Best interests .

3. Statutory Best Interests Duty (SBID) for all advice givers:  This review of Best interests is taking place against the backdrop of social and demographic changes which have led to an increasing need for individuals to take more responsibility for their own financial future. AND for the “ Wealth management “ industry to provide competent unbiased advice. We are very pleased to see that the Recommendations identify a Best interests standard as the key item .

Under the prevailing suitability standard and embedded sales commissions, mutual funds and annuities, and other such investments that can't compete on quality, can and do compete by offering generous remuneration to the sellers, and that’s the problem. In- vestors end up paying high costs, suffering substandard performance, being exposed to unnecessary risks and subjected to exploitative behaviours as a direct result. That has a huge impact on the ability of Canadians to afford a decent standard of living in retire- ment or fund other long-term financial goals.

Much independent research ( See REFERENCES for examples) has already been published in Canada and elsewhere that demonstrates that conflicted advice acts against the investors' interests. Our Comment letters to the CSA on Fund Fees and Best interests consultations provided a comprehensive listing of independent research references. Roundtables have been held. OSC and CSA Enforcement and Compliance reports have been issued that year after year contain the same issues adversely impacting retail investors. Unsuitable investments always tops the list

Multiple consultations have been conducted. An analysis of complaint data also shows the fundamental weaknesses of the suitability regime. All this accumulated knowledge plus the mystery shopping experiment results and the Cummings report should be more than adequate to justify a Best interests advice standard for Canadians saving for retirement.

[ A recent report from the UK FCA suggests reforms that would make financial advice and guidance work better for smaller investors http://www.fca.org.uk/news/reforms-will-make-financial-advice-and-guidance-work-better-for-consumers Some of the ideas would work well in Canada too and should be considered by the Govt. Of Ontario (GOO ) ]

We fully support a Statutory Best interests standard for all financial advice givers.

We note parenthetically that this month the U.S. Labor Department, after years of battling Wall Street and the insurance industry, will require financial advisers and brokers to act in their clients’ best interests” for retirement accounts. http://www.nytimes.com/2016/04/07/your-money/new-rules-for-retirement-accounts-financial-advisers.html?smprod=nytcore-ipad&smid=nytcore-ipad-share We propose that a Best interest standard (with agreed upon fiduciary principles) be applied to all account types- not just registered accounts.

As we have said many times before , implementation of the SBID must be accompanied by effective investor protection/enforcement . The standard must be supported by robust regulatory enforcement, strong Rep supervision ,a much improved KYC / risk profiling processes and an effective dealer complaint handling regime . Dealers need to establish controls over conflicts-of-interest. A recent IIROC Bulletin Managing Conflicts in the Best Interests of the Client http://www.iiroc.ca/Documents/2016/F58C9465-AFC5-42F3-A5D1- 6C5BFDF19CF3_en.pdf noted that that its recent compliance reviews have found that most of the firms it reviewed "lacked a meaningful process to identify, deal with, monitor and supervise compensation-related conflicts." Dealing with conflicts-of- interest is a key aspect of successful SBID implementation.

4. Exemptions We agree with the proposed recommendations that the only exceptions that should apply to the proposed universal SBID are as follows:

  1. The individual or firm is already subject to a SBID by virtue of his, her or its licensing and registration requirements (e.g. as in the case of registered portfolio managers);
  2. The individual or firm is already subject to a professional legal standard of care and fiduciary duty, and the advice being provided is solely incidental to his, her or its principal business or profession which is also regulated (e.g. as in the case of lawyers and accountants); and
  3. The individual or firm is a mere “order taker,” and no financial advice is being provided to the customer, and the individual or firm is exempt from suitability requirements (e.g. as in the case of discount brokers). This will avoid imposing duplicative obligations on professionals who are already subject to substantially similar requirements. The recommendation to provide an exemption to the universal SBID obligation for discount brokers makes sense as they do not provide financial advice.

5. Referral Arrangements

We agree with the recommendation that no individual who or firm that provides Financial Product Sales and Advice or Financial Planning be permitted to pay a referral fee to a third party for the referral of a customer or prospective customer who is to be provided with Financial Planning or Financial Product Sales and Advice, unless the other person or firm receiving the referral fee is regulated as a provider of Financial Product Sales and Advice or Financial Planning and owes a best interest duty to consumers. There must also be full transparency with respect to the referral arrangement, including compensation.

Implementation of this recommendation will facilitate such arrangements, while at the same time ensure that the integrity of the recommendations regarding proper regulation of all providers together with the duty of best interest remains intact.

6. Titles and Holding Out

It is evident that clients , especially seniors, are influenced and deceived by improper “advisor” titles/designations. That point came through clearly when IIROC ran focus groups involving investors of all ages. In general, firms are responsible for ensuring that designations are up to standard and appropriate for the services being offered by their advisors. IIROC's guidance note on titles and designations specifically outlines four criteria for deciding the use of titles and designations. Yet, we constantly hear of “advisors “ using terms like Retirement Consultant or Seniors Specialist. The OSC Mystery shopping experiment uncovered a whopping 48 different titles. This confuses and misleads investors .

Accordingly, we  fully support the recommendation that the use of titles by individuals and firms engaged in the provision of Financial Product Sales and Advice and/or Financial Planning be prescribed in order to reduce consumer confusion and deception. Specifically, we agree that:

  1. Regulators ( in particular, the FSCO) work together to develop a circumscribed list of approved titles that are descriptive of the regulated activities and that these are the only titles permitted to be used by individuals and firms in their Financial Product Sales and Advice and/or Financial Planning activities;
  2. Use of the title “Financial Planner”, whether explicitly or by Holding Out that this service is being provided, is circumscribed to individuals regulated as outlined in Recommendations 1 and 2 of the consultation;
  3. Individual designations, qualifications, and credentials (other than professional, academic qualifications, and those approved by the Regulators) are not permitted; and
  4. Those engaged in providing Financial Product Sales and Advice and/or Financial Planning are not permitted to use corporate positions or titles given the consumer confusion that results and can result from the use of such titles.
  5. No executive titles unless the person really is one.

This recommendation should, if enforced, mitigate the confusion, allowing financial consumers an opportunity to more easily identify trustworthy professionals who can help them meet their financial goals. NOTE: A number of dealer representatives ( “advisors”) do some financial planning whether accredited or not. Some industry participants have suggested that the use of the Financial Planner title should not be allowed with one sole exemption: fee-only Financial Planners. We do not have a firm position on this issue.

We do have some concerns about the potential for the standards for “Financial Planners” to be watered down as a result of the recommendation to create new harmonized standards. In our opinion, lowering standards and making the “Financial Planner” title accessible to individuals who are incapable of meeting the high levels of competence and expertise that consumers expect and deserve will do little to improve upon the current unregulated environment. Further, if the regulators responsible for overseeing those who use the “Financial Planner” title lack the expertise and understanding of financial planning needed to effectively regulate the associated activities, then restrictions such as those recommended by the Committee will make little difference to investor protection.

7. Central Registry We concur that a single, free, comprehensive central registry be created and maintained, with adequate resources to provide a one-stop source of information for consumers regarding the licensing and registration status, credentials and disciplinary history of individuals who and firms that provide Financial Product Sales and Advice and/or Financial Planning to Ontarians. Conducting a proper registrant background check currently is very complicated and requires searching several different databases. An online central registry created jointly by all relevant Ontario financial Regulators would provide a “one-stop location” where retail financial consumers can access the information they need to perform a background check on their service providers and their firms. The onus for due diligence would no longer be placed entirely on consumers within an environment that is difficult for them to navigate.

8. Financial Literacy and Investor Education We recommend that financial literacy and investor education of Ontarians be supported in Ontario by government, regulators, public and private schools (through their respective curriculum bodies and school boards), non-profit organizations and the financial services industry. We also recommend that payment for financial advice, purchase of Investment Newsletter and Adult education courses on investing be given favourable tax treatment as a Government strategic initiative. We'd also like to see more Investor Streetproofing materials, not just “educational” materials. There are plenty of minefields to navigate with registered representatives/dealers . Documents like the CFPBoard Consumer Guide to Financial Self Defense https://www.cfp.net/docs/publications/cfpboard_consumer_guide_to_financial_self- defense.pdf?sfvrsn=5 , 10 Questions to ask http://www.financialplanningforcanadians.ca/financial-planning/10-questions-to-ask-your-planner and Consumer Awareness Booklet ( 28 pages loaded with useful material for the retail investor) http://www.onusconsultinggroup.com/uploaded_files/InvestorAwarenessBooklet.pdf are examples of what we'd like to see. Ideally, there should be one inserted booklet to be provided to investors upon account opening about streetproofing. Such a publication would have to be agreed upon by advisors, investor advocates, SRO’s and Regulators.

We have also recommended to the OSC/CSA that they prepare User Guides on how to use Fund Facts , the new CRM2 cost and performance reports and on Equity Crowdfunding.

It should be understood that there are limits to the effectiveness of financial literacy ( and disclosure) in the face of increasingly-complex Financial Products that require a level of sophistication beyond the financial literacy level of average consumers. The Best interests standard should provide the appropriate level of investor protection given the large asymmetric information gap between investors and advice providers.

9. Issues for Further Consideration

Kenmar absolutely agree with :

  1. The need for simplified complaint and restitution mechanisms for financial consumers of Financial Planning and Financial Product Sales and Advice;
  2. A streamlined approach to the investigation, prosecution and adjudication of consumer complaints related to improper advice in the provision of Financial Planning and Financial Product Sales and Advice; and
  3. A consumer-friendly process for redress.

The prevailing system is unfair, hard to access and dysfunctional. A complaint system is closely related to the Best interests issue re the fairness of dealer complaint handling practices. It is bad enough that victims lose money due to bad advice but even worse when restitution is denied due to unfair complaint handling. This reflects badly not only on the dealer but on the investor protection regime itself. Dealer responses tend to be unfair, dismissive and abrupt based on our samples. Too often the “substantive responses” are not responsive to the complaint and critical information needed by the complainant to make an informed decision is not provided. It is not however just the implementation of existing rules that are a problem. The rules themselves are deficient in a number of critical aspects. Kenmar have provided the OSC as well as the CSA, MFDA and IIROC with a detailed report explaining the fundamental flaws in the prevailing SRO complaint handling rules.

A robust independent Ombudsman service is as key success factor for a Best interests regime. It is however evident from the Comment letters posted in response to the independent review that OBSI needs fundamental changes in governance , investor participation and operational processes . The comment letter from Mr. Harold Geller https://www.obsi.ca/en/download/file/645 succinctly makes the case for reform . A binding decision is essential . Investors should not have to split their complaint in two if their investment portfolio contains segregated funds. Systemic issues should be addressed not tossed over the wall to a faceless group of securities regulators whose efforts thus far are limited to monitoring victim exploitation. These deficiencies should be dealt with without undue delay. Canadians need and deserve an Ombudsman that works efficiently, that they can trust and provides a definitive outcome.

The concept of fee-based accounts was introduced in the mid nineties to try and resolve the conflict of interest related to commission- based accounts. The simple explanation was that in an effort to reduce account churning issues and minimize regulator attention, the investment industry started to request that representatives open fee-based accounts. As a result of the success, many of the brokerage firms encouraged their advisors to open more of these types of accounts. However , a new issue arose- reverse churning. This is happening in Canada as new compliance rules and threats to embedded compensation are looming. See our commentary on Reverse churning  http://www.canadianfundwatch.com/2015/10/are-you-reverse-churning-victim.html Regulators will need to be on their toes to ensure an unintended consequence of SBID , improper account types , does not occur or is vigorously enforced if it does.

Many accounts are and will be converted to fee-based. If not closely regulated ,higher fees with reverse churning will be the biggest killer of de-acummulating accounts for seniors. The elimination of embedded compensation will accelerate the process. Extreme caution is advised.

We also recommend that MOU's be signed between all affected regulators similar to the one signed between IIROC and insurance industry regulator FSCO. The IIROC- FSCO MOU not only facilitates information sharing between the two regulators, but will also see disciplinary decisions by one regulator trigger a review of a disciplined rep's activities by the other regulator. These reciprocal reviews will include examining the rep's suitability for licensing or registration, and may lead to further disciplinary action.

To the extent this initiative is part of a broader Ontario initiative to protect the savings of Ontarions we recommend adoption a tailored version of the NASAA Model act to prevent senior abuse . This model act is designed to protect vulnerable adults from financial exploitation. The model act, entitled “An Act to Protect Vulnerable Adults from Financial Exploitation,”  http://10882-presscdn-0-1.pagely.netdna-cdn.com/wp- content/uploads/2015/11/NASAA-Model-Seniors-Act-adopted-Jan-22-2016.pdf provides new tools to help detect and prevent financial exploitation of vulnerable adults.

SUMMARY and CONCLUSION

Multiple research reports and polls suggest many Canadians may not be well prepared for retirement. Trusted and competent financial advice can play a huge role in mitigating this issue.

Regulatory bodies exist to safeguard trust in the system. Our quarterly Investor Protection in Canada Reports regularly highlight numerous breakdowns and missed opportunities to protect retail investors. The results of this Ontario initiative will shape the future of financial advice .Best interests has a compelling case for “trusted advice” found in history, law, research and common sense but it will require a a high level of determination to counter the well funded opponents of change. The investment industry (now re-branded as the Wealth Management industry) needs regulatory guidance, decisiveness and finality .

Ordinary investors with relatively small balances in their accounts could especially benefit from the changes. These are the people who are now most likely to get "a sales pitch dressed up as advice" from “advisors”.

We respectfully suggest that the adverse impact on Ontarians of NOT imposing a Best interest duty be considered.

We recognize that these changes are disruptive , subject to several constraints and many details remain to be worked out. Kenmar is willing to assist the GOO and regulators in implementation.

Kenmar Associates agree to public posting of this Comment Letter.

We would be pleased to discuss our comments and recommendations with you in more detail at your convenience.

Sincerely,

Ken Kivenko P.Eng.
President, Kenmar Associates
kenkiv@sympatico.ca
(416)-244-5803

REFERENCES

Awareness and Perceptions of Financial Planners in Canada: Leger research Key findings- 92% have heard of the title financial planners 44% believe there are regulatory standards in place for financial planners http://fpsc.falafeldev.com/docs/default-source/FPSC/awareness-and-perceptions-of-financial-planners-in-canada-(coalition-research).pdf?sfvrsn=2

The Feeling’s Not Mutual  D. Mac Donald Feb. , 2015 PI The High Costs of Canada’s Mutual Fund Based Retirement System ABSTRACT This study compares the management fees charged by mutual funds and pension plans, and finds that high management fees will cause Canadians relying on mutual funds for their retirement income to work longer or retire with less, compared to those with pension plans. The study recommends an expansion of inexpensive workplace pension plans or public pension plans, like the CPP; and as a stopgap measure, trailers fees—the portion of mutual fund fees that go back to the advisor—could be capped or banned entirely. - See more at: https://www.policyalternatives.ca/publications/reports/feeling%E2%80%99s-not- mutual#sthash.arTWxQGH.dpuf

CARP calls for a Fiduciary Duty for advice givers http://www.carp.ca/wp-content/uploads/2013/12/CSA-Consultation-Paper-33-403-Fiduciary-Duty.pdf?e4b50d

WHITE Paper :The “ advice gap” from an investor perspective https://www.blogger.com/blogger.g? blogID=4766585986003571384#editor/target=post;postID=3975731540117215175;onPublishedMenu=allposts;onClosedMenu=allposts;postNum=6;src=postname

CFP Code of ethics and professional standards http://fpsc.ca/professional-standards

Held to a Higher Standard” – Should Canada’s Financial Advisors Be Held to a Fiduciary Standard?  Abstract Canada’s financial regulators are set to bring in a number of sweeping regulatory changes over the next couple of years in an effort to improve consumer protection and boost investor confidence following the global financial crisis. One of the key changes being proposed by Canada’s regulators is to raise the standard of care that financial advisors owe their clients to a fiduciary standard. Holding financial advisors to a fiduciary standard would require them to act solely in the best interests of their clients, and avoid or disclose all conflicts of interest that arise in the advisor-client relationship. Currently, financial advisors in Canada are held to a “suitability” standard that does not require them to act in the best interests of their clients, instead, they must simply ensure that any investment recommendations are suitable given a client’s risk tolerance and return objectives. The implementation of a fiduciary standard would have widespread implications for the financial industry, as advisors would be required to ensure that all recommendations were in the best interest of their clients, including the minimization of all fees and expenses, which is typically at odds with the advisor’s goal of maximizing revenue from a client account. This literature review will explore the various issues associated with the fiduciary standard debate in Canada, with commentary, analysis, and perspectives from both the consumers and providers of financial advice. It also includes findings from a variety of academic sources on the subject of a fiduciary standard, and its potential impact on the financial advice industry [Of course, with a fiduciary standard, the embedded commission issue would finally be laid to rest ] http://dtpr.lib.athabascau.ca/action/download.php?filename=mba-15/open/punkon-aprj-final.pdf

Is conflicted advice better than no advice? :Research ABSTRACT The value that brokers generate depends on both the quality of their investment recommendations and their clients’ counterfactual portfolios. To identify counterfactual portfolios inside a defined contribution retirement plan, we exploit time- series variation in access to brokers. When brokers are available, the correlations with age, income, and educational attainment suggest that brokers are chosen by participants who value advice on asset allocation and fund selection because they are less financially sophisticated. When brokers are no longer available, demand for target-date funds (TDFs), which combine portfolio management with asset allocation, increases differentially among participants with the highest predicted demand for brokers. We find that broker client portfolios earn significantly lower risk-adjusted returns and Sharpe ratios than matched portfolios based on TDFS—due in part to broker commissions that average 0.90% per year -but offer similar levels of risk. Exploiting across-fund variation in the level of broker fees, we find that broker clients allocate more dollars to high-fee funds. This finding increases our confidence that actual broker client portfolios reflect broker recommendations, and it highlights an agency conflict that can be eliminated when TDFs replace brokers. https://www2.bc.edu/~reuterj/research/ORP_201503.pdf

Unfinished Business: It's Time to End Embedded Commissions - Steadyhand Investment Funds https://www.steadyhand.com/globe_articles/2014/09/02/unfinished_business/

Clients sound off on mutual fund fees | Advisor.ca http://www.advisor.ca/news/industry-news/compliance-roundup-november-2013-135783

Fact Sheet: Middle Class Economics: Strengthening Retirement Security by Cracking Down on Conflicts of Interest in Retirement Savings | whitehouse.gov https://www.whitehouse.gov/the-press-office/2016/04/06/fact-sheet-middle-class-economics-strengthening-retirement-security

In whose Best interests?:Financial Engines https://corp.financialengines.com/docs/Financial-Engines-Best-Interest-Report-040416.pdf

Letters to the Editor: Best interests duty needed for seniors http://m.investmentexecutive.com/back-issues/letters-to-the-editor-best-interests-duty-needed-for-seniors-3/

Financial Literacy Study of Canadians http://www.statcan.gc.ca/daily-quotidien/160323/dq160323b-eng.htm

Legal Origins, Investor Protection, and Canada : Poonan Puri http://digitalcommons.law.byu.edu/cgi/viewcontent.cgi?article=2474&context=lawreview and http://digitalcommons.osgoode.yorku.ca/clpe/72/

A report British Columbia Investment Fraud Vulnerability Insights issued on March 31, 2016 http://www.investright.org/uploadedFiles/news/research/2015BCVulnerability.pdf? t=1459571137102 by the British Columbia Securities Commission (BCSC) examined the fraud vulnerability of older British Columbians. The research, conducted by Innovative Research Group, surveyed 800 British Columbians aged 50 and over . One key finding from the survey was that One-in-eight British Columbians over 50 are vulnerable to investment fraud. When presented with an investment opportunity that guaranteed 14% to 25% monthly and no risk, 10% said they would either look into it further and 3% said they simply didn’t know, suggesting they are not sure enough to reject the offer.

The Costs and Benefits of Financial Advice http://www.hbs.edu/faculty/conferences/2013-household-behavior-risky-asset- mkts/Documents/Costs-and-Benefits-of-Financial-Advice_Foerster-Linnainmaa-Melzer-Previtero.pdf Stephen Foerster, Juhani Linnainmaa, Brian Melzer Alessandro Previtero assess the value that financial advisors provide to clients using a unique panel dataset on the Canadian financial advisory industry. They found that advisors influence investors’ trading choices, but they do not add value through their investment recommendations when judged relative to passive investment benchmarks. The value-weighted client portfolio lags passive benchmarks by more than 2.5% per year net of fees, and even the best performing advisors fail to produce returns that reliably cover their fees. The research shows that differences in clients’ financial knowledge cannot account for the cross-sectional variation in fees, which implies that lack of financial sophistication is not the driving force behind the high fees. Advisors do, however, influence client savings behavior, risky asset holdings, and trading activity, which suggests that benefits related to financial planning may account for investors’ willingness to accept high fees on investment advice. This research, existing independent research and OSC contracted research should be more than sufficient to help shape regulations.

The role of ethics and independence: Professional relationships http://www.pearsoncanada.ca/media/highered-showcase/multi-product-showcase/showcase-websites-4q-2012/03_ch03_aren.pdf

Do seemingly smarter consumers get better advice?: Research paper Feb. 2015 Abstract The existing theoretical and empirical literature considers expert advice to be a substitute for a consumer’s information: According to these papers, more informed consumers should ignore the advice given to them, but the advisor does not (or cannot) take this into account. We show in a simple analytical framework that higher signals of consumer information should indeed lead advisors to provide better services. The model also suggests an identification strategy, i.e. to focus on consumers with bad signals (proxied by low education) but high financial literacy and vice versa. To verify our main hypotheses, we choose a two-pronged approach using data from the SAVE-panel. First we show that individuals with higher financial literacy are more likely to solicit financial advice, but less likely to follow it. Then, we turn to data on the market for subsidized private pension plans in consumers buy a contract with the firm employing their financial advisor. We show that individuals are strongly influenced by their source of advice – with dependent financial advisors steering customers towards choice options yielding higher kickbacks. We finally demonstrate that individuals with higher financial literacy are less susceptible to this effect. http://mea.mpisoc.mpg.de/uploads/user_mea_discussionpapers/1630_01-2015.pdf

Why A Fiduciary Standard For Investment Advisers Is Urgent And Crucial http://faircanada.ca/wp-content/uploads/2012/06/Why-A-Fiduciary-Standard_- Kivenko.pdf

Current Practices for Risk Profiling in Canada And Review of Global Best Practices https://www.osc.gov.on.ca/documents/en/Investors/iap_20151112_risk-profiling-report.pdf