An alphabet soup of designations!

When assessing a financial advisor's qualifications, most Canadians just don't know where to begin. Besides academic degrees, the plethora of professional designations in the industry tend to make people a little confused. Here is a mini-glossary of some of the more popular ones out there:

CIM: Certified Canadian Investment Manager -- a discretionary portfolio management designation of Canadian Securities Institute.
o Completion of 3 levels (courses), including the Canadian Securities Course.
o Experience Requirement: None

FMA: Financial Management Advisor -- A financial planning designation of the Canadian Securities Institute.
o Completion of 3 levels (courses), including the Canadian Securities Course.
o Experience Requirement: None

DMS: a professional designation of the Canadian Securities Institute specializing in the advanced concepts of derivatives and risk management.
o Completion of 5 levels (courses)
o Experience Requirement: None

FCSI: Fellow of the Canadian Securities Institute -- senior financial services designation *
o One of the above designations is needed (CIM or FMA), a licensing course, an additional course and dedication to continuing education (42 hours per year)
o Experience Requirement: at least 5 years of financial services experience in 8 years.
o Required to complete the Ethics Module and Case Study or the Ethics Seminar

CIMA: Certified Investment Management Analyst -- senior financial services designation *
o Pass 2 levels of exams, as well as maintain an average of 20 hours of Continuing Education per year
o Experience Requirement: 3 or more years of financial management experience


CFA: Chartered Financial Analyst -- the senior designation for investment analysis *
o Pass 3 levels of exams
o Experience Requirement: 4 years of acceptable professional work experience


CFP: Certified Financial Planner -- senior financial planning designation *
o Pass one exam after completing a FPSC approved education program, as well as maintain 30 hours of Continuing Education every year
o Experience Requirement: at least 2 years of personal financial planning related work experience

* Acceptance of these designations requires their holders to abide by certain ethical standards and guidelines set forth by the institution they are accepting it from.

Supreme Court of Canada works their magic...

"It reaffirms what has been the basis of company law in Western Europe and North American for the last 250 years since share-owning corporations came into being: the duty of the directors of the company is only to the shareholders, because they are the owners of the company."
--Gavin Graham, Chief Investment Officer, Guardian Group of Funds.

Now, I wouldn't put this quote forward as an unbiased view, as the Guardian Group of Funds is a mutal fund company owned by the Bank of Montreal. For Mr. Graham to favour the shareholders isn't exactly groundbreaking, but this statement reveals an accurate sentiment of those who favoured the deal.

The Supreme Court of Canada ruled in favour of the $52 billion leveraged takeover of BCE. A ruling against would have killed Canada's largest corporate buyout in its history. The case pitted shareholders against bondholders in the most unprecendented of fashion, and pundits had no idea which way the Supreme Court judges were going to rule. Considering the years that have transpired since such a significant ruling dictating corporate law, their preparation and decisiveness is absolute remarkable. I'd love to go on and on about this, but as the seven justices who ruled have given themselves 6 months to elaborate on the reasons for their decision, the commentary is quite limited in scope. This has left the articles and segments profiling the story basically sticking to the facts. Even pundits strayed from making a prediction on the possible outcome....even when asked to....Pundits? Who would have thought?

After everything is said and done, though, it must not be forgotten that the bondholders had a legitimate argument. The fact that the takeover was leveraged (meaning that the entity buying BCE was taking on debt to complete the buyout) resulted in the value of the bonds being lowered by 18%. BCE will go from an investment grade credit to a private company with junk bond status. Meaning that the people that lent BCE money thinking it was a fairly safe loan, have now totally been sandbagged over a variable they couldn't possibly have foreseen. Their frustration is, as well as should continue to be, understood.

With this in mind, this case isn't only about bondholders versus shareholders, but the legitamacy of the rating agencies passing judgement on these bonds. They blew the call on asset-backed commercial paper, duping investors, and now here we are....again. This wasn't as safe a debt issue as they graded it to be. But then again, there's really no way they could have known. A future blog post really needs to take into consideration the flaws of ratings agencies.

A later musing, perhaps. For now, congrats to the shareholders of BCE and the Ontario Teachers' Pension Plan.....and congrats to the Supreme Court of Canada. All in a day's work, eh.

Tim Russert (1950-2008)

While I was on the phone today, I was hit by shocking news run across my blog feed: Tim Russert had passed away. One of my favorite newsmen, Tim Russert, long-time host of Meet the Press, struck fear across the hearts of even the most seasoned politicians. As much as politicians must have loathed going on his show, they were compelled to because an appearance brought a credibility that no other journalist could match. Now, that's power...something he never abused, as he was tough on each equally. They had to explain themselves. Any contradictions in their views? You bet his viewers would know about it. Republican? Democrat? It didn't matter.

I wrote an obituary (or rather, tried), but as I see the outpouring of support and love for this man...I realize I'm a little out of my league. But I want to say he was a true success: a successful career and a successful family man, which is particularly exemplified with the pride and love he felt toward his son, Luke.

I do want to bring attention to an incredible blog entry I read paying respect to the man. Written by a doctor in Buffalo (Tim Russert's hometown), I feel a need to post the link. I hope you find it as a profound as I did.

http://alirizvisblog.blogspot.com/2008/06/tim-russert-1950-2008.html

Mr. Russert, you will be missed.

Escaping the Deferred Sales Charge

Are you invested in DSC mutual funds? Remember, with DSC funds, commissions aren't charged up-front, but rather redemption fees are inflicted when the client leaves anywhere from o to 6 years after investing in the fund. The earlier you leave, the higher percentage in fees. Is it possible to get out without paying such redemption fees? Yes...

• 10% rule: Most mutual fund companies allow clients to redeem 10% of their holdings each year in a DSC fund or transfer amount into front-end load funds in the same family. This is a viable option, and it serves as beneficial to the advisor as their trailer fee (a fee they receive from the fund company for keeping their client invested with them) doubles for this portion of the portfolio.
• Another means of getting out of a fund is to switch into another fund in the same family. As the DSC clock goes on for 6 or 7 years (the period of which you'll be charged for leaving), make sure they don't reset the clock to zero. This is usually not a problem.

For both these approaches, there is no uniform method that mutual fund firms use. Please read their simplified prospectus for how they approach these rules.

Some clients, who are unaware of the downsides of the DSC, show a great deal of frustration with their advisor for subjecting them unnecessarily to such a compensation method. They....maybe, led to believe....that they are stuck, not just in the fund family, but with the advisor that entered them into such a model. This isn't the case, as the client can switch advisors.

This won't be as beneficial to the advisor accepting the portfolio, assuming there's no attempt to sell you out of DSC funds. With significantly lower trailer fees, they'll be taking a client with little compensation in the beginning. I think that speaks volumes for the advisor, who, by accepting the account, are counting on a long-term relationship. Respect, in my books. However, a client should be careful if a new advisor's suggestion is to sell everything and pay these redemption fees, especially if you haven't been invested in the DSC fund for long. This will more likely benefit the advisor than the client. Be skeptical of such a suggestion.

David Vs. the Deferred Sales Charge....

A deferred sales charge, or rear-end load fund, is a manner of investing in a mutual fund with a transaction-based (or commission-based) advisor in which there is no upfront fees charged but rather fees are charged when leaving the fund. The earlier you leave, the higher percentage that must be paid in redemption fees. "All your money goes to work for you," a financial advisor will say to make this compensation method more appealing.

It is my belief that there are very rare circumstances where it is the optimum fee choice for clients. In fact, I'll go even further and say that it is one of the most commonly abused tools in the retail investment industry. When qualifying advisors for Onus, their manner of approaching this compensation structure is a factor used to judge their practice. Forget recommending it, if they are presenting it as a viable alternative to the front-end load, when, many times, it is clearly not.... It simply is not good financial advice. With the exception of some extenuating circumstances (such as a problem with compulsive gambling or spending), it is not necessary for you to commit your money into an investment for as long as 7 years.

Due to its high upfront fee paid to the advisor from the fund company (as high as 5% for an equity fund), the advisor is being compensated far in advance for a service that hasn't been fully completed yet [funnily enough, the investment industry acknowledges this with trailer fees being cut by half]. It can create an atmosphere for negligence as they have been paid a strong chunk of their fees and penalties inflicted for leaving a fund family is more than enough incentive to get the client to stay. Thus allowing trailer fees to collect for the broker.

As our society gets increasingly more knowledgeable, the Deferred Sales Charge on mutual funds is being used less frequently. Ten years ago, it was a mainstream option used by a great many advisors. Today, to use it extensively does not exactly garner widespread respect.

Is education really education?

When a tree falls in the forest, does it make a sound? With the sensibilities of that question in mind, I ask you: When an individual receives an education, but does not apply it, is it still an education? While the answers to both those questions are a seemingly obvious 'yes,' a credible point can still be made from them.

I discovered an advisor the other day, who had earned the majestic CFA. The Chartered Financial Analyst designation exemplifies a mastery of investment analysis. It brings instant credibility and respect to the holders' ability to analyze stocks and bonds competently. It is a staple for every analyst...or aspiring analyst....as well as hedge and mutual fund managers.

The CFA requires three exams and several years of experience. You don't simply wake up one morning and decide to write a CFA exam. Anyway, I was a little puzzled when this advisor invested his clients exclusively in wrap accounts, a means of empowering a third party to manage an investor's portfolio for a flat quarterly or annual fee. Essentially, it puts the entire portfolio on auto pilot, so the advisor can focus on other dynamics of their clients portfolio (like their clients' financial plan or tax savings, for example).....Well, this is the justified rationale. However, the truth of the matter is that it could just open up time for them to go recruiting other clients or, for that matter, just relax and enjoy life.

The point is that this method of investing removes portfolio management, asset allocation and, more significantly, investment analysis from the advisor's responsibilities, which are very possibly attributes a prospective client looks for in a financial advisor. This CFA he worked so hard to earn is simply there to more adequately sell himself to the client....it seems. A client will obviously be dazzled by an advisor, who holds the same qualifications as a hedge fund manager or investment analyst. After being left wide-eyed at the possibility of some one-on-one analysis of their investments, the client is being put into investment products that are available to a great many advisors. The advisor's CFA education is not being applied.

A pity, in my opinion. What is the point of an education? To apply what you learn, hopefully. To able society to somehow benefit from it. As it should, the CFA does aid this advisor in attracting clients. Unfortunately, in this case, it's not aiding his clients.

The finer things in life

An exhausting weekend!

Saturday marked the 30th wedding anniversary of my Uncle and Aunt, and their kids put together one of the most incredible surprise parties that I think I will ever witness. Not that this has anything to do with this blog or Onus, but it really reinforces the importance of family and friends. When you see such displays of affection, it makes you realize that, among other things, the existence of an Investment Policy Statement or a full financial plan in your relationship with your financial advisor isn't everything.

It sure does help, though.