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Hidden camera investigation uncovers ‘atrocious’ investment advice

Posted by GuruDan on April 29, 2014

CBC
CBC – Fri, 28 Feb, 2014 9:58 AM EST

People walk in Toronto's financial district in Toronto, on Oct. 29, 2012. THE CANADIAN PRESS/Nathan Denette

As RRSP season closes and many Canadians prepare for tax time, a CBC Marketplace investigation reveals that financial advisers at some of Canada’s top banks and firms are giving consumers inaccurate, misleading and inappropriate advice.

Meanwhile, consumers face a complicated patchwork of regulatory bodies if they want to complain about bad investment advice, as some investor rights groups call for more robust consumer protection rules.

Since a third of Canadians rely on advisers to help them make financial decisions, Marketplace sent a person wearing hidden cameras to visit the five big banks and five popular investment firms in Ontario. The full investigation, Show Me The Money, reveals how individual banks and firms performed. The show, including practical tips on how to hire a financial adviser, airs Friday at 8:00 p.m. (8:30 p.m. NL) on CBC Television.

“That’s one of the worst pieces of advice I’ve ever heard in my life,” financial analyst and former adviser Preet Banerjee told Marketplace co-host Erica Johnson when shown hidden camera footage of one of the tests. “That was atrocious. That’s the only word to describe that advice.”

The tests revealed a wide range in the quality of advisers. Some performed well, giving clear answers and asking appropriate questions about the tester’s financial situation and risk tolerance. Other interactions, however, Banerjee found troubling.

In some cases, information was incorrect or misleading – even in response to direct questions, such as how fees are calculated. Some gave unrealistic promises about returns, including one adviser who said that a $50,000 investment should increase by $10,000, $15,000 or $20,000 in one year.

Others failed to adequately assess the customer’s risk profile, which advisers are supposed to use to ascertain the suitability of investment products they recommend to a person.

In an unusual twist, one firm tried to recruit the Marketplace tester to become an adviser herself. While some designations and certifications do require training, and individuals have to be licensed to sell specific products, “financial adviser” is not a protected term. There are currently about 100,000 advisers in Canada.

Several advisers in the Marketplace test neglected to include any conversation of paying down debt in their financial advice, which Banerjee says reveals a conflict of interest that most consumers don’t consider as they’re weighing the recommendations of an adviser.

“If you invest there’s a commission involved with that, or a percentage of assets,” he said. “But if you pay down debt, there’s no financial incentive for the adviser to do that. So that’s one of those conflicts of interests that people should know about.”

As a result of the Marketplace investigation, one firm suspended the employee and reported the behaviour to the regulatory body, the Investment Industry Regulatory Organization of Canada (IIROC).

The Marketplace test was similar to a broader mystery-shopper test in the UK by the Financial Services Authority. That test included 231 mystery shopping tests of investment advice at six major firms. The results of that test, made public last year, found that more than 25 per cent of investment advice was of poor quality because it was unsuitable or because the adviser did not collect enough information to be able to make the recommendations.

Ontario firms could face a test this year, as the Ontario Securities Commission (OSC) conducts a mystery shop to determine the quality of investment advice. While the OSC declined to provide specific details about its test to Marketplace, the results are expected to become public later this year.

However, investor rights advocates are critical of slow-moving efforts to provide better consumer protection. In a letter to the OSC, the Investor Advisory Panel pressed for reform, including how fees are structured and how complaints are investigated. “We have debated, discussed and studied the issues and their solutions for many years. It is time for decisions that will lead to a more robust investor protection regime in Canada.”

Among the most pressing issues: Financial advisers are not in fact required to act in the client’s best interest.

“There’s a big debate raging about that very issue right now,” says Banerjee. “So, it seems in a couple of years they will be bound to do what’s in the client’s best interest. But right now that’s not actually regulation.”

That runs contrary to the very reason many Canadians turn to advisers in the first place.

"If you walk into a financial institution, I think the average person on the street assumes they’re going to have someone who’s going to take care of all their financial issues,” says Banerjee. “But on the other side of the desk, there’s a wide range of people that you could see. Some of them are just order-takers or salespeople and others are true financial planning professionals."

For consumers struggling with the consequences of bad investment advice, a confusing patchwork of organizations oversee complaints, including IIROC, the Mutual Fund Dealers Association (MFDA) and provincial securities associations. Each body oversees different types of complaints, depending on the nature of the complaint or the type of product the adviser is licensed to sell.

The Ombudsman for Banking Services and Investments (OBSI) also investigates complaints, but only for participating banks and firms. And OBSI has limited enforcement powers, offering only non-binding recommendations, so it’s entirely up to the bank or firm to decide whether or not to comply.

OBSI’s 2013 report, released this week, reveals a sharp increase in the number of banks and firms refusing to compensate investors for mistakes.

According to the report, banks and investment firms refused to pay back investors even when OBSI found wrongdoing in 10 cases last year. In total, investors were denied more than $1.3 million in restitution. The OBSI report called this trend “disappointing.”

Marketplace notified all of the banks and firms about the test and approached some for interviews, but all declined. Some viewed the test as an isolated incident; others vowed to investigate and take appropriate measures.

Posted in Investment, Mortgages, Non-insurance, Retirement Planning, Tax Planning | Tagged: , , , , | Leave a Comment »

Don’t fall for your bank’s ‘sucker rate’

Posted by GuruDan on December 7, 2012

Mortgage negotiation: Why every basis point counts

This article originally ran in Yahoo Canada! Finance

By Dale Jackson | InsightThu, 6 Dec, 2012 10:37 AM EST

 

When your mortgage comes up for renewal, you’ve got to go into negotiations armed with all possible info. » Basis points matter

I just renewed our mortgage for the last time – ever.

We locked into a five year term and the house will be paid off well before it ends. Any move from here would be a downsize so it’s pretty safe to say the mortgage renewal ritual is over for me.

After 25 years of home ownership, there’s a lesson for younger homeowners that can get their homes paid off quicker and save tens of thousands of dollars: basis points really matter.

For those who don’t know, one hundred basis points equals 1 per cent. Banks talk to us about the cost of debt in percentages, but banks talks to other banks about debt in basis points.

That’s because our mortgages transcend our neighbourhood banks and enter the multi-trillion dollar global debt market where they are morphed with other mortgages and debt instruments. A difference of a few measly basis points between what lenders charge and what it costs them to borrow can translate into billions of dollars in profit.

That’s what the banker across the desk is thinking at mortgage renewal time, and that’s what you – the consumer — should be thinking too.

Negotiation basics

The ritual often begins weeks ahead of the renewal date with a phone call from the bank offering a mortgage rate below the sucker rate – more commonly known as the posted rate on the bank’s website. It sometimes comes with a threat that the offer could expire if you don’t act now. After some haggling the offer to me was 3.99 per cent, or 399 basis points for a five-year closed mortgage. The sucker rate was 5.24 per cent, or 524 basis points.

I took a pass and was contacted by another representative two weeks before the renewal date who, after I threatened to take my business to a mortgage broker, offered 3.09 per cent.

At the time, the best rate for a five-year closed mortgage on broker websites was 2.84 per cent. Mortgage brokers are great. Posting the best rates on their websites gives the borrower leverage. If you choose to go with them, most are compensated by the lender — not you. Brokers like RateHub.ca also provide calculators to let you do your own number crunching and see the cost in dollars.

After mentioning mortgage brokers I usually get a slight whiff of condescension at the pettiness of bickering over a few basis points, and ungratefulness at not appreciating a rate so far below the sucker rate.

In this case, I was also informed that the penalty to be imposed by the bank for taking my mortgage elsewhere would outweigh any gains from a few basis points — not true, but a good point. Touché.

In the end I went to a broker at Mortgage Intelligence who came up with the bright idea of negotiating my mortgage with his contact at the same institution. I signed off at 2.85 per cent.

I saved a few hundred dollars this time around but for an illustration of how a few basis points have, and can, make a big difference over several years let’s plug in the same rates for a mortgage of $300,000 and biweekly payments of $1,000.

  • Total interest on the "sucker" rate of 5.24 per cent would be $156,366.
  • Interest on the "special" rate of 3.99 per cent is $100,383.
  • The "final" offer of 3.09 per cent generates $70,203 in interest.
  • And the 2.85 per cent settlement rate would generate total interest of $63,152.

In the end, the homeowner with a 2.85 per cent mortgage saves over $90,000 from the sucker rate and pays the house off nearly three years early.

Petty? I don’t think so. No wonder the banks fight so hard for a few basis points.

Posted in Insurance related, Mortgages, Real Estate | Tagged: , , , , | 3 Comments »

 
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