A Tale?

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going to Heaven, we were all going direct the other way -- in short, the period was so far like the present period, that way of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
-- Opening Sentence (and paragraph) of A Tale of Cities

And so Charles Dickens described the build-up to the French Revolution. Reading this book as a child, the story was introduced in an abridged version in which there'd be a page of content followed by a picture describing what was read. This sentence followed a picture cut into two images: the French aristocracy feasting at a grand banquet and a group of children dressed in rags desparately in need of food.

Now, of course, we are not living in the time of the French Revolution, but could not this very quote, published in 1857, be used to open up a newspaper, book or periodical to describe the last few months?

It certainly is amazing on how timeless some prose can be.

Will Canada ever have a federal securities regulator?

"Canada is currently the only G-7 country without a common securities regulator, and Canada's investors deserve better." -- Rodrigo de Rato, IMF Managing Director 2004-2007

We couldn't have echoed the words better ourselves, particularly in Canada's political climate. Love, hate or apathy toward the Conservatives aside, Flaherty's pet project since his party became government has to be respected. There really should not be doubt in the minds of most that a national securities regulator will make this country's investment climate better and more efficiently regulated. The inclusion of a national securities regulator, in some form, in the Conservatives' recent budget was taken with a huge sigh of relief. It actually seemed like things were going to get done. Now, of course, reckless politics has put this noble endeavour into jeopardy, and Canada is not better for it.

Canadian securities regulation is currently conducted by 13 provincial or territorial securities commissions, which are regulatory agencies of their respective provincial government or territory. Their job is to protect investors, as well as promote fair and efficient business practices, which is done by enforcing their province's Provincial Securities Act -- a set of laws and regulation outlining what participants in the market can do.

It is intuitive to realize that monitoring the securities regulation for 13 different jurisdictions is cumbersome at best. At worst, Canadian public companies, who are looking for either equity or debt financing, have to consider the costs of complying with 13 different sets of rules. These additional costs particularly hinder smaller companies, which can be argued are in greater need of capital in order to grow. Furthermore, quite simply, paying thirteen groups of people to do the same job, is a terrible use of resources. Particularly, considering there are more individuals earning six figure salaries in the Ontario Securities Commisssion than there are in the SEC. How much of taxpayers' money is being spent on these thirteen regulators when the job can be done with one?

The International Organization of Securities Commissions, IOSC, comprises of 182 members, which make up 90% of the world's securities markets. Of those 182 members, only Canada and Bosnia do not have a national securities regulator. What a pair! It can be easily observed from the quote above that our situation is viewed as fragmented by the international community. A united front will surely give Canada a stronger voice in the regulation debate, which is now a vital global issue. What's the problem? Well, by several accounts, the Ontario Securities Commission seems to take the lead on the majority of the initiatives. It is due to this influence that several other provincial securities commissions, particularly British Columbia, Alberta and Quebec, fear that a national securities regulator will mean ceding their influence to the Ontario Securities Commission. To them, it seems to be a question of maintaining their autonomy.

On November 20th, we celebrated a Canadian Heritage Day, the birthday of Wilfrid Laurier, one of the greatest Prime Ministers in Canadian history. Laurier presided over a time in which this great country came into its own as its people witnessed the expansion of the West and a significant wave of immigration. But, it was his attitude toward conciliation that cemented his legacy and drew the admiration and awe of many. That same week, hearing the Throne Speech outlining the government's agenda for the coming year, it was so easy to think: How fitting that the federal government is now going to sit down with the provinces and figure this out.

Unfortunately, the rejoice was shortlived. Hopefully, with Parliament set to reassemble next month, not for long...At a time of great change in the world economy, isn't it time Canada got on with it?

Death of a Canadian Hero...Ted Rogers (1933-2008)

In an earlier blog post, Rogers Communications was lambasted for charging obscene prices for, at the time, data plans of the newly incoming iPhone. Entitled "The Power of the People" http://www.onusconsultinggroup.com/2008/07/power-of-people.html), we applauded the successful grassroots effort to charge a more reasonable price and encouraged a greater consumer advocacy lobby in this country.

Today, though, those thoughts are put aside to mourn the death of one of the greatest visionaries Canada has ever seen. Like it was said when writing about Tim Russert, there will be no shortage of obituaries making their way into the press over the next few days, so we'll refrain from making this blog post one of them. However, it must be pointed out the contribution this man made to Canada in which he pursued a vision with unwavering dedication. His unrelenting ability to tolerate debt in order to achieve his goals was legendary. To take such risk, surely, it was not so much about making money, as it was about making a difference. Starting with FM radio stations, he went into cable and a great deal followed. Entering into new markets, successfully lobbying our government and winning licenses in a country where such a feat is challenging for any new entrant, he serves as an inspiration for any entrepreneur. It made this country a better one for all Canadians. In doing so, he went up against the titans becoming one in the process.

Canada is a better place for Ted Rogers. Thank you, Mr. Rogers, for being you.

'Z'

Second Opinion's Advisor Scorecard asks the right questions...

Not too long ago, Second Opinion Investor Services introduced the Advisor Scorecard, a straight-forward True/False evaluation of your financial advisor. We loved the concept of displaying such a tool for all Canadians to take advantage of. Moreover, a point system was introduced in which the individual filling out the evaluation could give their advisor an actual score out of 100 based on their responses. Thus far, almost 900 people have filled out the scorecard, and a 60 has been dubbed the average score....Translated as: You are fortunate to be with a competent advisor. One point lower, however, and you "...might need to monitor results."

This particular blog entry is not intended as a review, so there will be no explaining perceived strengths and weaknesses of the evaluation itself. Perhaps another time. We simply want to draw attention to this terrific concept. Second Opinion has the right idea. Are you fortunate enough to be with a competent advisor? Check it out...It is the season.

http://www.advisorscorecard.ca/

Seeing the success of a noble grassroots campaign, makes me take pride in our own.

And so goes my Twitter entry on election night.

This week we saw history. Well, every week we see history, but it was absolutely remarkable seeing Obama's victory in the 2008 US Presidential Election. It was remarkable seeing the effect the victory had on Canadians and the world. As proud Canadians, why does this matter to us? Yes, America has just elected their first African-American President, but he's gone futher than that. He has captured people's imaginations, and the citizens of his country feel empowered.

In March, with Obama vying against Hillary Clinton for the Democratic nomination, we wrote a blog entiled, "Obama Consulting Group," where praise was heaped on the process-oriented approach that he had embraced. As we said at the time, instead of focussing on the issues alone, he focussed on the the concept of changing the way politics had been done and what a government should do. Promoting this belief to the grassroots, he was able to spark a movement that did not end on election night. Go to: http://change.gov/ Already the tools to bringing transparency to Washington are there! His platform. His agenda. His blog. The opportunity to share your story.

It is this belief in the grassroots approach that inspired the founding of the Onus Consulting Group. Frustrated with the way business was conducted by the retail investment industry, the company was established with nothing but the belief that Canadians deserve transparency and the ability to decipher great financial advice. With full-service financial advisors given a great deal of flexibility regarding how they can conduct their business and charge fees, with our investor advocacy lobby relatively week, with embedded fees galore; the only logical solution, to us, was to ignite change from the bottom-up. Raise awareness among the public. Find those financial advisors that do exemplary work and refer them to Canadians who deserve it.

Will it work? If an African-American can get himself elected President with a similar grassroots approach, anything is possible. Hence, our jubilation this week.

An anniversary to remember

"Economics as a subject matter is normally lacking in drama; change for better or worse is incremental and often discovered in a scholarly way only after the fact."

And so the brilliant John Kenneth Galbraith wrote in his book, A Journey Through Economic Time, then going on to name one notable exception: Black Tuesday.

Today is the 79th year anniverssary of the infamous stock market crash of 1929, that sparked the Great Depression. If the great Galbraith had lived, he would now have two exceptions as we are in the midst of a similar historic economic time, the credit crisis of 2008.

It's important to pay tribute to this significant moment in world history. The lessons learned during that time has given us great insight to deal with our present day problems, while serving as a precendent regarding how weak the economy can get.

79 years ago.

Got to be...Are you underperforming or outperforming your relative benchmark?

Wow, so sorry fans, it has been ages, since I've written....The last couple of months have been incredibly intense, and while I've been tempted to write on several occasions, the dynamic at the office has been such that's it has been hard to tear myself away from the day-to-day. Very unwise, said the incredibly helpful SEO consultant, I met at an expo a couple weeks back.

"You got to be blogging at least 2 or 3 times a week," he said.
"But..."
"Got to be."
"But, the purpose of us having a corporate blog was to give Canadians insight regarding our thoughts in improving the retail investment industry, giving them a pulse for the way our company thinks and believes. We weren't really thinking about search engine results."
"Got to be."

Okay, with "Got to be" the theme for this blog entry, I will proceed. Obviously, writing a blog entry once every month is a little too infrequent. I acknowledge that.

Anyway, if you are a subscriber to this blog, you are fully aware of the state of the economy. Many of you have probably inundated yourselves with all sorts of commentary about what's going on. You can pretty much find a pundit point in every direction. Up...down....sideways.

As horrific as this loss of wealth has been for Canadians, for the first time since Onus was founded, people are engaged. They are conscious of what's going on. This concern, although it has come with a cost, should be cause for victory in the sense that many Canadians are no longer taking anything for granted and are asking the right questions.

Listen, people, there's no sugar coating it. A financial advisor that says that his clients are completely unscathed is either inaccurate or lying (for me to say which would be inappropriate, for I would have to qualify their intentions). If you have any exposure to the markets, your portfolio has suffered. The relevant question is: By how much? Was your asset allocation appropriate?

If you have questions regarding your current situation, allow me to outline an important one and give you the tools to answer it: How is your porfolio doing compared to your relative benchmark? A relative benchmark tells you the performance of your investment portfolio relative to a market index (for example, the Dow Jones Industrial Index). Money managers and investment analysts are evaluated by their ability to outperform their relative benchmark. As a client paying active management fees (assuming you're not employing indexing strategies), you're paying for your investments to be able to do better than the respective index. Otherwise, you could seriously reduce your fees by investing in index funds or ETFs while getting better returns then an active manager.

How do you calculate the return of your relative benchmark?

If your advisor and you have not predetermined the benchmark that will be used to evaluate your returns (material that should be in your Investment Policy Statement), visit www.showmethebenchmark.ca set up by my hero, Warren MacKenzie, and other fee-based financial advisors. Calculate your relative benchmark using the Benchmark Calculator and compare them to your returns. It is an excellent way of judging your financial advisor's (or, for that matter, your own) performance.

It's safe to say if you underperform your relative benchmark once over the last five years, it isn't grounds alone to conclude unsatisfactory financial advice. However, if year after year, you're underperforming your relative benchmark, you should take more than a moment to evaluate your current situation.

Do you know the answer to this question? Got to be.

The Politics Between Brokerages and their Full-Service Financial Advisors

The following is an excerpt from the recent edition of our firm's Investor Awareness Kit:

When a full-service financial advisor starts off at a full-service brokerage, they are given a starting salary for the first year only. Then, exclusively, they earn only on commissions. An advisor has a great deal of discretion to charge however they like. Whether they've been in the business for 26 months or 26 years...whether they've barely passed their licensing exams or hold a series of professional designations...It is up to them to decide how much they will charge their clients. What they don't have control over, however, is what percentage of the commission charged they will keep. That goes to the grid. Basically, the more commissions an advisor earns off his 'book' (the term used for all an advisor's clients), the higher percentage of their commissions the advisor gets to keep. For example, an advisor in his first few years of business will have fewer clients and therefore will be lower on the grid (take a lower percentage of commissions charged) then say somebody who has been in the business for years.

The grid, which varies from brokerage to brokerage, indicates the proportion of the commission that goes to the advisor versus the brokerage. The dynamics of the relationship between broker and brokerage is more like a partnership. The brokerage's responsibility is to provide the office, the assistant, the research, additional support and overhead, while the broker's responsibility is to provide the clients.

Keeping this partnership concept in mind, it must be noted that an investment advisor is more accurately running their own business. They are given a great deal of flexibility of what they can do with their clients, and they are fairly independent. The point is there can be great investment advisors at a specific brokerage firm, and there can be some not so great investment advisors. What's more important is that their value to the firm is assessed not by the success of their advice, but by the amount in commission being charged to their clients and going to the grid. An advisor on their brokerage's Presidents Club or Executive Club, being dubbed a Senior, Director or Vice President; are given these distinctions on account of this.

The difference between an Investment Policy Statement and a Know - Your - Client Form

All this jabbering about the importance of having an Investment Policy Statement, and I forgot to mention an important dynamic already in place in the industry. An IPS is not to be confused with a Know Your Client form, which are designed to protect and limit liability of the brokerages. While the IPS is an extensive document outlining the vital dynamics of the client-broker relationship, the know-your-client form represents the industry's minimum standard of what is expected for an advisor to know about their client. For example, the Mutual Fund Dealers Association requires the following:

- Investment Knowledge: extensive, moderate, none
- Risk tolerance: low, medium, high
- Time Horizon: 1 to 3, 4 to 5, 6 to 9, 10 plus
- Investment Objective: income, growth (short/long term), balanced
- Individual income
- Household net worth

Note how general a profile this is. If you are ever a victim of advisor malfeasance, it is the first thing that is looked at by the Branch Manager or perhaps the Compliance Department. Furthermore, John Lawrence Reynolds wrote in his book, The Naked Investor, that financial advisors will have their clients sign the bottom and fill the rest in later. Be wary of this because, if there is problem, it will be the place you'll have to turn to in order to make your case.

The Importance of having an Investment Policy Statement

If there's one thing that we hammer home with our clients, it's the necessity of an Investment Policy Statement prior to beginning your relationship with your financial advisor. If you don't have one, have your advisor set one up for you. If you do have one, verify that it's complete. In his book The Professional Financial Advisor, John DeGoey put forth the statistic that 15% of retail investors with financial advisors have investment policy statements. Although it has been six years since the book came out and, surely, the percentage has increased significantly since then, it is quite an issue.

An Investment Policy Statement (IPS) is a document that details the dynamics of a client's relationship with their financial advisor, such as the most vital elements of a portfolio's elements and design. It is the ultimate guide to transparency between an advisor and the client. Having an Investment Policy Statement, quite frankly, makes the client's expectations clear, and the advisor will understand fully the standard he or she is being held to. The more a client knows entering a relationship with a financial advisor, the healthier that relationship will be.

The best breakdown that could be found of what should be in the Investment Policy Statement (this includes the industry textbooks) was in Warren Mackenzie's The Unbiased Investor. Great book pick it up, if you have a chance!

An IPS should have:
i) the target average rate of return for this investment portfolio over different time periods.
ii) The expected range of returns for the portfolio as a whole over different time periods.
iii) The percentage of each asset class in the recommended portfolio and the permissible ranges for each asset class.
iv) The benchmark that will be used to evaluate actual performance (see next page).
v) Possible investment constraints
vi) Rebalancing strategy
vii) All fees that will be charged
viii) Frequency of contact
ix) Topics to be covered in the quarterly review meetings.
x) Assumptions being made

Eenie.... Meenie..... Mynie.... Moe (How does an advisor pick their mutual fund firms).

The mutual fund industry is quite saturated with there being an array of different types of mutual funds, which might specialize in a specific sector, geographic location and/or asset class. Financial advisors, who choose to invest their clients in mutual funds, have a huge selection to choose from. As most mutual fund firms carry a wide selection of mutual funds, a financial advisor will typically only use the investment products of a few firms that he or she is comfortable with.


How do they choose which mutual fund firms to put their clients in? In order to get financial advisors to carry their investment products, mutual fund firms employ "wholesalers," whose job it is to persuade advisors to understand why their funds are better than the rest of the industry. Historically, "wholesalers" used what was called "soft dollars" to entice advisors to carry their products. These incentives could have been tickets to shows, games or even all-expense paid trips. As of late, these widespread "bribes" have gotten under control and have declined significantly over the years. However, they do still exist, but in a much toned down manner. Furthermore, a mutual fund firm can also offer higher trailer fees as an incentive to get advisors to carry their funds.


Looking at past performance does show a track record but do keep in mind that it is common place for mutual fund firms to merge bad funds with decent ones to make their history look better...Yes, this is permitted...and, yes, the next thing to wonder is how do we know how legitimate their posted returns are.

Deciphering Churning

Young and dashing...the young man looked every bit the Bay Street executive. A beautiful wife and home...he exuded a Canadian success story. Little did many know at that time that they were dealing with Bay Street's most notorious con man later made infamous in John Lawrence Reynolds' Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 million. In just a few years, he manhandled his clients' accounts under the noses of his brokerages, who gave him plump titles and credibility. Smooth talking and charismatic, Michael Holoday was considered the ideal investment advisor by his clients until it all came crashing down. Holoday's favorite vehicle for his malfeasance was churning.

Churning, in the retail investment industry, is excessive trading in a client's account done with the intention of generating as much commissions for the advisor, while not focussing on the client's needs.

First and foremost, I'm grateful to say that the retail investment industry has improved to a point where instances of churning are becoming significantly less prevalent. Historically, the retail investment industry was filled with entirely commission (transaction)-based advisors where a commission was charged every time an investment product was bought or sold by a client. These commissions were the advisor's sole medium of receiving compensation, and they depended on it for their livelihood. Hmmm...I just realized I was talking in the past tense. Commission-based advisors still exist today and, most of them are honest and hard-working people. It is the industry, which they've adopted as their own.


Churning is rarely the reason for a clients' complaint. Usually, they complain about another aspect of their portfolio, such as losses, when churning is discovered. The problem was more common with commission-based advisors, whose drive for revenue may have interrupted their focus to give their clients the best.

A general way to assess churning: Add up the value of all purchases and sales (excluding Treasury Bills) in a year and divide the total by the value of your account in the beginning of the year. This is called turnover. If your turnover is less than 2, you are fine. If your answer is between 2 and 6, you should be conscious and start asking questions regarding the frequency of the buying and selling. Do be aware that the older you are, the closer to 2 you should be.
A more conservative method measurement of churning includes only the cost of purchases and not the cost of sales. If the answer is over 6 in this method, give your branch manager a call.

The Power of the People

Can consumer advocacy become a powerful special interest group? I certainly hope so. One of my favorite consumer advocates, Ellen Roseman, is one of the country's few unwavering constants. With a blog and a column in the Toronto Star, she cunningly points out injustices being committed toward the consumer. While for the most part it is teaspoons out of an ocean, she builds awareness on whatever issue, and we're all better for it, including the companies she outs.

Now, Canadians have long been the victim of higher prices. With a relatively small population and oligopolies galore, we only have a few wireless companies to choose from, a few phone companies, a few Internet providers....and wait, it's provided by all the same companies. Of course, such variables do put us in the position for higher prices compared to other consumers worldwide, and we, for the most part, have accepted it. Sure, we complain. But, more so as a conversation piece, not so different from talk of the weather or celebrity gossip. Rarely, has such a statement been proven wrong until recently.

When Rogers won the license to carry the Apple's IPhone, die-hard fans held their collective breaths. If a Canadian wanted an iPhone, they'd have little choice but to accept the fees charged. The fee schedules did finally come out and provoked wide-scale uproar. All of a sudden, Canadians, who had been the victim of higher prices for years, were furious. Passive Canadians, who had accepted their fate of higher cell phone plans, higher gas prices in an oil rich country and a number of other things, were all of a sudden in a fury. Why? Why now? Of course there can be several answers to this, but when people want what they cannot afford....

Most famously, a site (http://www.ruinediphone.com/) was set up with the intention of showing Rogers the frustration felt by Canadians. With over 60,000 people signing the petition, the fervour fuelled countless newspaper articles and negative publicity for Rogers and, by extension, Apple. Reading this commentary myself, I thought Rogers would simply yawn at the headlines, ignore the petition and life would continue. They did have exclusive control over the Apple iPhone.

Shockingly, they yielded. They adjusted the price points, and Canadians can now get an Apple iPhone at a value short of a rip-off.

Why do I care? Why am I writing about this? It's sort of this successful change from the grassroots...the bottom-up approach....that exemplifies probably the most untapped way to get change in this society. Why we haven't more efficiently harnessed it remains beyond me. The Leafs are horrible? We question management's commitment? Why...Why, instead of just fan clubs, do we not just have fan unions, which can boycott entire strips of games. For those sports enthusiasts, remember, when MLSE hired Mike Babcock as GM of the Raptors. A novice GM with no prior experience, we watched Vince Carter get traded away for nothing and a decent team reduced to subpar. It wasn't until the fans stopped attending...that people stopped watching...that Babcock was fired, and they decided to get a former Executive of the Year (now, a two-time Executive of the Year), Bryan Colangelo. The Raptors are a good team again.

I do realize it seems like I'm harping and perhaps I am. However, if this approach can be applied to the Apple iPhone, then why can it not be applied to lobbying for lower MERs (Management Expense Ratio) or boycotting Principal Protected Notes and other investment products that sound sexy but provide little value to Canadians. Lobbies that, if done successfully, will save a Canadian family thousands of dollars and make Bay Street conscious of our educated collective.

It cannot go past us that change from the bottom-up is possible in this country, and we have a responsibiliy to ourselves and future generations to adequately harness a power so far neglected.

Dow Jones officially in a bear market

Now, I try to avoid play-by-plays of the markets just because there are so many people who do it much so better than me. However, this is an occasion. The Dow Jones is officially in a bear market, which is characterized by a 20% decline. With the S&P500 and the Nasdaq flirting with a similar classification, there is a great deal of uncertainty in the market right now. Understatement of the century, right?

As the economy goes through an incredibly volatile period and is flirting with stagflation (high inflation, limited growth, high unemployment), it kind of makes me feel...that really...it's about time. It's about time this uncertainty reached the mainstream and played its toll on the markets. With high inflation, central banks have no choice but raise rates to keep it in check. However, a recessionary environment is best fought with lowering interest rates. Not since the 1970s have so many brilliant men and women been so doubtful of what the central bank should do. It appears there's no clear answer. With these issues with liquidity (our "credit crisis"), we're learning as we go along.

Remember, although a recession has been declared by many pundits, it has not yet reached a consensus yet. With the second quarter over, companies are beginning to come out with their second quarter earning's numbers. Perhaps with this, we'll be able to assess our two consecutive quarters of declining GDP (and, hence, declare a recession).

Remember, folks, be brave. For every recession, there is a recovery. As retail investors, we have to be concerned with the long-term and not selling on weakness. Hang tight. If you guys have an Investment Policy Statement and a full financial plan, you have all the insight you need going forward. The more transparency in your relationship with your advisor, the more confidence you have in your portfolio during uncertain times.