Who speaks for investors?

May 5 2008 by Ellen Roseman

CTV’s program, W-Five, recently told the story of a dairy farmer in Nova Scotia who inherited $155,000 and put it all with RBC Dominion Securities. Within a year, the account was worth only $134,000. Another 10 months later, it was down to just $1,800.

The broker was churning the account — making 126 trades in a 20-month period alone — to earn commissions. He’s since left the industry. His boss was fined $70,000 for failing to supervise his employee. And the dairy farmer collected an amount (which he’s not allowed to disclose) from RBC as compensation for his losses.

I’ve told such stories myself and given space to readers (see first comment, Leveraging Misery), so I’m glad Paula Todd highlighted abuses on W-Five. I’d love to see stronger regulation of stockbrokers, mutual fund sellers and commision-based financial planners, but I’m not confident anything will change.

Here’s the problem: No one listens to ordinary investors. Canada’s securities regulators set up task forces to study what should be done for investors. But do they include investors on these task forces? Almost never. The most recent example of exclusion is the Purdy Crawford-led committee working to restructure asset-backed commercial paper.

The Ontario Securities Commission decided to break the tradition. In 2005, it announced the formation of an investor advisory committee to give direct input on important issues. I was one of 10 people selected for a two-year term.

Our term ended last December and we agreed not to talk publicly about what went on behind closed doors. So I’ll just say this: We didn’t accomplish much. We were more like a focus group than a policy-making body. We never put out any reports on what we were doing or discussing — though we did try. We were divided about many issues and rarely reached a consensus. Still, it was a useful exercise.

The OSC didn’t announce new committee members after our term ended. Nor did it consult us. So I was surprised to see a story in this month’s Investment Executive about what it planned to do to replace us. Basically nothing. The experiment is over.

Instead of listening to a committee of investors, the OSC and self-regulatory organizations will listen to each other. They will talk about issues that concern investors — and invite a few investors to chat from time to time — and that’s all.

Here’s how OSC vice-chair Larry Ritchnie justifies the decision:

The IAC was “extremely useful” but it had “run its course.” Regulators have decided to try something new and, hopefully, better.

This new approach will represent progress because it brings together the four primary organizations with responsibility for retail investor protection; it will also aim to generate investor input from a broader array of voices than a formal investor committee can produce.

There is no one voice for retail investors. We are all retail investors.

Come on, guys. You’re retail investors second and industry insiders first. You’re the last people I’d expect to understand what happens to the dairy farmer from Nova Scotia who hands over the first substantial sum of money he’s ever had to a commission-hungry snake in a suit.

It seems to me there are many articulate people who can speak for investors. There’s no lack of input. The bigger question is: When will the regulators and SROs start listening to investors? And taking action on what they’re told?

16 comments

  1. Will Ashworth

    May 6 2008

    Ellen:

    It’s not surprising to learn your committee was unable to effect change in the industry. There are many in the financial services business who could care less about the retail investor. Our money is chump change. Hardly worth the effort.

    You can regulate all you want but until people in the industry start to care about their customers, nothing will change. We will continue to get ripped off just like the Nova Scotia dairy farmer.

    There’s an old saying, “People don’t care how much you know, until they know how much you care.” There are plenty of CFAs and CFPs in our world, just not enough that truly care.

    Keep up the great work.

  2. W S Snyder

    May 6 2008

    Will Ashworth’s comments are right on. However, his last paragraph shows up the major problem we have. Are we to let this issue go with a comment like “keep up the good work”.

    The real problem here is that not enough people care enough to directly do something about it, so I will go one step further and say “Ellen Roseman, how can I help you to get changes”.

  3. MFN

    May 6 2008

    Danger, Will Robinson! Danger!

    This systems warning from “Lost in Space” seems appropriate for the OSC. SROs exist to promote the advancement of their constituencies (brokers and mutual fund companies), not investors.

    If SROs have any interest in protecting investors, it is to prevent their members from lawsuits. Has the number of lawsuits filed against brokers and mutual fund salespeople declined since the IDA and MFDA were launched? I suspect not. This is as clear an example of “putting foxes in charge of protecting the chicken coop” as one could contemplate!

    Ellen, your comments and concerns are on point. What can be done? The OSC has abrogated their responsibility for consumer protection. One can speculate that staffers are:

    1. Trying to avoid criticism and seeking a strong vantage point from which to point fingers;

    2. Yielding to organizations that pay them the most fees (bank-owned brokerage/investment banks and mutual fund companies);

    3. Recognizing that Staff lacks the knowledge, information and understanding to be credible.

    Perhaps it is inappropriate for a government-funded organization to advocate for investors, but to put foxes in charge of the chickens’ well-being is at best foolishness and at worst a clear example of why timid, fractured provincial securities regulators need to be replaced with a federal regulator with teeth. They’ve got the “teeth” idea right, but it belongs to the wrong people.

    I echo Will Ashworth: keep up the great work!

  4. Andrew Teasdale

    May 6 2008

    “There is no one voice for retail investors. We are all retail investors.”

    Reminds me of another phrase, “everyone is equal…., but some are more equal than others”.

    Larry Ritchie forgets that the role of the financial services industry is to mediate the transfer and investment of capital between those who supply (investors) and those who invest.

    An efficient intermediary will be transparent, efficient and competitive. Both sides of the marketplace should be looking to lower costs and efficiently communicate and understand the risks and returns of the decisions being made.

    Unfortunately the intermediary has found that by reducing competition and limiting transparency it is able to profit from its position. It therefore has a conflict of interest, which not only conflicts with investor needs but with the interests of an efficient capitalist system.

    Could Canada please wake up? This is not about ignorant retail investors crying over risks they should not have taken, but about a system sorely compromised. It is clear that the regulatory structure is raising the spectre of the retail investor who knows nothing making decisions that risk the greater good.

    Larry Ritchie is either being disingenuous or does not know what he is talking about. I would not discount either, although I believe this is all about protecting an “old boys’ club” that makes a lot of money for itself and those who support and maintain the status quo in its favour.

    Andrew Teasdale

    The TAMRIS Consultancy

  5. bylo

    May 6 2008

    Out of curiosity, Ellen, I wonder how much remuneration you and your fellow IAC members received from the OSC during your tenure. It would be interesting to compare that sum with the $700,000 that Chairman David Wilson earned, er, was paid last year, not to mention the other 189 OSC staffers who got more than $100,000 each.

  6. bylo

    May 6 2008

    > We were volunteers and donated our time for free.

    I’m shocked, shocked 😀

    You’d think that someone like David Wilson, who was Vice Chair of the Bank of Nova Scotia and Chair and CEO of Scotia Capital before his OSC gig, would have the financial wherewithal to also volunteer his services for the public good rather than suck on the public teat. But I digress…

  7. Mike Macdonald

    May 6 2008

    The Industry Insiders and the Berlin Wall have a lot in comon….they come down one brick at a time, but they will come down! Thanks for kicking loose a brick Ellen!

    Mike

  8. MFN

    May 7 2008

    For the year ending March 31, 2007, the OSC proudly announced $1,658,399 in administrative fees and penalties from actions brought by the Commission. Given the costs Bylo has listed above, this is a pretty lousy return on investment.

    Enforcement? It is hard to believe that 10 years has passed since Livent, Garth Drabinsky and pals first ran amok. What the heck has been going on for a decade?

    Andrew Rankin pleads guilty and the OSC still can’t nail him! We won’t even start on Conrad Black!

    If the OSC were a private company they could not exist. Somebody should fire somebody! But who is in charge? I can hardly wait to see how successful enforcement was for fiscal 2008!

  9. Bruce D. Gow

    May 7 2008

    I saw this article on bylo’s site, and think he makes a good point about the overall cost of this oversight exercise, although I disagree with him in asking you about your renumeration, in this forum.

    I recognize that many volunteers, like you Ellen Roseman, are trying to fix the system, and not gain financially while doing so.

  10. bylo

    May 7 2008

    > I disagree with him in asking you about your renumeration, in this forum.

    Bruce, I asked Ellen that question facetiously with the intent of comparing it to what the OSC pays its own staffers. I was 99.9% certain that Ellen’s answer would be $0. I’ll also venture that Ellen and the other IAC members have done more to serve the interests of individual investors than Wilson and the rest of the OSC’s $100k club will ever accomplish.

  11. Zahid Jafry

    May 7 2008

    Besides covering the grave injustice that occurred, the story goes on to cover the farmer’s inability to receive restitution from the Investment Dealers’ Association, the self-regulatory organization that oversees full-service financial advisors. The segment’s lambasting of an adequate means to seek restitution without mentioning the Ombudsman for Banking Services and Investments is where I take issue. The journalist claims at the end of her segment that the best way to seek restitution is to take it to court, which I disagree with….at least initially, anyway.

    A part of my comment, which had its debut on wheredoesallmymoneygo.com:

    The one thing I didn’t like about the segment is the lack of respect toward OBSI (Ombudsman for Banking Services and Investments) in resolving the matter. OBSI is a private organization, so unlike the IDA and MFDA, they’re are not financed by its members. IDA and MFDA are more concerned with policing (and yes, the jury is out on how effective they are) brokers. Restitution, simply, is not their concern. Quite frankly, I find getting self-regulatory organization to take the side of a special interest group that isn’t there own…..counter-intuitive.

    OBSI, on the other hand, is totally independant. The services are free, and the clients can take legal action if they don’t find the judgment satisfactory. While it is true that their judgements aren’t binding, their decisions are agreed to by both parties almost all the time. Furthermore, while they cannot order restitution over $350,000, many clients, including the exploited dairy farmer, can really get some justice. As significantly, faced with a two year limitation period to file a civil lawsuit in such a matter, the clock stops pending a judgement from OBSI.

    If a client feels that their advisor has commited some sort of malfeasance on their account, file a complaint with OBSI. The news segment really should have stressed this!….Or at least mentioned it with a little more than an afterthought. Unfortunately, it was only briefly mentioned by the anchor after the segment.

    File a complaint with the IDA (or MFDA, if you’re dealing with a mutal fund dealer), as well….however, just so the advisor can be disciplined. Don’t count on them for restitution. Even discipline is up in the air, as the broker can just quit the profession.

    For a straight-forward tutorial on how to assess churning, see page 14 of our Investor Awareness Kit available at:

    http://www.onusconsultinggroup.com/requestinfo.htm

  12. Beuford T.

    May 13 2008

    The OSC has totally disregarded a complaint reported to them about a company operating in Ontario. They didn’t even answer the person who was reporting it, after several attempts to contact them.

    The same report was taken by the SEC (in the USA)with a lengthy interview of the report(er). The SEC concluded that impropriety had been committed! What’s the point of the OSC? Sounds good, but that’s about it.

    Who looks after the investor? Not too many people. Like the article says, the broker made numerous trades to earn commissions.

    People have the idea they can run a business like it’s a piggy bank and hide the descrepancies. Why not? The OSC doesn’t care.

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