Does an investment firm’s compliance office completely protect me?

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Who's looking out for me?

As an investor these days, one of the biggest concerns is the Compliance part of the investment equation. More clients are asking “Does your head office keep an eye on whether I am invested correctly?” The answer is a resounding YES. We in the industry are bombarded with never ending compliance regulations and follow-ups.

But this question does not cover off what the client really should be asking.

The real question should be:

“Does your head office keep an eye on whether I am invested correctly FOR ME?”

This is where reality and regulation don’t always meet up. In reality not every firm offers all the products that are available and/or instead have products that they would prefer be sold to their clients. Many of these products are well disguised and may not look like proprietary products to the public. Some of these, while not looking completely proprietary, do earn more for the company than one would think. This is very disconcerting. How does a non-industry professional know if their advisor has the full slate of choices available? Some of the advisors I speak with truly believe they have the full spectrum to choose from and only understand that they don’t when pointed out.

Many of the products being offered are probably the best choice of the limited range that is available. This is not to say the firm you are dealing with can not still call themselves “full service investment houses”.

For example;

  • Many of the brokerage firms no longer offer Segregated Funds (which have many special qualities that Mutual Funds don’t offer); even through their properly licenced advisors. Many are positioning their advisors to get rid of any of this that is on their books, in spite of the fact that their clients will lose their guarantees if sold.

  • Many are only offering their own slate of Separately Managed Accounts (under many different branding names) which usually don’t offer a Corporate Class option that is extremely tax efficient, let alone an extremely narrow number of choices. I would call these accounts a grouping of mutual funds.  The difference is that you can see each of the investments individually and not just a unit price like in Mutual Funds.

  • There has been a lot of double dipping of income for advisors who only run fee based accounts and also buy a lot of new issue products for these clients.

  • More and more advisors are becoming Portfolio Managers for their clients. The main sales pitch is that their fees are slightly less and claim these portfolios are selected directly for each client individually. The truth is that in order for them to manage these portfolios – in which the client lets the advisor do all the buys and sells without their consent to each investment – the advisor must run them as one or two funds that they manage. You simply are bought into one of the funds. I would call that a mutual fund, run by one local advisor. Again, the difference is that you can see each of the investments individually and not just a unit price like in Mutual Funds.

Era of Fee Transparency

In this era of fee transparency, many of the products being offered to you are less transparent. I have yet to have person who transfers to me from Fee Based Managed accounts offered at these firms do as well as the average fund. They usually end up with have extremely high accounting fees because of all the buys and sells. The total cost to the client often ends up higher than simply buying a mutual fund.

I recently reviewed a fee based balanced account, charging the client 1.75%. Thirty percent of the portfolio was in bonds with an average yield of .9%. This meant that 30% of the portfolio was guaranteed to lose .85% every year if held to maturity. At the very least, they could have at least sold the client a high yield savings account outside of the fee based account and earned the client 1.3%, not lost .85%.

To put this into dollars and cent; on this $500,000 portfolio you would pay an annual fee $2,625 on the bond portion of the portfolio and only earn $1,350. A GUARANTEED LOSS OF $1,275 A YEAR. You know who was making the money here. 

Good for the regulators

There is new industry regulation that is here and rolling out over the next while about transparency in the fees clients are being charged.  I can not believe that we needed a rule to force financial institutions into being fully transparent about the cost to the client. Apparently I have been wrong all these years as enough advisors did not fully inform their clients that the regulators have stepped in. Good for the regulators.

So yes, the industry has more and more rules to try to protect the investor. This does not mean that as an investor you can take your eye off the ball. Ask questions, look at the logic of what you are being sold and protect yourself.

If you want to see what a truly independent advisor can do for you, call me at 905-846-9060, ext.3838, email me at or visit my website at