Excerpt from The Financial Navigator – How Transparent is the Financial Industry?

The Financial Navigator by Timothy Paziuk

The problem is that we are bombarded by a never-ending stream of new investment products being touted on television, in newspapers and in magazines. It’s as if the industry wants to convince us that it’s discovered a way to build a better mousetrap. In reality, have they developed a new generation of super-investment products? No, they just keep on trying to improve the packaging of what they sell, so it appears superior to their competitors’ offerings.

You may think that on the one hand I’m telling you not to believe all that you hear about investing, and at the same time I’m telling you to believe me. And, you’d be right, but the big difference is that I’m not trying to sell you anything. You have to decide if a particular investment opportunity makes sense for you, your family and your circumstances.

When I wrote Professional Corporations: The Secret to Success, I explained how to set up and manage a professional corporation in a way that would enable professionals, in particular, to keep more of what they earned. What I didn’t do in that book was explain what to do with the money once it started to accumulate. This unfortunately left the door open for people to use my book to gain people’s confidence and then take advantage of them. I’ve seen case after case where my book has been used by a salesperson to encourage professionals to incorporate, and then subsequently get them involved in some very destructive “investments.”

One case that comes to mind was a physician in northern Manitoba who incorporated the first year he started practicing. He was given my book by a life insurance agent who showed him how he could leave money inside his professional corporation. This same agent sold him a very large universal life insurance policy with a premium of $28,000 per year. What the agent failed to explain was that when you incorporate, you have to file a corporate tax return and if you leave money inside the company you have to pay corporate tax. At the time the physician contacted me he had not filed a corporate tax return for three years (the period he’d been incorporated). He owed back taxes, plus interest, and was stuck with a universal life policy that he should never have purchased.

If this particular insurance agent had been looking after his or her client’s best interest they would have carried out a more thorough review of the client’s situation and helped him deal with his taxes, before selling him a very costly life insurance contract. Unfortunately this individual, like so many others, appears only to have been interested in the sale.

In December 2010, the Canadian Task Force on Financial Literacy published their report. Not surprisingly the report found that Canadians, for the most part, are financially illiterate. The report went on to make thirty recommendations to improve financial literacy.

Recommendation seven in the report states, “The Task Force recommends that financial services providers put a strong emphasis on delivering educational information and ensuring that it is fully understood by Canadians at “teachable moments” so that Canadians can make responsible financial decisions.” The report continues on this theme, “The Task Force believes that professional financial advice must meet rigorous standards, especially with respect to remuneration transparency and professional qualifications. It has an important role to play in empowering Canadians in their financial decisions. We believe that the advisory role of financial institutions and financial practitioners should be promoted. Many Canadians rely on, and benefit from, the advice of financial sector professionals. More than half of respondents to a 2009 Canadian Securities Administrators (CSA) Investor Index Survey, carried out by Ipsos Reid, indicated that they relied on a financial advisor for investment information.”

Hold on a minute – aren’t financial service providers the ones that stand to gain the most from financial illiteracy? Isn’t it them who put out prospectuses that are hundreds of pages long and almost impenetrable to the average person? As the Chair of the task force is Donald A. Stewart, Chief Executive Officer of Sun Life Financial Inc. it would seem like the financial industry is policing itself.

Later the report reads, “Governments can help create the right financial environment through appropriate policies and regulations, but the burden of making financial decisions ultimately rests with individuals.” This and the previous quotes speak to the very root of the concerns I have about the investment, banking and insurance industries – caveat emptor (buyer beware).

For all the Ministry of Finance’s good intentions when setting up the financial literacy task force, the financial industry as a whole is still not compelled to give full and complete disclosure on its products. So, how can an average consumer know how most of these financial products work? How can anyone make an informed decision? Especially once a client complains about what’s happened to their account, and the industry’s standard response is, “It was ultimately your decision.” This is flat out wrong.

When I talk about full and complete disclosure I’m thinking about things like understandable language. There is no reason why all consumer literature can’t be written in simple English. If almost half the Canadian public has trouble with reading financial material, then this should be mandatory.

All fees and costs should be disclosed within the first three pages of any investment prospectus, or offering memorandum, and each monthly or quarterly statement should have all costs for that client clearly disclosed. Technologically this should not be an issue, as all statements are computer generated and this would simply be an additional line item. If, for example, the management expense ratio (MER) of a fund is 2.6 per cent and additional costs of .22 per cent are charged to the fund, the company should be able to tell a client that last month the cost to own their investment was, for instance, $1,246.25.

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