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Investment firms are wooing star advisers – in exchange for their client book – The Globe and Mail

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If you follow your adviser to a new firm, it’s likely you won’t be told if they received an enormous cheque to cross the street. Known as recruitment bonuses, these incentives are based on how much clients’ money the adviser can bring over to the new firm.Illustration by Anson Chan

Canada’s investor protection framework has long had a reputation for being weak and not particularly well-enforced. Investors are still often paying excessively high fees and hidden charges on investment funds. Advisers are often under no legal obligation to act in their clients’ best interest. And even when an investor has been harmed by their investment dealer, there is no binding dispute resolution system to ensure their losses will be recovered. This is the first part of an occasional series examining why the pace of progress in advancing investor rights in Canada has been so painfully slow, and what changes are needed to fill in the gaps.

If you, like millions of Canadians, work with an investment adviser, there’s a good chance they will decide to switch firms at some point, leaving you with a decision to make.

Do you follow your adviser to the new firm? They will certainly try to convince you to do so. You will probably be told that making a move will be an upgrade for all involved – it’s a better firm, bigger research department, more resources, better platform.

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You probably won’t be told, however, that your adviser may have just received an enormous cheque to cross the street. Known as recruitment bonuses, these incentives are based on how much clients money the adviser can bring over to the new firm.

An industrywide bidding war has taken hold in the Canadian wealth management space, as investment dealers look to quickly add scale by luring away star financial advisers from their competitors. Multimillion-dollar payments are dangled as inducements, on the condition that the adviser brings the majority of their book of investors with them.

Canada’s top wealth advisors 2022

They are under no specific obligation under current regulations, however, to disclose the bonus to their clients. The Globe and Mail spoke to several wealth management companies and investor advocates to confirm that lucrative payouts to switch firms are commonly not disclosed to clients.

“While all of this money is changing hands, clients, for the most part, are kept completely in the dark,” said John Milani, a 30-year veteran of the wealth management business and the founder of JP Milani Asset Management in Toronto. “Clients are being bought and sold, and they’re not even being told about it.”

This raises a potential conflict of interest. Is switching to a new dealer really in the best interest of the client? Or is the adviser just chasing a windfall? With huge amounts of money showered on the country’s top talent, the potential for abuse is significant, according to several investor rights advocates.

Individual investors may face a disruption of service during the period of transition. They may be encouraged to move to a firm that doesn’t meet their needs, one with higher fees, or a limited product shelf. Some advisers may bounce around from one dealer to the next to keep the cheques coming. And in the end, all of the money flowing to advisers has to come from one source – the client.

Big changes across the investment management landscape in recent years have made for heated competition between firms. A push for lower fees and greater transparency around the cost of financial advice has squeezed profit margins. Slowly but surely, mutual fund fees in Canada, as around the world, are trending downward, while more and more investors are drawn to a lower-cost passive investing approach.

Between 2013 and 2022, net assets in exchange-traded funds in Canada rose by 400 per cent – five times the pace of growth in mutual funds, according to the Investment Funds Institute of Canada. One way for investment dealers to defend against that pressure is to increase assets under management as much as possible. And the quickest way to scale up is to poach your competitor’s talent.

One firm paying richly to recruit advisers is Toronto-based Optimize Wealth Management. “Some say we pay too much,” reads Optimize’s information kit for prospective advisers. “We frankly don’t care.”

The document illustrates how much an adviser with $75-million in assets under management might earn. Between a transition bonus, fees from client accounts, and a succession bonus, total earnings come to $20-million over 10 years – 75 per cent more than they would earn at a typical dealer.

“It’s worth paying up to bring on high-end financial professionals,” said Matthew McGrath, chief executive officer of Optimize.

The generous bonuses mean that the company forgoes some earnings over the first few years of a new adviser contract, but pays off down the road with advisers who can expand their books of business, he said. The company’s new clients, he added, pay no more in fees than they were before the move. And they’re always told how much their adviser is receiving in bonuses. “If there are advisers out there that are not disclosing that, there’s something very wrong,” Mr. McGrath said.

Shelling out large recruitment bonuses has been a long-standing practice within Canada’s wealth management industry in order to obtain top advisers. But as the average age of advisers continues to rise and a wave of baby boomers prepare to retire, investment dealers are becoming more aggressive in their hunt to scoop up seasoned books of business, which typically includes top-producing advisers who manage clients with more than $1-million in investable assets.

Another one of Bay Street’s more aggressive recruiters is Wellington-Altus Financial. As the co-founder of an independent startup, Charlie Spiring knew he couldn’t compete against some of the more aggressive bonus offers in the market. So, in 2021, the company sold a minority interest to two private investor groups for about $85-million – an amount that has largely been allocated for recruitment. A year later, the company has added $4.9-billion in new assets by hiring 11 adviser teams.

Mr. Spiring pointed to his firm’s upgraded technology program, an open product shelf that does not include proprietary products, and the ability for advisers to own equity in his growing company. “When you can directly explain to a client what they will receive in a move, then it becomes pretty transparent on why you are suggesting a move,” he added.

In addition to his role as CEO, Mr. Spiring continues to work as an investment adviser himself – a role he has held for 40 years. Recruitment bonuses are necessary payments, he said, in order for an adviser to bridge the gap in income loss during a move. As someone who has worked at both bank-owned investment dealers and independent firms, he knows how disruptive moving firms can be for both an adviser and a client.

While many advisers make a move with good intentions, don’t assume, however, that every adviser switching firms has their client’s best interest at heart, Mr. Spiring said. “If you are moving from one bank to another bank, how is that beneficial for a client to take that move with the adviser?” he asked. “In some cases, it becomes quite clear it is a payday for someone looking to cash in.”

Historically, these incentives, also known as “chequebook recruiting,” were paid out in the form of cash – usually as a five-year, forgivable loan. They were seen as an upfront payment that would help an adviser financially during a period of transition as they moved their clients over to a new investment company. After all, most advisers’ income would effectively drop to zero as soon as they part ways with their old employer.

But these inducements in recent years have inflated well beyond what could be considered a reasonable cost of transition. “The amounts being paid are so gross that it would be shocking if consumers knew how much many advisers are being compensated,” said Harold Geller, an Ottawa lawyer who represents investors with claims against their advisers.

Bonuses of $5-million or more are not unheard of for a high-end adviser, said Mr. Spiring, who has seen a competitor offering of an all-cash bonus north of $7-million for an adviser generating $4-million in revenue. For most advisers, switching firms should only happen once or twice in their career. But some move frequently or look to double dip – change firms just prior to retirement so they can get a cash bonus in addition to a separate payment when they sell their book of business.

The companies cutting the largest cheques are not doing so out of generosity. They expect to make a return on that investment. Some firms can pay huge bonuses because they’re charging clients higher fees. Others can afford the additional expense by taking a bigger slice of an adviser’s revenue, or pushing clients into proprietary funds so they can collect fund fees. “It gets passed on to clients one way or another,” said Jason Pereira, a partner at Woodgate Financial Inc. and president of the Financial Planning Association of Canada.

Many Canadians rely heavily on the counsel of advisers when making financial decisions. A recent survey by FAIR Canada, an investor advocacy group, suggested that 80 per cent of investors in Canada work with an adviser. And most follow the advice given, while also being concerned about paying too much in fees and being sold unsuitable products. “Investors tend to place a great deal of reliance on their advisers, but they don’t necessarily trust them,” said Jean-Paul Bureaud, FAIR Canada’s executive director. “It’s an uncomfortable relationship.”

The level of financial literacy in Canada is not particularly high, which puts investors in a vulnerable position, Mr. Bureaud said. That imbalance is exacerbated when investors aren’t in possession of all the relevant information.

The New Self-Regulatory Organization of Canada, which is the temporary name given to the group of merged regulators overseeing all investment dealers in Canada, said advisers are expected at all times to properly manage conflicts of interest. “Should an adviser choose to move to a new firm they, and their firm, must continue to follow all disclosure and conduct requirements including those relating to conflicts of interest,” the New SRO wrote in an e-mail. “We believe our principle-based conflict provisions are sufficient at this time.”

Many advisers, however, choose not to divulge their bonuses to their clients, said Thomas Caldwell, the founder of Caldwell Securities and a past governor of the Toronto Stock Exchange. “The clients are always given bogus reasons for leaving, while this inducement is not disclosed,” he said. “This is a massive conflict of interest and a lack of disclosure of exceptional proportions.”

Over a decade ago, the Financial Industry Regulator Authority in the United States proposed a rule that, if approved, would require advisers to disclose their incentive bonus to any client who follows the adviser to the new firm within one year of the transition.

At the time, Canadian regulators said they were closely monitoring their U.S. counterpart’s decision. But in 2014, the U.S. dropped the original proposal that would have placed a duty of care on the investment adviser and the financial firm to disclose any bonus amount of $100,000 or more.

Instead, a watered-down requirement for financial advisers to provide clients with “educational communication” was put in place. It includes questions clients may want to ask their adviser during a move to a new investment firm. Several U.S broker dealers, such as UBS Wealth Management USA and Merrill Lynch, voluntarily disclose to clients that an adviser could receive an incentive if they choose to move their assets over to the firm.

In Canada, despite new conflict of interest rules being adopted in 2021, the topic of specifically disclosing recruitment bonuses to clients was not addressed.

Advisers have a vested interest in convincing their clients to switch firms. After all, the return on investment paid to the adviser is only as good as the number of clients that move. When an adviser decides to jump ship, battles may arise over who owns the client relationship, and non-compete clauses can create a confusing time for clients who end up receiving phone calls from both parties. Competitors offer elite SWAT (support with adviser transition) teams, which are trained to assist an adviser in moving their client base over to a new company within weeks.

Most clients are completely unaware of the process until they receive their investment statement with a new logo on the front.

Mr. Spiring, who was also the head of the Investment Industry Association of Canada in 2014, said the New SRO should reconsider a rule proposal that would bring increased transparency to recruitment bonuses. “Advisers should absolutely disclose to their clients if they are getting a monetary benefit. It should be right in the package saying, ‘I’m changing firms and here’s what I earned,’” he said.

“We need to just put it out there and tell the world because quite often when someone does make a move for a hefty paycheque, it just puts the stink in our industry.”

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For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio

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Fee competition in the exchange-traded fund business is driving down the cost of investing to new lows.

A simple little ETF strategy I call the Freedom .08 Portfolio proves it. Some previous names for this portfolio included Freedom 0.15 and Freedom 0.11. The numbers are based on the aggregate management expense ratio for the portfolio, which has fallen ever lower through the years. That’s how we get to Freedom .08 in early 2023. That’s 8 cents in fees for every $100 you have invested.

Here’s how the Freedom .08 Portfolio is put together using a 70:30 asset mix of stocks and bonds.:

-30 per cent in the Desjardins Canadian Universe Bond Index ETF (DCU-T): The MER for this fund is 0.08 per cent, which is at the low end for aggregate bond ETFs covering the broad Canadian market for government and corporate bonds. It tracks the Solactive Canadian Bond Universe total return Index, which is a relative newcomer to the Canadian market. You can compare returns to competitors using the bond fund installment of the 2023 Globe and Mail ETF Buyer’s Guide, but they’re very similar to more established indexes.

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-30 per cent in the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T): The MER for this fund is 0.06 per cent and the underlying index is the ultimate benchmark for Canadian stocks.

-20 per cent in the Franklin International Equity Index ETF (FLUR-NE): The MER here is 0.1 per cent, which is strikingly low for the international equity category. That’s markets outside North America, by the way. Solactive is again the index provider. In doing your research, compare returns against international equity ETFs tracking the more traditional MSCI EAFE index.

-20 per cent in the Vanguard S&P 500 Index ETF (VFV-T): The MER is 0.09 per cent and the index is one you know and love, the S&P 500.

ETFs trade like stocks, which means you’ll need a digital brokerage account to build a portfolio. For extreme frugal investing, consider the zero-commission brokers Wealthsimple, National Bank Direct Brokerage, and Desjardins Online Investing. CI Direct Trading and Questrade offer ETF purchases at no cost, but you pay the usual commission to sell.

A final point of comparison for the Freedom 0.08 Portfolio is a popular kind of exchange-trade fund called the asset allocation fund. You can buy these fully diversified portfolios with MERs of 0.2 to 0.24 per cent.

— Rob Carrick, personal finance columnist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Bombardier Inc. (BBD-B-T) The plane maker is generating cash, paying down debt and raising its financial targets. Investors are paying attention, too: The share price has rallied more than 250 per cent over the past eight months. David Berman asks: Has the stock become relevant again?

WELL Health Technologies Corp. (WELL-T) After this health-care company reported record quarterly financial results last week, the share price rallied nearly 16 per cent on high volume. Analysts believe this positive price momentum will continue. The average one-year target price implies a 61 per cent potential gain for the stock. Jennifer Dowty takes a look at the investment case.

The Rundown

Banking woes, Fed keep investors on edge in nervous stock market

Investors are settling in for a long slog in the U.S. stock market in coming months, braced for more tumult in the banking sector and worries over how the Federal Reserve’s tightening will ripple through the economy. As David Randall of Reuters reports, many worry that other nasty surprises are lurking as the rapid series of interest rate hikes the Fed has delivered over the past year dry up cheap money and widen fissures in the economy.

Grocery REITs are a safe harbour in the market storm

Feeling gouged by high grocery prices? Bummed out by bank runs? Sick of stock market volatility? With inflation and rising interest rates creating turmoil in the economy and financial markets, these are tough times to be a consumer – or an investor. John Heinzl is here to offer some help by profiling some real estate investment trusts in the grocery sector. The goal: put some of that grocery money back in your pocket while enabling you to sleep better even as markets gyrate.

Throw caution to the wind with the Free Cash portfolio

It’s time to catch up on the value stock race. Norman Rothery pitted 14 popular measures of value against each other in the U.S. market. Each measure was used to form a tracking portfolio containing the cheapest 10 per cent of the stocks in the S&P 500 index based on that measure. The 14 tracking portfolios were equally weighted and rebalanced annually. So far, the trend favours investors who keep an eye on debt while hunting for bargains.

Read more from Norman Rothery: Portfolios for Value and Dividend Investors

Canadian bank stocks may not be quite as special as we think

Canadians are used to thinking of bank stocks as a safe, nearly guaranteed way to bet the market. They may want to think again. As Ian McGugan tell us, investors would be wise then to consider the prospect of a future in which Canadian banks no longer churn out market-beating results with clockwork regularity.

Strength in megacap stocks masks broader U.S. market woes

Investors are relying on an old strategy to navigate the current tumult in asset prices: buying shares of the massive U.S. companies that led markets higher for years. Shares of the top five companies by market value — Apple , Microsoft, Alphabet, Amazon and Nvidia — have gained between 4.5% and 12% since March 8, when troubles at Silicon Valley Bank set off banking system worries. In that period, the S&P 500 has fallen 0.5%. Lewis Krauskopf of Reuters tells us more.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

Globe Advisor

Where investors put their money in this year’s RRSP season

How to play the demand for microprocessors as chatbots, robots and EVs disrupt sectors

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.

Ask Globe Investor

Question: Harvest Healthcare Leaders has units that trade in U.S. dollars on the TSX. For tax purposes, is the income considered foreign income or Canadian? For example, can donations to registered charities in the U.S. be deducted against the income from HHL.U? – Michael K.

Answer: Only a small amount (9.26 per cent) of the income from this ETF was classified as foreign income in 2022, according to the Harvest Funds website. Most of the distributions (about 94 per cent) are treated as return of capital. So, you won’t get much help here for U.S. charitable contributions.

–Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question in the subject line.)

What’s up in the days ahead

Bond markets are suggesting interest rate cuts loom for this summer in both Canada and the U.S. But central bankers are dropping few hints. Who should we believe? Veteran bond fund manager Tom Czitron will provide some insight.

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Online investment fraud increasing in Manitoba

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Manitobans are being warned about the rise in fraudulent online investment websites, which have exploited some Manitobans out of more than $200,000.

During the Manitoba Securities Commission’s (MSC) ongoing investigation into cryptocurrency fraud, the agency uncovered 66 victims in Manitoba who were scammed through 34 separate online platforms. These Manitobans had transferred money to offshore crypto exchanges based in Lithuania and Bulgaria.

According to Jason Roy, MSC senior investigator, the initial investments were smaller amounts of money as the fraudsters know if they ask for too much money right off the bat, then people are more likely to decline the offer.

“They start with these small amounts and then show you fake trading results and get you excited about putting more money in,” he said in an interview with CTV Morning Live on Monday.

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The victims’ losses ranged from $306 to $206,000, with the total losses coming to $710,000.

Roy said there are likely a lot more investment fraud victims in Manitoba, but they may feel too embarrassed to report what happened to them.

“Really, only five to 10 per cent of victims actually report being victimized,” he said.

For those who come across an online investment website, there are certain things to look out for to ensure it is legitimate. Roy recommends ensuring that you are dealing with a company that is registered to do business in Canada. Checking a company’s registration can be done online.

Other common attributes of the investment fraud websites uncovered in the MSC investigation include:

  1. Targeting victims on social media;
  2. Promoting cryptocurrency or Forex trading;
  3. Promising an unreasonably high or quick return on investment;
  4. Victims being unable to withdraw their initial investment or fake returns;
  5. Operating offshore, but telling investors they have offices in Canada;
  6. Requesting investors to convert funds to cryptocurrency; and
  7. Getting investors to provide remote access to their computers or phones.

Those who are solicited by a fake trading website, which can appear to be legitimate, are asked to report the incident by calling 1-855-372-8362.

– With files from CTV’s Katherine Dow.

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Sen. Bob Casey oversaw Pa. pension investment in China-linked firm

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Sen. Bob Casey (D-Pa.) supervised a potentially risky investment worth more than $31 million from state worker pensions into a Chinese government-backed firm — that has since been deemed a threat to the US — while he served as the commonwealth’s treasurer in 2006.

A state report on the fund from 2007 notes holdings by the Pennsylvania State Employees’ Retirement System in China Mobile Ltd. valued at $31,386,930 — the eighth-largest foreign asset held by the state at the time, joining a list that included major brands like Nestle, UBS and BP.

A report covering the previous year, 2005, does not list China Mobile as one of the fund’s 10 largest overseas holdings, nor does one for the year before that — though the value of many other foreign investments remained similar.

The state report for 2007 also does not show China Mobile among the fund’s ten largest international assets.

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China Mobile has since been designated a national security threat, with the Department of Defense in June 2020 noting the company was part of the Chinese Communist Party’s “military-civil fusion national strategy.”

 

Sen. Bob Casey (D-Pa.) as Pennsylvania treasurer in 2006 placed more than $31 million of state employees’ pensions into a Chinese firm.
NurPhoto via Getty Images

The New York Stock Exchange delisted China Mobile in January 2021 following the Pentagon’s designation.

President Biden, in a June 2021 executive order, further demanded US shareholders divest from the company, citing China Mobile as one of many threats “posed by the military-industrial complex of the People’s Republic of China.”

The Federal Communications Commission also deemed China Mobile a threat to national security in March 2022.

Founded in Hong Kong on Sept. 3, 1997 — weeks after the territory was handed over to Beijing by the United Kingdom — China Mobile is owned by China Mobile Communications Corp., which is a subsidiary of the People’s Republic of China.

 

President Joe Biden.

President Biden in 2021 called China Mobile one of many threats “posed by the military-industrial complex of the People’s Republic of China.”
Bloomberg via Getty Images

The China Mobile assets were one of many lucrative holdings Casey oversaw when he served as state treasurer from 2005 to 2007, investing much of Pennsylvania taxpayers’ money in international equity.

The holdings in China Mobile were overseen by Casey as the fund’s custodian as well as 10 other board members of the Pennsylvania State Employees’ Retirement System, including former Pennsylvania House members Nicholas J. Maiale, Michael F. Gerber, and Robert W. Godshall; and former Pennsylvania state senators Gibson E. Armstrong, Raphael J. Musto, and M. Joseph Rocks.

A spokeswoman for Casey’s office told The Post Monday that the senator should not be held responsible for the investment.

 

President Xi Jinping.

China Mobile is owned by China Mobile Communications Corp., which is a subsidiary of the People’s Republic of China.
Xinhua News Agency via Getty Images

“This story is a false attack — the investment in question was made before Bob Casey became State Treasurer in 2005,” she said.

“No one is tougher on China than Senator Casey. During his time in the Senate, he has fought to crack down on China’s currency manipulation, and against unfair trade practices and US corporations that invest in China at the expense of American workers,” she added.

The spokesperson did not respond to a follow-up question about whether Casey approved further investments in China Mobile in 2006.

Casey has touted his experience handling the Pennsylvania state employee retirement fund, both as treasurer and in his eight years as the commonwealth’s auditor general.

 

Chinese President Xi Jinping

Chinese President Xi Jinping
Getty Images

“As Auditor General and State Treasurer of Pennsylvania, I took a particular interest in the two state public pension funds, for teachers and public employees, which are traditional defined benefit plans,” Casey said in a July 2008 press release.

“As Auditor General, I audited both funds and as State Treasurer, I served as a trustee for both funds. It gave me an insight into the benefits of well-run defined benefit plans, both to retirees and to our economy as a whole,” he added.

Additionally, Pennsylvania’s pension fund paid $15,315 to the state-owned Bank of China for trading broker commissions under Casey in 2006.

Most state employees are required by law to enroll in the Pennsylvania State Employees’ Retirement Code, which handles benefits for around 240,000 employees and retirees, according to its website.

Employees gain a lifetime pension after contributing roughly 6% to the fund for a minimum of five years, or at least 10 years if they were hired after Dec. 31, 2009.

Casey was succeeded as state treasurer by Robin Wiessmann, whom Biden chose last April to serve on the board of Amtrak.

Wiessmann is listed as state treasurer on the financial report for 2006, since the document was finalized in June 2007, six months after Casey was sworn in as a senator.

Casey’s financial ties have drawn scrutiny from ethics watchdogs in recent weeks, after The Post revealed his campaigns have paid more than $500,000 to a printing company owned by his sister and brother-in-law.

Meanwhile, as Congress weighs a ban on TikTok over national security concerns, Casey is one of the few federal lawmakers with an account on the Chinese-controlled social media app.

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