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November 30, 2015

Marsha Gerhart Vice-President, Member Regulation Policy

Investment Industry Regulatory Organization of Canada

121 King St. West, Suite 2000 Toronto, Ont., M5H 3T9

Fax 416-943-6760

mgerhart@iiroc.ca

Kenmar Associates Comment Letter

The Public Policy Implications of Changes to Rules Regarding Proficiency Upgrade Requirements

and Directed Commissions on the IIROC Platform

http://www.iiroc.ca/Documents/2015/d6d80c57-066d-4e04-bf92-cb270c5de2ec_en.pdf

Kenmar have identified investor protection priorities for IIROC several times over the years. In 2012, Kenmar

commented on Fee-based accounts (NOTE: all record of this important consultation has been swept from the

IIROC website). We have submitted a detailed brief on deficiencies of IIROC Complaint handling rules. We

have advised IIROC on numerous occasions of our views on dealer Rep incorporation and utilization of

stockbrokers as executors and trustees. We expended a tremendous effort in responding to IIROC concepts

on financial planning .For over 10 years Kenmar has requested that IIROC require incorporation of its logo on

dealer client account statements. For nearly 15 years we have pleaded in vain with IIROC to intervene with

discount brokers who accepted mutual fund trailer commissions for advice they could not and did not provide.

We could go on but the message we are receiving via persistent inaction is this-investor priorities are not

IIROC’s priorities. We remain cautiously optimistic that this situation can be changed.

Kenmar is prepared to comment on the IIROC White Paper despite IIROC’s long history of ignoring our

investor protection suggestions. We view this White paper as an opportunity to indirectly address rationalizing

regulation; to move away from product regulation; to regulate the advisory function; to broaden the

proficiency and professional requirements for dealing with individual/retail investors; to having uniform

standards throughout Canada.

We are surprised that the White paper indicates that IIROC has not consulted with the Canadian Securities

Administrators (CSA) in developing its proposal, "nor has the CSA expressed any view concerning whether or

not any element of the proposal has merit, or whether or not it is in the public interest either in the short or

long term." Would it not have been wise to validate the core ideas before launching a consultation requiring

so much time and effort by commenters?

The White Paper proposes possible rule changes to allow firms and reps to operate businesses that are limited

to mutual funds and ETFs, but under IIROC's oversight. IIROC is putting forth the idea as a way to make

securities regulation more efficient by reducing regulatory overlaps and harmonizing its requirements and

standards with those of the Mutual Funds Dealers Association of Canada. Harmonizing is better than not

harmonizing but integration is even better. Our vision is to eliminate overlaps by having a single SRO, one

that does not regulate by product. Perhaps this White paper will lead to more dialogue as to the root issue

and a way forward.

One of the positives cited is “facilitating succession planning for mutual fund dealing representatives, by

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allowing them to transition their business to an investment dealer dealing representative “.We do not

understand what is meant by “ business”. If it means “advisors” incorporating and thereby muddling the

accountability chain, we do not support this. See APPENDIX I for a list of questions we have on this

controversial topic.

Under the proposed approach, IIROC would eliminate its current requirement for firms and reps to be

qualified to offer a full range of investment products. Instead, IIROC would allow firms to have reps that only

deal in mutual funds and ETFs with "appropriate adjustments for the relative risk of such firms and individuals

to IIROC's proficiency, supervisory and oversight requirements," whatever that means. IIROC should clarify

what these adjustments and risks might be. In any event, we believe the days of regulating by product are

over – it’s time to regulate advisory processes and the client-adviser relationship.

Given the history, we can understand why IIROC is focused solely on mutual fund dealers and salespersons.

But would it not make more sense to subsume EMD’s and to work towards classifying Segregated funds as

securities so as to minimize regulatory arbitrage?

The proposed approach would allow all IIROC reps to direct their commissions through a personal

corporation, as MFDA mutual fund reps are, to our dismay, allowed to do. As we have said multiple times we

do not see how this adds to investor protection. It seems the only goal is to allow brokers to optimize their

taxes which is not an investor protection priority and thereby create another barrier to regulatory reform .

We would like to see the many open investor protection issues dealt with rather than opening up a whole new

can of worms that may impair investor protection and encroach on the MFDA mandate. If the end game is for

IIROC to merge with the MFDA, it should propose that forthrightly facilitated by the CSA. If it does want to

emulate the MFDA, it shouldn’t cherry pick provisions. For one, IIROC should drop its determined initiative to

allow stockbrokers to act as executors and trustees as the MFDA does not permit this. It might also want to

apply the MFDA CRM2 reporting which deals with all markets while the IIROC rule does not or the MFDA rule

requiring annual branch audits. But these would just be patches of an archaic regulatory structure.

As IIROC is well aware, the whole question of “advisor” compensation including commissions is a critical issue

currently under consideration by the OSC and CSA. So why spend time debating “directed commissions” at

this point in time? Allowing individual registrants to incorporate “professional corporations” will further

contribute to Canadians’ misunderstanding of the nature of the client-“advisor” relationship and will

exacerbate the misalignment of obligations and expectations. Additionally, the Ontario Government has

launched an enquiry surrounding the regulation of financial advice and financial planning. Why not wait until

the Expert Panel reports its findings in H2, 2015?

Furthermore, at the Federal level, work continues on the Cooperative Capital Markets Regulatory (CCMR)

System. We note that the CCMR system has instituted more stringent governmental approvals for the

Authority to propose and enact regulations regarding advisor incorporation although it has provided

definitional language in the Act as to a "Professional Corporation". This is one more reason why we feel the

IIROC consultation is untimely and redundant.

We continue to be disappointed at all the IIROC effort put into the obsolete sales- incented “advice” model.

Denis Morin, a professor in the Organization and Human Resources Department at the UQAM School of

Management discusses the impact of sales quotas in an article in advisoe.ca. He says “Financial incentives to

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promote performance are counterproductive. Sales quotas necessarily undermine service quality. Advisors set

their sights on the target, because it’s profitable, and forget the rest. Past research has shown that

performance bonuses increased productivity. But more recent scientific studies qualify these results. Money

can motivate, but not consistently. We now know that performance bonuses decrease enjoyment at work,

lead to burnout and diminish service quality. They are suitable motivators for simple tasks like counting and

cleaning bottles, but they shouldn’t be used for the complex activities of financial advisors. ” Source:

http://www.advisor.ca/news/industry-news/are-sales-quotas-effective-

194731?utm_source=EmailMarketing&utm_medium=email&utm_campaign=Midday_Newsletter The full

report is available in French at http://www.conseiller.ca/nouvelles/quand-les-objectifs-de-vente-virent-au-

cauchemar-55975 Instead of deliberating how sales commissions can be directed to minimize stockbroker

taxes , we think IIROC should be thinking of how they can be eliminated as has occurred in the UK, Australia

and elsewhere. Making sales commissions more attractive will only complicate reforms.

A recent OSC Mystery Shopping exercise found an incredible 48 different titles were used by advisors making

shopping for advice a perilous journey for the retail investor. A fair number of issues arose also regarding KYC

process breakdowns. http://www.osc.gov.on.ca/documents/en/Securities-Category3/20150917-mystery-

shopping-for-investment-advice.pdf These are the bread and butter issues we’d like to see IIROC spending

their time on.

An Oct. 2015 report A Dissection of Mutual Fund Fees, Flows, and Performance from the Canadian

Securities Administrators (CSA) confirms research elsewhere that mutual fund commissions influence mutual

fund sales and adversely impact investors' returns. The CSA report details the results of independent

research carried out by a trio of academics on 10 years of data from 43 mutual fund companies. Research

leader Professor Doug Cumming finds that:

· Mutual funds that perform better attract more sales.

· However, the influence of past performance on fund sales is considerably reduced when fund manufacturers

pay sales and trailing commissions.

· As past performance becomes less influential on fund sales, so too is there a reduction in future fund

performance.

· For mutual fund sales through fund distributors that are affiliates of the fund manufacturer, past

performance has little to no influence on sales, and this also negatively impacts future fund performance.

· For mutual fund sales through fee-based purchase options, fund sales are highly influenced by past

performance, and this positively impacts future fund performance.

The Cummings Report informs IIROC that the people selling mutual funds have a financial incentive to sell

clients mutual funds with high trailer commissions and keep clients in those funds while the performance of

the funds is poor. Indeed, the larger the trailers, the greater the incentive to remain invested with the very

mutual funds that have the worst performance! Report at

http://www.osc.gov.on.ca/documents/en/Securities-Category5/rp_20151022_81-407_dissection-mutual-

fund-fees.pdf The report leaves it up to regulators to decide whether to ban trailers or introduce other

reforms to address the conflict-of-interest. IIROC should jump all over this in conjunction with the OSC/CSA

and introduce real reforms.

The New Account Application Form and its associated risk assessment routine are long-standing issues before

IIROC management that deserve a greater sense of urgency. A recent OSC - IAP research report on risk

profiling found that many risk concepts do not have a standard definition and that there is a lack of

understanding of the factors involved in assessing clients' risk appetite. While risk questionnaires are widely

used in the mutual fund dealer channel, the report found, the vast majority (83.3%) of these questionnaires

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"are not fit for purpose." The report found that these surveys have too few questions, use poorly worded or

confusing questions and involve arbitrary or poorly conceived scoring methodologies. More than half (55%) of

risk questionnaires have no mechanism to identify highly risk-averse clients who should be invested solely in

cash. Unsuspecting clients do not know this. A flawed KYC system isn't leading to robust advice and that is

where we feel IIROC should spend its precious resources. We are more than willing to assist and contribute.

One big issue IIROC should address is salesperson proficiency .Perhaps part of the problem is that while

professionals in other lines of work require a significant investment not only of their time, but also of their

money in the pursuit of the credentials required for their particular vocation, to become a mutual fund

salesperson (aka “advisor”) in Canada requires little of either. As regards salesperson proficiency we note that

under MFDA Rules and National Instrument 31-103 Registration Requirements and Exemptions ("NI-31-

103"), each Approved Person who is a salesperson and who trades or deals in securities in respect of a

Member must have passed the Canadian Investment Funds Course Exam, the Canadian Securities

Course Exam or the Investment Funds in Canada Course Exam . As a comparison, if one wants to become a

professional lawyer, a doctor or a professional engineer requires undergraduate schooling and graduate

studies. It can take perhaps 5 years or more of education and tuition and ancillary expenses of $100,000 and

more are not unheard of. On the other end of the spectrum, in order to sell mutual funds for a living requires

just 60-90 hours of work and writing a 3 hour multiple choice exam with a pass mark of 60%. Since these

folks are now labelled “wealth managers” we would expect IIROC to significantly raise the proficiency bar

before adopting these controversial changes. At least then it could be argued some progress is being made.

It is our understanding that CIPF coverage would not be impacted by any of the proposals.

We’re told that given the magnitude of the possible changes and their potential impact on the investment

industry, these proposals are out for a prolonged comment period, until Mar. 31, 2016. Indeed, some of the

changes are high impact. For one, this approach could seriously undermine the MFDA. As the white paper

notes, if IIROC were to allow reps to use personal corporations, the structure would only be available to firms

that use agent-principal relationships, which may spark a shift away from employer-employee arrangements

within the investment dealer channel. It also considers allowing IIROC reps to direct their commissions

through a personal corporation, a controversial model that has long been in use in the mutual fund industry

through which salespersons enjoy favourable tax treatment, among other advantages. Kenmar see this

consultation as an untimely distraction with increased risks for retail investors.

Our concern is that this consultation could draw attention away from critical, long-standing investor

protection issues such as reverse churning, Off book transactions, financial planning , KYC system overhaul ,

needed improvements to risk profiling ,use of misleading titles, deceptive dealer ads, adoption of Best

interests standard, OBSI low ball offers/Name & Shames, deficient dealer complaint handling , low deterrence

value of IIROC sanctions policy, non-collection of fines imposed on individuals, lack of investor restitution,

inadequate RRIF account handling proficiency, multiple senior/vulnerable investor issues, IIROC complaint

handling deficiencies ( as noted by the OSC) , wrist slap regulatory enforcement and a corporate governance

structure that is disengaged with the retail investor .

Conclusion

FAIR Canada, SIPA, the OSC IAP and ourselves have commented on IIROC Strategic Issues. Nowhere on any

investor priority list do the issues in this consultation appear. It is our view that IIROC should let the IIAC

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deal with stockbroker related issues such as personal tax optimization and instead should focus on investor

protection, restitution and retirement income security. We urge IIROC to look at developments in the UK,

Australia and elsewhere for 21st century ideas on securities regulation. Fiddling with the status quo is not

what Canadian financial consumers need, want or deserve. Canadians face a decline in DB plans, a weak

economy, a low return market environment , the threat of inflation and are living longer . IIROC , the MFDA

and the OSC/CSA need to take a big picture approach to the regulation of investment advice in Canada.

Perhaps it’s time to revisit the Fair Dealing Model of 2004?

As the investment industry has evolved from the transaction model based on the low suitability standard for

advice to the wealth management role it now touts it provides, it is very clear to us that advisor proficiency

and ethical standards need to be upgraded. Regulations should deal with the relationship and the advisory

process. This should be an IIROC/CSA priority independent of this consultation.

If introduced , these changes will lead to unhealthy regulatory competition- in our worst nightmare, a race to

the bottom with lower standards and lax enforcement. Other major concerns include damage to the MFDA’s

critical mass, potential investor confusion as to which products and services can be offered by a mutual fund

restricted dealing representative, the possibility for investor confusion over the difference in proficiency

between full dealing representatives and a mutual fund restricted dealing representatives, , lack of clarity on

applicable suitability guidelines /criteria ( relative to MFDA Bulletin-069) and the very real risk of mutual fund

restricted dealing representatives selling products for which they are not registered. Investors are confused

enough as things stand now. We are hopeful that responsible commenters will point out that these changes

are like rearranging the deck chairs on the Titanic and that substantive reforms are needed to support a

professional wealth management industry and to protect retail investors.

Overall, we are convinced that these rule making proposals are not a priority with respect to investor

protection and would be harmful. They are not, by themselves, supportive of investor protection or in the

Public interest. We want to emphasize that fostering the discussion contemplated by the White paper

shouldn't be at the expense of pulling back on other initiatives that are so crucial to remedying well-known

problems that diminish investor protection. There needs to be a rationalization of regulation in Canada.

As we have said at least a dozen times before, if IIROC is truly interested in the voice of the investor, it

should establish a funded Investor Advisory Panel. These types of consultations result in an avalanche of

industry commenters with only a few comments representing the views of the retail investor. IIROC should

take steps to level the playing field as the OSC has done with its IAP.

Permission is granted for public posting of this Comment letter. We would like to see our Comment letter

posted as received so other commenters can view our commentary prior to making their submissions.

We hope this input will be useful to IIROC.

Kenmar is eager to work with IIROC to resolve the current and emerging retail investor protection issues.

But as they say, it takes two to tango.

Should you have any questions, do not hesitate to contact us.

Ken Kivenko P.Eng.

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President, Kenmar Associates

kenkiv@sympatico.ca

(416)-244-5803

APPENDIX I Questions re advisor incorporation

We have the following questions about the incorporation model which we believe need to be answered before

proceeding with this controversial measure:

1. Has the CRA opined on this scheme that diverts commissions to a corporation ( presumabely single

purpose) so as to minimize, avoid, or defer stockbroker income tax?

2. Are there any adverse consequences for IIROC dealers if the CRA rules against this scheme or if the

employee deliberately or inadvertently files incorrect tax returns ( or doesn’t file at all) for the corporation?

3. Are trailer commissions considered sales commissions or advisory service fees (as depicted by industry

participants)?

4. Would base salary/bonuses/referral fees also be transferred to the incorporated entity? ( can

commissions earned as an insurance agent be inluded in this account?)

5. Will statutory deductions be made on the commissions?

6. If not, could this be taken as evidence that salespersons are really independent businesses rather than

employees/agents (and thus shield dealers from liability and complicate investor retitution )?

7. Will CRA T-slips ( e.g. T-4's) be made out in the name of the employee or his/her corporate tax shelter?

8. Will robust regulatory oversight of registrants, including continued unencumbered access to all relevant

information, books and records be assured?

9. Could multiple owner ownership of a corporation limit access to needed corporate information in any way

(e.g. a privacy shield)?

11. Are there going to be restrictions on share ownership and how will compliance be monitored and by who?

12. Will offshore bank accounts be acceptable under the proposed rule(s)?

13. Are there going to be restrictions on corporation names (e.g. could they be called XYZ Financial

Advisors)? If no restriction, we believe this could lead to misrepresentation issues and harm to investors such

as Off Book sales/outright fraud.

14. Will salesperson incorporation add to regulatory costs (which are ultimately paid by retail investors)?

15. Will this change further complicate IIROC’s inability to collect fines levied on individuals?

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16. Will some provinces/territories have barriers to implementation in that they would have to make

legislative or regulatory changes in advance of implementation of a legislative option and how long will this

take?

17. What new risks does this add to the already confusing “advisor”-client relationship ?

18. How does this change improve investor protection and is it in the Public interest ?

REFERENCES

Why Ontario’s financial advice industry is fraught with more issues than insiders are willing to

admit | Financial Post http://business.financialpost.com/personal-finance/ontarios-financial-planning-reform

Will IIROC eat the MFDA's lunch?

http://insurance-journal.ca/article/will-iiroc-eat-the-mfdas-lunch/

Kenmar comments on IIROC Strategic issues

http://www.iiroc.ca/Documents/2015/2dd2a8ce-0d80-43e5-a248-b0364ee7b865_en.pdf

Retail investor identifies key IIROC strategic issues

http://www.iiroc.ca/Documents/2015/4e6cba7d-47c5-4daf-97c7-13ab61703d83_en.pdf

FAIR Canada Comment letter on the incorporation of Individual Representatives Project

Update http://faircanada.ca/wp-content/uploads/2011/01/120430-FAIR-Canada-submission-re-

Incorporation-of-Individual-Reps.pdf

Should Canada’s Financial Advisors Be Held to a Fiduciary Standard? , January 30, 2015 “While

Canada’s regulators have proposed a number of regulatory reforms to better serve the public trust, well-

entrenched conflicts of interest will continue to impact the quality of advice that consumers receive. Despite

potential challenges in its implementation, holding financial advisors to a fiduciary standard represents one of

the most important steps Canadian regulators can take to ensure that the advice consumers receive is truly

in their best interests. The adoption of a fiduciary standard also represents an important step”

http://dtpr.lib.athabascau.ca/action/download.php?filename=mba-15/open/punkon-aprj-final.pdf

FAIR DEALING MODEL Concept Paper (OSC)

http://faircanada.ca/wp-content/uploads/2010/10/FDM.pdf

SIPA Comment letter on the Fair Dealing Model ( 2004)

http://www.osc.gov.on.ca/documents/en/Securities-Category3-Comments/com_20040430_33-

901_buellstan.pdf

Risky Business : Canada’s Retirement Income System "RRSPs and PRPPs are a boon to mutual fund

managers- who “earn” among the world’s highest mutual fund fees from investors-— but fall short on the

promise to Canadian retirement savers. Those fees have a significant impact on what an individual can

accumulate from retirement savings.” “An individual Canadian who contributes a constant percentage of his or

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her income over a working lifetime to these retirement income savings plan pays an average of 2.07% annual

in investment management fees to mutual fund managers. Over a working lifetime, that soaks up about 36%

of his or her retirement savings,” Mackenzie says."

https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2014/03/Risky_

Business.pdf

PIAC Files Submission on Financial Advisory and Financial Planning Policy Alternatives for Ontario

Consumers September 25, 2015 – Ontario consumers continue needing additional protections when

engaged with financial planners or those giving financial advice, according to a submission by the Public

Interest Advocacy Centre (PIAC) to the Ontario Ministry of Finance. PIAC’s submission to the Expert

Committee to Consider Financial Advisory and Financial Planning Policy Alternatives suggested the creation of

enforceable regulations or legislation to ensure those providing financial planning or financial advice always

act in the best interest of consumers. “Many Ontario consumers expect their financial advisor to work in their

best interest, and many do. However, the Expert Committee should recommend a defined legal standard that

accurately reflects consumer expectations,” noted John Lawford, PIAC’s Executive Director & General Counsel.

PIAC also suggested limiting of the use of unnecessary or misleading job titles by financial advisors and

planners, as well as enhanced disclosure about how a financial service provider is paid.

http://www.piac.ca/our-specialities/piac-files-submission-on-financial-advisory-and-financial-planning-policy-

alternatives-for-ontario-consumers/

The Feeling’s Not Mutual: The High Costs of Canada’s Mutual Fund Based Retirement System

AUTHOR(S): David Macdonald FEB. 25, 2015 This study compares the management fees charged by mutual

funds and pension plans, and finds that high management fees will cause Canadians relying on mutual funds

for their retirement income to work longer or retire with less, compared to those with pension plans. The

study recommends an expansion of inexpensive workplace pension plans or public pension plans, like the

CPP; and as a stopgap measure, trailers fees-the portion of mutual fund fees that go back to the advisor-

could be capped or banned entirely. - See more at: https://www.policyal

ternatives.ca/publications/reports/feeling%E2%80%99s-not-mutual#sthash.UrKhYJZv.dpuf

https://www.policyalternatives.ca/publications/reports/feeling%E2%80%99s-not-mutual Report at

https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2015/02/Feeling

s_Not_Mutual.pdf

The socio-economic impact of trailer commissions: Canadian Fund Watch

https://drive.google.com/file/d/0ByxIhlsExjE3V09BS1QxN3duM2M/view?pli=1

The effects of conflicted advice on retirement savings: White House

https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf

Collapsing Arguments for Conflicted Advice | PWL Capital

https://www.pwlcapital.com/en/Blogs-section/GUEST-BLOGGERS/Dan-Solin/October-2015/Collapsing-

Arguments-for-Conflicted-Advice

Canada’s Investment Industry: Protecting Senior Investors: IIAC http://iiac.ca/wp-

content/uploads/IIAC-Working-to-Protect-Senior-Investors.pdf

Why some advisors might abandon mutual funds

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http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?culture=en-CA&id=601299

Restricting Investment Sales Inducements: Impact of Reform, Other Mis-selling Solutions (Feb

2014) “..In our recently released paper , Restricting Sales Inducements: Perspectives on the

Availability and Quality of Financial Advice for Individual Investors, we explore the current state of

play in markets that have decided to ban inducements, such as the UK and Australia, and others that have

opted for increased transparency in lieu of an outright inducements ban...."

https://blogs.cfainstitute.org/marketintegrity/2014/02/18/restricting-investment-sales-inducements-impact-

of-reform-other-mis-selling-solutions/

Restricting Sales Inducements: Perspectives on the Availability and Quality of Financial Advice for

Individual Investors http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2013.n15.1

The advice gap is more of a challenge for the industry. | Depth Dynamics

http://blog.moneymanagedproperly.com/?p=3245#more-3245

Retirees: Do the face an advice gap?: Kivenko http://faircanada.ca/wp-

content/uploads/2013/09/Retirees-An-Advice-Gap_Kivenko.pdf

Financial Regulation: Regulatory Arbitrage and Regulatory Harmonization

http://www.researchgate.net/publication/255698905_Financial_Regulation_Regulatory_Arbitrage_and_Regula

tory_Harmonization

FG14/1 - Supervising retail investment advice: inducements and conflicts of interest

http://www.fca.org.uk/news/fg14-01-supervising-retail-investment-advice-inducements-and-conflicts-of-

interest

Kenmar on Best interests: Comment letter to CSA/OSC

https://www.osc.gov.on.ca/documents/en/Securities-Category3-Comments/com_20130213_33-

403_kivenkok.pdf

Problems with trailer fees highlighted by new study - The Globe and Mail

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/funds/problems-with-trailer-fees-

highlighted-by-new-study/article26936658/

Is Conflicted Investment Advice Better than No Advice? John Chalmers Jonathan Reuter NBER Working

Paper No. 18158 (2012) ABSTRACT The answer depends on how broker clients would have invested in the

absence of broker recommendations. To identify counterfactual retirement portfolios, we exploit time-series

variation in access to brokers by new plan participants. When brokers are available, they are chosen by new

participants who value recommendations on asset allocation and fund selection because they are less

financially experienced. When brokers are no longer available, demand for target-date funds (TDFs) increases

differentially among participants with the highest predicted demand for brokers. Broker client portfolios earn

significantly lower risk-adjusted returns and Sharpe ratios than matched portfolios based on TDFs—due in

part to broker fees that average 0.90% per year—but offer similar levels of risk. More generally, the portfolios

of participants with high predicted demand for brokers who lack access to brokers comparable favorably to

the portfolios of similar participants who had access to brokers when they joined. Exploiting across-fund

variation in the level of broker fees, we find that broker clients allocate more dollars to higher fee funds. This

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finding increases our confidence that actual broker client portfolios reflect broker recommendations, and it

highlights an agency conflict that can be eliminated when TDFs replace brokers.

http://www.nber.org/papers/w18158

Global Fund Investor Experience Study: Morningstar June 2015 “.. For Fees and Expenses, the highest-

scoring country (that is, the country with the lowest costs) is the U.S., a position held since the start of this

study in 2009 and reflective of the scale of this market and, as discussed later, sales practices. Australia and

the Netherlands join the U.S. with an A grade. Among the lowest-scoring markets are Canada and China,

which, while not the most expensive in all categories, do not have any category where fees are at an average

or better level...” http://news.morningstar.com/pdfs/2015_fee_study.pdf ;

http://corporate.morningstar.com/US/documents/2015%20Global%20Fund%20Investor%20Experience.pdf

Financial Advice: Does it Make a Difference? by Michael S. Finke:: SSRN Abstract: The financial advice

profession provides a potentially valuable service to consumers within an increasingly complex financial

marketplace. Financial advice professionals can substitute for costly investment in financial knowledge by

households. This paper provides evidence that financial advisers improve financial outcomes when the

interests of the advisor and household are aligned. However, professional advice can harm consumers if

conflicts of interest create high agency costs. Understanding how differences in compensation methods and

regulatory frameworks affect incentives is essential to improving the breadth and quality of professional

advice. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2051382 This paper makes it clear- embedded

commissions have to go not made more tax-efficient for stockbrokers.

Segregated Funds Sales Rise – Due to Regulatory Arbitrage?

http://faircanada.ca/dialogue/segregated-funds-sales-rise-due-to-regulatory-arbitrage/

When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of

Interest “The most effective antidote for the problems caused by conflicts of interest is not to disclose them

but to eliminate them.” “…Even if disclosure does no direct harm (e.g., if it does not morally or strategically

license bias), it can have a pernicious effect if it substitutes for more-effective regulations, thereby morally

licensing policy makers to not take more substantive measures to deal with conflicts. Disclosure is much less

likely to help individuals such as personal investors, purchasers of insurance, home buyers, or patients, who

are unlikely to possess the knowledge or experience to know how much they should discount advice or

whether they should get a second opinion in a given conflict-of-interest situation (Malmendier and

Shanthikumar 2007). In conclusion, we echo the sentiments of Surowiecki (2002) in concluding that

transparency may be good, but objectivity is even better: regulators should focus less on

disclosing sources of bias and more on ensuring that objective information reaches the audience,

if not in lieu of biased information, at least directly alongside it…”

http://www.cmu.edu/dietrich/sds/docs/loewenstein/WhenSunLightFails.pdf

White paper - The real cost of Fees: Personal Capital These are shocking numbers and a wake up call for

retail investors. Figures could well be worse for Canadians especially with poor disclosure and higher MER's.

https://www.personalcapital.com/assets/whitepapers/PC_Fees_WhiteP

Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows, Barber, Brad, Terrance

Odean, and Lu Zheng, 2005, Journal of Business 782095?2120

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=496315 ABSTRACT: We argue that the purchase

decisions of mutual fund investors are influenced by salient, attention-grabbing information. Investors are

more sensitive to salient in-your-face fees, like front-end loads and commissions, than operating expenses;

they are likely to buy funds that attract their attention through exceptional performance, marketing, or

advertising. Our empirical analysis of mutual fund flows over the last 30 years yields strong support for our

contention. We find consistently negative relations between fund flows and front-end load fees. We also

document a negative relation between fund flows and commissions charged by brokerage firms. In contrast,

we find no relation (or a perverse positive relation) between operating expenses and fund flows. Additional

analyses indicate that mutual fund marketing and advertising, the costs of which are often embedded in a

fund's operating expenses, account for this surprising result.

The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice

https://www.onefpa.org/journal/Pages/The%20Impact%20of%20the%20Broker-

Dealer%20Fiduciary%20Standard%20on%20Financial%20Advice.aspx

The value of advice: An investor viewpoint http://www.investingforme.com/pdfs/reports-studies/Advice-

An-Investor-View.pdf

Advisors must make an effort to show their value: DAC 2015 More than four in 10 Canadians either

believe they do not pay their financial advisors or are uncertain about how their advisors are compensated,

suggests new research from Mississauga, Ont.-based Credo Consulting Inc. in partnership with Montreal-

based TC Media's Investment Group. Although 58% of respondents are aware their financial advisors are

charging for services, 22% believe they're not paying their advisors anything and 20% are simply unsure of

whether they're paying their advisors, according to the new report, entitled Your true value proposition:

the must-know financial advisor literacy survey. The findings show that the greatest proportion (25.7%)

of Canadian investors stated "investment management" as a key service provided by their advisors.

"Retirement planning" came in second place (19.5%) and "education and information" was the third- most

popular response (11.5%). Among the least popular responses were "estate planning" (4.6%), "insurance

coverage" (3.8%) and "charitable giving" (0.9%). http://m.investmentexecutive.com/home/dac-2015-

advisors-must-make-an-effort-to-show-their-value/

CSA 2012 Investor Index The Investor Index shows that the overall investment knowledge of Canadians is

low, with 40 per cent of Canadians failing a general investment knowledge test. According to the findings, 57

% of Canadians say they are confident when it comes to making investment decisions. Yet most Canadians

have unrealistic expectations of market returns. When asked what they think the annual rate of return on the

average investment portfolio is today, only 12 % of Canadians gave a realistic estimate, while 29 % provided

an unrealistic estimate and 59 % explicitly chose not to hazard a guess. Nearly half of Canadians (49 per

cent) say they have a financial advisor, up from 46 % in 2009 and 42 per cent in 2006. However, 60 % of

those with a financial advisor have not ever completed any form of background check on their advisor. Thirty-

one per cent of Canadians say they have a formal written financial plan, up from 25 % in 2009. Although

more Canadians have a financial plan, they are reviewing it less frequently (78 % say they reviewed their

plan in the past 12 months, down from 83 % in 2009). http://www.securities-

administrators.ca/investortools.aspx?id=1011

CARP submission to CSA Re Fiduciary Duty http://www.carp.ca/wp-content/uploads/2013/12/CSA-

Consultation-Paper-33-403-Fiduciary-Duty.pdf

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How Do Incentives Lead to Deception in Advisor–Client Interactions? Explicit and Implicit

Strategies of Self-Interested Deception | Cognitive Science

http://journal.frontiersin.org/article/10.3389/fpsyg.2012.00527/full

Legal liability for financial advisors Provinces have done little in the way of enacting legislation to provide

regulation of financial advisors. Rather, the regulatory regime arises from a variety of industry based -rules?

and principles which serve to guide financial advisors. The key regulatory -rules? are that a financial advisor

must -know your client? – in other words, they must in a general sense know their client‘s tolerance for risk

and investment goals. http://www.dolden.com/content/files/1296766764154-legal-liability-for-financial-

advisors-in-canada-february-2011.pdf

Can Advise (o) rs Disclose Away Their Fiduciary Obligations?

http://fiduciarypath.com/2015/11/10/can-adviseors-disclose-away-their-fiduciary-obligations/

Fraud and misconduct by financial intermediaries

http://www.mcmillan.ca/Files/142508_Fraud%20and%20Misconduct%20by%20Financial%20Intermediaries.

PDF

How mutual fund salespeople in Canada who lie, cheat and steal from clients are escaping justice

Financial Post http://business.financialpost.com/news/fp-street/youre-talking-about-how-many-millions-how-

sanctioned-mutual-sellers-in-canada-are-avoiding-stiff-punishment

Risky Business: Canada’s Retirement Income System Reports that Canadians are undersaving

for their retirements are exaggerated, according to a new report released today by the C.D. Howe

Institute. In “Do Canadians Save Too Little?,” author Malcolm Hamilton takes a fresh look at all the

assumptions and finds that Canadians are reasonably well prepared for retirement. For the report go

to http://www.cdhowe.org/pdf/commentary_428.pdf Given that this analysis is robust why do IIROC

dealers still use scare tactics to push Canadians to invest more for retirement? The answer appears

to be - fees!

https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2014/0

3/Risky_Business.pdf

Kenmar Associates

The Voice of the retail Investor

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