The patron saint of lapdogs is getting a little tarnish on his halo:
There has been quiet talk for some time that Bank of Canada Governor Mark Carney was seriously considering a run at the Liberal leadership but, until this weekend, it was only in the form of whispers.
A Globe report, however, has revealed that Mr. Carney had serious discussions with Liberal party insiders on his ability to defeat Justin Trudeau in a leadership campaign and even stayed at Liberal MP Scott Brison’s house for a period of time – a likely violation of the bank’s conflict of interest guidelines. If true, the allegations reveal a serious lack of judgment and threatens to taint one of the country’s most vital institutions.
I think Carney has done plenty to taint it already – in acting as a stalking horse for his political masters. But our hero can do no wrong:
The Bank of Canada says it’s assessed Mark Carney’s family stay over at the seaside home of the Liberal Party finance critic this past summer and decided he was not in a conflict of interest for accepting this hospitality.
The Official Opposition NDP pointed out, however, that its finance critic could only get a phone call from the Bank of Canada governor when she asked for a meeting.
I mentioned the regulatory proposals on trailer fees on December 13 and will have more to say – in response to a query from an Assiduous Reader – shortly. In the mean-time, there’s a dogfight brewing in the UK:
Peter Hargreaves made himself a billionaire by selling mutual funds through his discount broker, Hargreaves Lansdown Plc. (HL/) Now, as planned rules threaten his business model, he intends to raid fund managers’ profits.
Hargreaves built the firm into the U.K.’s biggest retail broker, the country’s equivalent of Charles Schwab Corp. (SCHW), by selling funds and charging money managers rather than clients. Starting in 2014, U.K. brokers will have to charge clients directly, a move analysts say jeopardizes the firm’s 64 percent profit margin. Hargreaves says funds must eat the cost.
“All the groups are sitting there, smug, thinking we’re getting 0.75 percent and we’re not going to give Hargreaves anything anymore,” Hargreaves, 66, said in an interview at his office in Bristol, western England, where he started the firm in his spare bedroom 30 years ago. “That’s not going to happen. They need to bear some of it.”
The Financial Services Authority, the U.K. regulator, plans to ban brokers from receiving cash from money managers and require investors to pay brokerage fees directly to bolster transparency in an industry where costs are more than double those in the U.S. Hargreaves Landsown has increased earnings sixfold since 2007, and the stock has climbed 65 percent this year in London trading, making it the second-best performer in the FTSE 100 Index. (UKX) Still, the shares have slipped 7 percent this month on concern the rule change will crimp earnings.
…
Hargreaves plans to introduce charges to replace the payments, called trail commission in the U.K., which would either be an annual fee based on the value of clients’ assets, a charge for each trade or a combination of the two. He declined to give more details on his pricing plans before the FSA approves the rules. The fees, which he called “competitive,” will probably apply to existing clients’ funds, he said.
A custodial fee charged by discount brokerages will be interesting, to say the least, regardless of how much sense it makes. Geez, I can hear the howls from the DIY guys already … ‘you mean I have to pay as much to hold my ETF (and my common stocks? and my GICs?) as others do to hold their 2.5% MER mutual funds? What?’
What else can we think of by way of unintended consequences? How about tied selling? “Sorry, buddy, but we will no longer allow you to buy ABC funds through your DEF account, because there’s nothing in it for us. We offer DEF funds only.” or how about “If you want to buy the ABC funds, you have to open a ‘Wonder-Gizmo ABC Account’. It’s quite expensive, I’m afraid, and charges have to be paid in person and in cash at our Tuktoyuktuq branch. Here, fill out these forms.”
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets down 8bp and DeemedRetractibles up 13bp. Volatility was average, but entirely negative. Volume was high.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2408 % | 2,481.8 |
| FixedFloater | 4.18 % | 3.53 % | 30,288 | 18.21 | 1 | -1.0870 % | 3,853.3 |
| Floater | 2.80 % | 2.99 % | 62,065 | 19.76 | 4 | 0.2408 % | 2,679.7 |
| OpRet | 4.64 % | 2.44 % | 51,760 | 0.50 | 4 | 0.0383 % | 2,592.1 |
| SplitShare | 4.64 % | 4.69 % | 59,438 | 4.40 | 2 | 0.5474 % | 2,871.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0383 % | 2,370.2 |
| Perpetual-Premium | 5.24 % | 1.52 % | 72,670 | 0.80 | 30 | 0.0503 % | 2,323.9 |
| Perpetual-Discount | 4.85 % | 4.88 % | 133,787 | 15.59 | 4 | 0.0305 % | 2,636.7 |
| FixedReset | 4.94 % | 2.99 % | 229,760 | 4.32 | 77 | -0.0772 % | 2,451.8 |
| Deemed-Retractible | 4.90 % | 1.70 % | 117,749 | 0.40 | 46 | 0.1260 % | 2,414.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.H | FixedReset | -1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-17 Maturity Price : 23.57 Evaluated at bid price : 25.25 Bid-YTW : 2.78 % |
| BAM.PR.G | FixedFloater | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-17 Maturity Price : 23.08 Evaluated at bid price : 22.75 Bid-YTW : 3.53 % |
| MFC.PR.D | FixedReset | -1.05 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 26.35 Bid-YTW : 2.92 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PR.T | FixedReset | 80,245 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-17 Maturity Price : 23.11 Evaluated at bid price : 25.04 Bid-YTW : 3.76 % |
| BNS.PR.Y | FixedReset | 54,798 | Nesbitt bought 10,000 from CIBC at 24.05. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.03 Bid-YTW : 3.33 % |
| CU.PR.C | FixedReset | 53,512 | RBC crossed 50,000 at 26.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 26.24 Bid-YTW : 2.87 % |
| BAM.PR.B | Floater | 52,612 | National bought 38,900 from Nesbitt at 38,900. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-17 Maturity Price : 17.52 Evaluated at bid price : 17.52 Bid-YTW : 2.99 % |
| NA.PR.K | Deemed-Retractible | 50,113 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-01-16 Maturity Price : 25.00 Evaluated at bid price : 25.19 Bid-YTW : 2.83 % |
| BAM.PR.C | Floater | 44,189 | Nesbitt bought 40,000 from National at 17.51. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-12-17 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 2.99 % |
| There were 39 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.G | FixedReset | Quote: 25.90 – 26.90 Spot Rate : 1.0000 Average : 0.5382 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 25.25 – 25.72 Spot Rate : 0.4700 Average : 0.2656 YTW SCENARIO |
| IAG.PR.G | FixedReset | Quote: 25.67 – 26.00 Spot Rate : 0.3300 Average : 0.2053 YTW SCENARIO |
| ELF.PR.H | Perpetual-Premium | Quote: 26.00 – 26.28 Spot Rate : 0.2800 Average : 0.1723 YTW SCENARIO |
| W.PR.J | Perpetual-Premium | Quote: 25.50 – 25.70 Spot Rate : 0.2000 Average : 0.1240 YTW SCENARIO |
| BNS.PR.Z | FixedReset | Quote: 24.48 – 24.67 Spot Rate : 0.1900 Average : 0.1199 YTW SCENARIO |
If anyone cares to understand the FSA rules, here is a summary of them from a recent CSA paper:
“The rules require advisors to set their own charges for their services in agreement with their clients. Advisors may no longer receive commission set by product providers or otherwise embedded in the cost of the product. Their charging structures will therefore have to be based on the level of service they provide, rather than the particular provider or product they recommend. Whether the charging structure is based on a fixed fee, an hourly rate or a percentage of funds invested will be up to the advisor to decide together with the client, provided the advisor always bears in mind its duty to act in the client’s best interests. Ongoing fees will only be permitted where a client is paying for an ongoing service that has been properly disclosed or where the product is one in which the client makes regular payments, and may be cancelled by the client at any time without penalty.”
Imagine that – rules that require advisors to negotiate their compensation directly with those they advise, rather than allowing them to extract it from clients back pockets when they’re not looking.
Trailer fees are kickbacks, and in any self-respecting profession they’d be regarded as corrupt. The only thing that surprises me about the changes mandated by the FSA (similar changes are being contemplated in the US and Canada) is that it has taken the regulators so long to wake up.
Regarding your musings about unintended consequences, muse away. Doing what’s ethically right is never wrong just because you don’t know all of the potential consequences of your actions.
What you say would be quite correct, if in fact retail investors were the clients of stockbrokers.
However, in this Canadian segment of this particular universe, retail investors are not the clients of stockbrokers. This may change at some point – there are proposals to make stockbrokers fiduciaries, which will change the whole ball-game; a proposal that at this point has had no more thought or logic surrounding the debate than the proposal to ban trailer fees.
To whom does an ethical man owe a duty? To the person who pays him. Who pays stockbrokers? In the case of mutual funds, the fundco pays. The stockbroker has no more fiduciary duty to the client than the salesman at the electronics store had to me when I bought a television recently. He had no duty to tell me a half price sale was set to happen the next day, or that I could purchase the same thing cheaper from another salesman at another store. And, as an adult, I understand that.
Fiduciary law is extremely complex, and can be arrived at constructively on a case-by-case basis. It is fashionable nowadays for regulators to dismiss five-hundred years of legal experimentation and experience as a mere bagatelle – there are many proposals that will have the effect of eliminating bankruptcy law as it applies to banks. I would prefer public policy decisions to be founded on better grounds than ‘all the cool regulators are doing it!’
In my particular case, I am explicitly recognized in law as a fiduciary to my clients – which only makes sense, given that my clients pay me and nobody else does. And other fiduciaries are widely available to anybody who cares to hire them.
It occurs to me with respect to the example of an electronics store, that if I owned one and one of my employees were to tell MY customers where they could get the same or similar goods cheaper, I would probably take the view that the employee was in breach of his fiduciary duty to me, although I’d want to discuss that with a specialist in employment law before taking any action.
[…] mentioned yesterday, I received a query from an Assiduous Reader asking me to clarify my remarks of December 13 […]
The following was posted by Assiduous Reader Drew on another thread and has been moved here [which I believe was the intended location] for clarity by JH
It’s hard to know where to start in responding. The issue to my mind is really quite simple: it is wrong for the regulated fund I own to to pay my regulated advisor an amount that is contingent on me remaining an owner of that fund, for all of the reasons enunciated in the CSA’s recent paper on the subject. Put more expansively, because it’s wrong for me, it’s wrong for all others in my situation, and therefore it is contrary to the public interest as it relates to securities markets.
As you might know, the securities commissions are required by law to regulate in a manner that protects the “public interest” (colloquially know as the “public interest mandate”). Thus, if the commissions judge as I have as it relates to trailer fees, they have a legal obligation in law to fix it.
Your examples of what is permissible at an electronics store are, you should know, because they are not subject to the special regulation of the securities industry. That is to say, they are not subject to the public interest mandate, though, to be sure, they are subject to various items of consumer protection legislation that are intended to operate to similar effect in their industry.
You say the following:
“A further problem with the regulatory proposals with respect to trailers has arisen in the comments to yesterday’s post with respect to fiduciary duty. If fees are charged directly by the advisor to the investor, then the advisor will have a fiduciary duty towards that client.”
You are very quick to chide the regulators for bad and offensive logic (even though logic is incapable of being offensive, only valid or not). Yet you commit the same error in the last sentence: how does it follow that if fees can only be charged by the advisor, the advisor must, seemingly as a causal matter, be a fiduciary? It doesn’t. The requirement could arise by virtue of the existence of a fiduciary duty, but equally it could arise by virtue of a statutory provision.
The issue at play is whether the regulators should impose such a requirement. You’ve said a lot, but nothing about the real issue: whether trailer fee arrangements are contrary to the public interest. To my mind, that they are contrary to the public interest is so obvious as to be in need of no explanation. Regulators in Canada, the US, the UK and Europe have all, essentially, finally come to this view. Maybe they are all the idiots you make them out to be, and once again they’ve got the issue wrong. But if you want to be persuasive you’d do better to address the issue directly.
it is wrong for the regulated fund I own to to pay my regulated advisor an amount that is contingent on me remaining an owner of that fund, for all of the reasons enunciated in the CSA’s recent paper on the subject. … You’ve said a lot, but nothing about the real issue: whether trailer fee arrangements are contrary to the public interest. … you’d do better to address the issue directly.
Nowhere in the CSA’s recent paper on the subject do they make the claim that trailer fees are “wrong”.
In their strongest proposal for change, (vii) on page 39, they request comments on
You will note that they refer to “actual or perceived conflicts of interest” – which has the clear intent of taking them off the hook with respect to showing there is an actual conflict of interest.
I have addressed some of their argument in my post of December 13, with a more detailed elucidation of my objections in my post of December 18 and I have no particular interest in spending a lot of time on this. However, if there is a specific argument you wish me to address, please specify it with a page number.
Mine is a rough-and-ready investment-manager definition: your client is the one who pays you, and you owe him duty and loyalty. I’m sure there are many extremely thick books regarding precise definitions of fiduciary relationships in general.
Are you suggesting that an investor could pay a broker for a service without triggering the fiduciary standard? If so, I’d like to learn more about that.
Of course a broker can be paid for a service without there being a fiduciary standard. That’s precisely what clients of brokers do every day. Brokers get paid and yet they owe no fiduciary duty.
As for your comment about the CSA paper not indicating what’s wrong with trailer fees, if that’s what you genuinely believe – that the CSA has published a paper designed to elicit comments on problem, namely trailer fees, they perceive exist and possible solutions to that perceived problem – then you’ve not read it. How could it be presented as a problem without at least hinting that there is something wrong with it.
As for “showing” there is an actual conflict of interest, it’s self-evident, for the reason I mentioned previously but you’ve ignored: it’s a kickback. If I refer a client to another lawyer and receive a fee from that other lawyer for doing so, I disclose that fee to my client, not because of my fiduciary duty to the client but because I believe it is important to disclose that I have a conflict of interest. How, on your standards, would I go about providing you with the proof you demand that my fee arrangement constitutes a conflict of interest? It’s obvious.
Just to clarify the issue of conflicts of interests and fiduciary duties, I said above that I disclose my conflict of interest by virtue of the fact that it is a conflict, and I feel it is right and proper to disclose it. There is also a Law Society rule that requires disclosure. The point, however, is that my duty to disclose is grounded in ethics and the Law Society rule, not my fiduciary duty. My fiduciary duty requires only that I ensure that the referral is in the best interests of the client. Having discharged that duty, I’m free to accept payment from the lawyer to whom I’ve referred the client, where it not for my ethical and statutory obligation.
Of course a broker can be paid for a service without there being a fiduciary standard.
It’s a pity you didn’t provide an example.
As for your comment about the CSA paper not indicating what’s wrong with trailer fees …
You will recall that what I said was:
which was in response to your assertion that:
There is a world of difference between “it is wrong” and “what’s wrong”. If the CSA believes that trailers are “wrong” in the sense that you used the term, it is rather odd that six of their seven topics for comment envisage the continuation of these payments.
As for “showing” there is an actual conflict of interest, it’s self-evident, for the reason I mentioned previously but you’ve ignored: it’s a kickback
As I explained:
At this point it has become clear that the discussion has run its course. I suggest you direct further comments to the CSA prior to their 2013-4-12 deadline.
[…] the risk that mutual fund trailers will be banned (see various posts and comments commencing on December 17, 2012). In such a case, they’ll be up and running with a working model of access to small investors […]