Episode 236: Harold Geller: "I Sue Financial Advisors"

January 19, 2023 Guest User

Harold is a senior lawyer whose practice is focused on both helping investors who have lost money in the markets and life insureds who were sold unsuitable life insurance. Harold's goal is to help investor get their money back. He negotiates settlements directly with industry and through suing industry in the courts. Harold has been helping investors for more than 25 years and represented more than 1500 investors.

He is one of Canada's leading experts. He works with regulators to improve investor protections. He provides education both to the public and to the financial industry's own experts.

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Our guest today, Harold Geller, is a lawyer who helps clients dealing with fraud and negligence perpetrated by financial advisors, and is a passionate advocate for investors and their rights. Tuning in you’ll hear details of some of the most common issues Harold has come across in his work, along with his practical advice for financial advisors and investors. We discuss the importance of clear communication between advisors and their clients, the concept of KYC (Know Your Client), and simple steps investors can take to ensure that their advice is properly understood by their clients. Harold goes on to provide an outline of factors that could make individuals vulnerable to negligent financial advice (such as marital problems or a sudden health crisis) and how to gain perspective in extreme situations. We also discuss the key differences between salespeople and financial advisors, the type of credentials investors should be looking for, and how regulation needs to be modernized in Canada for investors to be properly protected. Harold has been in this industry for a long time and is immensely knowledgeable on the subject of fraud and negligent investment advice.

Key Points From This Episode:

An overview of Harold’s practice and how he helps clients get their money back. (0:03:22)
The difference between salespeople and financial advisors and the vulnerability of investors. (0:05:40)
Practical advice for investors to ensure their financial advisor is doing due diligence and the concept of KYP (Know Your Product). (0:10:46)
The concept of KYC (Know Your Client) and how to be sure your financial advisor understands you as a client. (0:15:32)
The type of individuals who are particularly vulnerable to negligent financial advice, and why we can all be vulnerable in certain situations. (0:18:33)
The role of the trusted contact person in Canada specifically, and how to know when to take the advice of your financial advisor. (0:25:13)
Harold’s thoughts on what is causing Canada’s slow adoption of low-cost index funds. (0:32:27)
How financial advisors earn money and why we need an updated regulatory system. (0:34:21)
Harold’s approach to crypto and why he classifies it as a speculative asset. (0:41:50)
Examples of negligence when the investment made was too conservative and why clear communication between client and advisor is crucial. (0:44:20)
The worst insurance products that Harold has come across. (0:46:10)
What financial advisors should be doing to make sure that their advice is properly understood by their clients. (0:49:23)
What investors can do to make sure that they understand what the advisor is saying to them. (0:51:16)
Ontario’s recent implementation of title regulation for financial planners and advisors and some of its key flaws. (0:52:16)
The credentials that investors should expect from their financial advisors. (0:55:34)
The value of good advice when it comes to financial planning and investment, and what motivates Harold to be such a strong investor advocate. (0:56:56)

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to Episode 236. I think, Ben, this is the first time we've taken a dive into this subject. We're looking at the world of investors who have a need to defend themselves against fraud and negligence from the financial services industry. So we had a chance to speak with a lawyer who is based here in Ottawa. His name is Harold Geller, who we both known for quite a few years, but you had a chance to meet him, I believe at a recent conference?

Ben Felix: Yeah. We spoke at the same conference last year, and I heard him speak and he was he was just excellent. The premise of the episode is what you said, Cameron, people who need to defend themselves against fraud and negligence, but it was a lot more far-reaching than that. We talked a lot about what people should expect from financial advice, how to know that they're maybe not getting what they should be expecting, what to look for in a financial advisor, what to avoid in a financial advisor. I think there's a pretty far-reaching discussion. Harold, as you mentioned, is a lawyer who sues financial advisors, as he says in the opening of the conversation, but he's also a very active investor advocate here in Canada. I thought it was a really powerful conversation right from beginning to end.

Cameron Passmore: Conversation is the key. That's what he kept coming back to. It's all about the communication you have with who's giving you advice, how to ensure you're getting good advice. How can we as advisors, communicate better with clients to ensure we are understanding them better and giving them good advice, due diligence, credentials, naming convention in the industry. A lot of great practical information from someone who's represented many clients, who've gone after advisors. And he also talked about at the end how he's actually turned down representing clients, because sometimes people come forward, but they've actually not received negligent advice, which I thought was interesting.

Ben Felix: Yeah. He said, when he goes through the files of the advisor, sometimes they'll come back and realize, this was maybe a communication breakdown, but it was necessarily negligent advice based on the client's circumstances.

Cameron Passmore: Harold's a lawyer and Geller Law, which is a law practice based here in Ottawa. He has a long track record of being involved with the regulators, including being a member of the Ontario Securities Commission's Investor Advisory Panel, the OSC's Seniors Expert Advisory Committee, and many number of other appointments and different boards in terms of regulatory bodies.

Ben Felix: Yep, Harold's website is gellerlaw.ca if you want to learn more about him. Keep in mind, he's a lawyer in Canada. A lot of the stuff that we talk about pertains to Canadian law, but I think it's broadly applicable.

Cameron Passmore: Absolutely.

Ben Felix: Just keep in mind, he's a lawyer in Canada dealing with Canadian clients. But yeah, 90% of what he said, I think is broadly applicable. And anybody looking for or receiving financial advice, in any form, should hear what Harold has to say.

Cameron Passmore: Exactly. With that, let's go to our conversation with lawyer, Harold Geller.

***

Harold Geller, welcome to the Rational Reminder Podcast.

Good morning. Thank you for inviting me.

Harold, how do you describe the focus of your law practice?

Well, I sue financial advisors. I help people get their money back. Usually, it's because of something that's happened in the market, although with insurance policies, it can also be because of the very complex form of investing involved in some insurance policies. So I really help people to understand what happened, and then give them advice on whether or not there is good reason to take the complaint further. And if so, I assist them on bringing that complaint in one of a different number of different forums, depending on what's best for them.

Okay. So I want to get more into all of that, but I want to quickly ask, if it's related to the market, at least in part. Does that mean last year was a – or I guess the last couple of years were busy for you?

Yes. Well, I'm always a tailing indicator because things happen in the market, and then people start asking questions, and then they start calling. Over the last few years, it was more interest rate related. In particular, insurance policies that were predicted to perform based on a lower cost and higher returns. More recently, certainly in the last year, we've seen an explosion of crystal ball type cases, people promising better returns or stock picking. Of course, them not performing, doing much worse than the actual markets.

Are those the most typical types of cases you see Harold?

Yes. I know we'll get into it later. But fraud is actually sort of the tail wagging the dog, and regulators in industry are very concerned about fraud and I understand why. But it's a very small portion of what we actually see, by way of problems. We're all professionals on this broadcast, and we all give a lot of advice. Any professional is bound to make errors. So even the bests are bound to make errors. Now, in something like investing where you guys have very high criteria, get certifications and licensing, but a lot of people out there are dressed up salespeople. They often take a one-size-fits-all approaches, chasing returns, making promises to capture clients. That's the majority of cases that we see.

So you're really seeing advisors that are going out there and promising high returns that they then don't deliver on.

Yeah. Shocking as it is – I mean, to people who are professionals in this industry, they understand what they guarantee is the process that they will follow a tried and trued process. What they can't do is guarantee results. But some of the financial advisors out there are actually guaranteeing results. In a recent case, they were saying, "Look, we've made 37% year in, year out, and we can double your money within the year." But no financial advisor can make that promise with any credibility, or any ability to follow through on a consistent basis. So yes, we still see that.

Wow! That's real.

Yeah.

That's one that's like in my experience for the last whatever, 10 years that I've been in this industry. The big compliance thing that you'd never do is promise a return.

That's right. It's common sense to those of us who live and breathe in the industry. What's not common sense is for the investor. So many of them are vulnerable. They're vulnerable for different reasons. They're vulnerable, partially, because of lack of education in the area, lack of experience, lack of understanding of the industry terms. But it's also vulnerable, because it's an amazing human trait. You must see with your clients all the time. People who are somewhat sophisticated in life, but really don't want to bear down on the hard decisions in their finances. So people tend to trust and they're looking for good news. Why wouldn't they? It's a human trait.

So really, what distinguishes the salesperson from the financial advisor who's a professional, is that you can't make promises about return. What you can do is help people to understand their situation, understand what their choices are, and as a result, make informed choices. And very importantly, that once they've made the informed choices, they stick to their plan, the knee jerk reactions of people who recommend things like momentum trading, or stock picking, often cause more harm than just buying the index. We all know about Buffett's famous bet against anybody who wanted to choose stocks versus him picking three ETFs. And over a 10-year period, he won and his charity got a million dollars. That's because even a brilliant investor like Buffett knows that in long-term investment, the best is to make a plan, stick to it and don't make changes.

Okay. I think you're probably just touching on this a little bit. But knowing that financial market returns are uncertain, we all know that. How do you draw the line between good advice that got a bad outcome and bad advice?

Well, I come back to the process. If there's a promise of returns, well, nobody can do that, but people can follow a process. So let's start at the very beginning, onboarding of a client. The term in the industry is KYC, know your client. Often, what you see at some of the larger dealers that are more mass producers of financial products, is that they have you fill in something called a new client application form, which has a few very basic pieces of information. Which the average investor is not able to really make decisions on. For example, how do they compare their risk tolerance to the general population? None of us as individuals can do that. What is average? Nobody knows what average is. That document is really the tip of the iceberg. The good financial advisor, good financial advice follows a process which leads to those template or tombstone documents.

So let me give you an example of a risk tolerance question. Risk tolerance is, what's your risk tolerance? Low? Medium? High? Speculative? Well, that doesn't have a lot of meaning to most of us. But a questionnaire, which asks us, what do we expect in returns? Later on at a different place ask, "Are you a conservative investor? Do you want to conserve your principal?" Well, if somebody is saying, "I want returns of 10%," but also claiming to be a conservative investor. That's an opportunity within a process. That's an opportunity to both learn more about your client, about these inconsistent wishes, and educate them so that they can become more informed investors. If you're simply doing what used to be like a meat chart, and you'd add up the answers, and come to a solution of 10 or 20 questions, well, you know, that's guaranteed to be a flawed process. If there is than not, using that questions to explore further, to get to know the client. Then, the financial advisor or financial planner is simply not doing their job. That's bad advice.

How about some practical advice for investors? What can they do to make sure that their advisor is actually performing appropriate due diligence on the products that might be recommended?

Oh, so the product. So that's known in the industry as KYP or know your product. That's a very difficult thing for most investors, to be able to audit, to double check the work of their advisors. You can ask them for their past recommendations in different years and take a look at how those recommendations performed. But really, if it’s stock picking, then it's very difficult. Let me suggest that most of us should not be flying off and doing the newest and hottest thing. An example was a national dealer, who allowed their advisor to recommend large proportions, over 10% of their clients holdings. A new insurance company that was going to revolutionize the insurance market. Well, that's a pretty high-risk trade. If that's the type of recommendation, something new that's going to overturn a very mature, very moneyed market, then there should be a lot of skeptics. Things like that do occur.

Amazon overturned a whole lot of retailing, but it did over a lot of years. For many of those years, it was not a conservative pick, it was a high risk, long shot, a moonshot. Maybe people can have a moonshot within their products, but they should be a small proportion for almost all of us. But coming back to your question, Cameron, it's really, really hard for most clients to be able to check the recommendations of their advisors. Perhaps, what you should do, is if you're starting to have questions, go get a second opinion. Go get it from somebody who's a fee for service planner, or in a different area. Somebody who doesn't have something to sell you is going to be much more objective than somebody who's commission depends on you selling something.

A good example of a commission depending is these exempt market dealers, who pay eight to ten points on recommendations for sale of some of their products. Well, that's not likely to be an objective advisor recommending those products, that's commission that is completely outstrips those of more conventional products. And face it, follow the money. That's one of the problems within this industry is the distorted compensation, in sense, the lower end of the market to behave poorly. But Cameron, I really don't have a good answer for that, because you can't become an expert in what you're paying somebody because of their training, experience and education.

Yeah. I like your comment about following the money and avoiding conflicts of interest. It was another option for due diligence, or at least the process of due diligence analysis would be to reach out to someone like you?

Yes. Well, if I'm – I'm better at when there's been a problem for filtering through whether it's a problem, which merits a complaint and merits compensation. But on ongoing advice, it's really more people like you. I've looked at your certifications. I've followed your broadcast. Financial planners, and CIFM's and people with higher-level degrees tend to learn professionalism. Whereas, the entry level courses, for example to become just a dealing representative, which is the industry title for a stockbroker, or a life agent, which is industry terminology for an insurance salesperson. Those are really low qualification hurdles. As a result, within that, those qualifications, they're not taught about ethics. They're not taught about conflicts of interest.

So let me give you an example. I'm a lawyer. I sell my time. So with every client, I have to have a conversation about whether you pay me fee for service or you pay me on results. I have a conflict of interest. I talk to you about the terms of my retainer and give you advice about that. I can only explain what I do, because I'm a party and I'm interested. Well, that's also true with your financial advisors. Clients should be asking, investors should be asking themselves, have my financial advisors explained how they're getting paid, how that can be a conflict of interest, and made recommendations on how I can inform myself about the decisions? Cameron, I hope I answered your question, although it wasn't a direct answer.

I want to come back to Cameron's question, but I want to ask it slightly differently. Cameron asked about product, product due diligence, KYP. I want to ask a similar question on KYC. So we were talking about risk profiling, and you illustrated an education opportunity for an advisor to give to their client through that process. How should a client know whether their advisor is properly performing the KYC process, properly understanding them as a client?

Well, it's also difficult. How much are they asking about your past investments? And it's not just what was your experience, although that's important, right? Because that's a subjective evaluation, and might inform things about your objectives and your risk tolerance. But also, what did you do? When did you do it? Did you make money? Did you lose money? How did the experience of making money impact on you? How does the experience of losing money impact on you? If I made you 10% over two years, how would that impact you? If you lost 10%? Now, let's try 20%. These are the types of discussions with know your client that really should go on. Not just good news about how successful a financial advisor is.

Also, if the financial advisor is using a whole lot of industry jargon, then, you really got to question their skills. Because one of the skills is communication. I think this is true, whether you're a lawyer or financial advisor. Pick someone who can explain the concepts to you, that will help you to learn more about the industry term, so you can understand the forms. So you can understand the reporting. If your a financial advisor is not sitting down with you. When you get your first statement, and asking you what you understood and what you didn't understand what more information you could use, then they're not reporting to you meaningfully. That's another indicator that this whole KYC process, which should be ongoing is not occurring. If it only occurs at the beginning, or once every couple of years, when they have to fill in a mandatory form, they're not really keeping up on you, because we all forget. That's about KYC.

Well, KYC changes over time. Most of us forget to tell people about KYC changes. Know your client circumstances to change. Well, I mean, there were obvious ones. I'm planning to retire. Well, I'll probably going to tell my financial advisor about that. But if I'm worried about getting my bonus, or I'm worried that I'm taking on another expense, because my child got into the University, and it's going to cost me more than I planned. Those are material changes. If the financial advisor is not seeking to update themselves regularly about these changes, by sitting down inquiring, then you're not likely to report them, and it's a garbage in, garbage out scenario. They can't give you good advice, because they don't know you.

If we were to take a look at the cross section of your clients, are there certain types of investors that are particularly vulnerable to negligent advisors?

It's a real hodgepodge of different people who are vulnerable. Let's take and start with the extreme. People who have less certain health, sometimes because of age, sometimes because of other health symptoms, depression, heart problems, diabetes, it can be many things. So they're more vulnerable, because their cognition can be impacted. As a result, when they talk to their financial advisor, it might really matter on their understanding of that discussion.

Let me give you a simple example using myself. I'm a long term stay with it sort of guy. But in February 2020, we all remember that period very well. I happened to get extremely ill and was hospitalized for an extended period of time. At that time, the markets going through a freefall, I did a knee-jerk investment. I did a knee-jerk investment because I couldn't tolerate the risk. Now, if we had separated the two events, my illness by a period of time from the markets, I might have felt very differently. So I was vulnerable at that point, although I don't blame my financial advisor. In fact, my tolerance changed at that point for a short period. And I was willing to take a little loss in order to not have the uncertainty over time.

Vulnerability can be very much time associated and elderly are in some ways more vulnerable. Let's take retirees are more vulnerable because they don't have the time, they don't have the ability to make up for losses in their portfolio. They're more vulnerable. Another type of vulnerability is people under extreme stress. I think very vulnerable investors include people with marital trouble. If you're having marital trouble, and you actually separate, you should immediately be talking to your financial advisor, because your assets are divisible, depending on the asset and the circumstances, but they may be divisible. If the market drops at that point, you may be responsible for paying for a larger portion, then the stock portfolio is presently worth. So that's an example.

But let me give you another example, which comes from a different area when you're less involved with. But often, life insurance is sold as a tax deferral process and as an investment. Well, they are interest rate sensitive, and a lot of the products that are sold are actually incredibly complex, and very sophisticated and unsuitable for a long term, even though they're called permanent insurance. For example, a universal life policy, and then we get into technical terms, right? Annual renewable term, whatever that means. I mean, I understand it, but most people don't understand the impact.

As you get older, if you have a long life, it's all but guaranteed. This policy is not going to be permanent, it's going to become unaffordable. So a different type of vulnerability, which is something which should be sold as a short-term product, less than 10 years, and sticks around and then blows up when the person no longer has the resources to fund the continued investment. That's a very different types of vulnerability. Well, the way that the regulators tend to look at vulnerability tends to be the frail, the elderly. I don't think that's fair. I think that what we're talking about is a larger rubric. We all could be vulnerable at different stages. So really, is that he – that I know you guys believe in, which is continued communication, continued learning by the financial advisor, and communication by the investor, so that everybody can do the best?

What do you think people with aging parents should be on the lookout from their parent's financial advisor?

Okay. Well, number one is, the money is the parents. If the financial advisor is all worried about the next generation of what they want, that's a red flag. That's sales. It's not planning. Now, if your parents are planning that the investments should outlive them, then that's different. That's the parents' objectives. Another thing they should be on the lookout for is that the financial needs per year. The expenses of their parents are projected on a reasonable basis. Well, they may decrease in the early years of retirement. For many people, the later years of retirement are likely to get quite expensive. If you're talking about in home care or supplemental care, that's a very expensive process, so that should be planned for.

One of the things that really all of us as children should be doing is not interfering with their parents' investments, but encouraging them to record information so that we can pick up when they need us to. Where are their bank accounts? What are their bank account numbers? What are their credit cards? I mean, these just some really basic things. How do they pay for different things. For example, life insurance policy? What policies are out there? What payments are required? How are they paid? Where does the notices go? I know these are really mundane things, but they're really important. Because if your parent becomes disabled suddenly, it certainly happened to my dad. One day, he's chair of the Ontario Securities Commission. The next day, he can't talk. Well, I mean, that's what happens.

If it hadn't been for his good record keeping partly kept by my mother, we would not have known where to go, what to look for. Financial advisors, particularly financial planners can help with that. It's a very valuable part of the process. Then, looking at the types of investments. Are they relatively resilient to market changes? Are they well-known companies or are they moonshots? There's nothing wrong with your parents deciding that they want to gamble, but it should be after being clearly informed that that's not suitable for them and that it's not recommended for them, and that should be in writing and put to them. If you see things which appear to be moonshots in your parents' portfolio, there's a lot of questions to ask. It doesn't mean there's a wrongdoing, but there's a lot of questions to ask.

Can you talk about how the trusted contact person in Canada fits in there?

Okay. What we have is a layering of responsibilities. First of all, you have things like joint accounts. The idea is that, the people are co owners of the accounts. Now, that has some problems sometimes between siblings. Consult with a professional before doing something like that. Then you have things like power of attorneys, which can be triggered by the power of attorney when there's a reason. There's either an agreement that the power of attorney over property is to be exercised. Maybe a parent wants to involve you, to have you take over some of their investments. That can be triggered through a power of attorney. The trusted contact person is really something different. The trusted contact person has no authority. It was put in place because of, sometimes the conflicts between the power of attorney and the parent. But also, because, sometimes the financial advisors of dealers are picking up that something's not quite right. They're just being surprised with the person's behaviors, choices, whether it be sending money overseas, or gambling, or taking up larger amounts of money, then it's really explainable. There can be many different reasons why an advisor is questioning what's going on.

The trusted contact person should be in place for everybody, regardless of age. What that is provides the advisor to take a timeout to say, "I want to call somebody you trust" and to ask whether there's anything up. Maybe that trusted contact person knows that you're under stress, because your grandchild is ill, and you're worried about it, and so you need money, but you're not explaining yourself as well. Maybe it's something very benign, but maybe it's something like, – well, actually, I told you about my parents, very sophisticated people. They got a call from the grandchild scam from a Montreal police officer, allegedly, that their grandson had been arrested and needed money. Could they go to Western Union and transfer money. If you were to get a call about something like that and the investor needed $10,000, you could take a timeout, call the trusted contact person. And the trusted contact person can either talk to the parent and say, "What's going on here?" Or talk to you and say, "Perhaps, you should know these things." But perhaps, there's nothing to do. It depends on the circumstances.

But it's really something which is, no harm done. Let's check before we take action, opportunity. I recommend it for everyone. This is different than a power of attorney. I'm jumping in here. But it's different than a power of attorney. It's because of, maybe it's the power of attorney influencing in a bad way, a decision. So it's not uncommon, but that does happen. This is an opportunity, a timeout.

Yeah, it's an interesting role. This is a tough question, so I'm interested to see how you answer it. We know from empirical research, looking specifically at Canadian financial advisors, that advisors often hold misguided beliefs. I'm sure you know the paper I'm talking about. But they also exert substantial influence over their client's asset allocations. From the client's perspective, how do you decide whether or not you should be taking the advice of your advisor?

Some of these questions are very tough, and I don't have the clearest of answers for them. I agree with you, that sometimes advisor have pet theories. Pet theories rarely worked out. I've certainly seen gold bugs along the way or foreign market bugs. I remember going to a seminar about how the European market was going to explode in 2020 and be the best returns. Then, something happened. The Ukrainian crisis and price of gas [inaudible 00:29:03]. It's very difficult. I'm sorry. I lost the question. Please ask it again.

How should a client decide knowing that financial advisors have these misguided beliefs and that are well documented? How does the client decide whether they're going to take the advice of their advisor?

Well, it's partially if they have a pet theory, then that's probably not reliable, and you shouldn't be taking advice. Gold bugs as an example. But there are other reasons. Again, I go back to conflicts of interests. If the advisor is getting paid higher than normal rate of return for a particular investment, well, that distorts the lens through which they see that investment, and so that should be a red flag. There was a very interesting study done by Bloomsbury Group published in 2015 by the Canadian Securities Administrators, which looked at a huge number and percentage of mutual fund trades over I think 11-year period.

One of the interesting things which I had found was, mutual fund advised holdings underperform the market. If there was one, clear [inaudible 00:30:11], it was the higher fees paid in most mutual funds. ETFs are very different. They are very low-cost ways of doing very similar things to most mutual funds. Where you can save cost, that is an important indicator of who to choose. But not all advice should be given by the lowest cost alternative. It depends on what you're getting.

For example, if you're getting a financial plan, which is updated regularly, and where you're getting real planning intake, how much are you spending? How much can that be decreased? What are you saving and how are you deploying it? Are you paying down debt, because that's a bit of a free lunch? Are you diversified? If you're doing those things through a planning exercise, and that's added value, and it has real value that results in long-term performance. Well, price is an issue. What is a greater issue is that you have a real plan. I must take a shot at a lot of the planning that I see out there from the bank associated advisors, who do the same plan for everyone and it's understandable by most of us. It's 50, 100 pages with chart, after chart that most people can't understand. All they do is, they drop in the different age, the different amount of assets, a few details about you and bam, it prints out the same as the next person. That's not planning. It might be called a plan. It's not planning. It's this integration of the interview process, learning about you keeping up to date, and a plan, which looks at things like your savings, and how can you reduce your costs.

Again, paying down debt is not always in the financial advisor's interest, because they might earn less income, because there's less assets to manage, but it's likely in your interest. It reduces your risk, it reduces your spend and leads to greater savings. That's part of the plan.

So you've referred to moonshots index funds, fees? What do you think is causing Canada slow adoption of like low cost index funds?

Well, partially, it follows the money. As financial planning gets more and more established, there are fee for service planners who don't sell funds, who don't sell mutual funds, weren't compensated for the recommendations. They're likely to recommend suitable ETFs. Now, not all ETFs are assets. You get leveraged ETFs, which are suitable for very small percentage of very few people. But the broad base, the XBBs, the XIUs, the market broad indexes should be recommended for most people's portfolios. Why are they? Partially, because of prejudice. If you're licensed in a particular silo, and that's been a particular problem historically, prior to the upcoming merger of the MFDA and IIROC. So the mutual funds representatives and the broader base stockbrokers.

It used to be that a mutual fund salesmen couldn't sell ETFs, even if it was at the client's best interests, lower costs, all that stuff. That's why it wasn't sold, because it wasn't on their shelves. A lot of the larger dealers, the bank-associated dealers also don't want you – once their advisor is selling the ETFs, were they're going to make less money? So their shelf contains other products. We've seen a recent trend where it's only their own in-house products. That's not going to be in the best interest of the client. They say that they always advise in the best interest of the clients. But really, what they're doing, and I think this shouldn't be sanctionable by the Securities Commissions, we'll see if that happens, is they're selling what makes them the most product. How is that reconcilable?

So you mentioned XBB and XIU, so these are ETFs that do not pay trails to advisors. Are you saying there's a lot of advisors still that don't have the machinery to be able to capture fees and client accounts?

Yes. Financial advisors should be paid for their work without doubt. If they're doing their jobs, and they are planning, providing you with plans, keeping up to date, helping you to avoid in the meltdown of markets, selling low, things like that. They're earning their dollar and they should be properly compensated. But again, it comes back to the silo that the person's registered in. Mutual funds have been the most obvious along with life insurance. A life insurance agent, to take a different example, often aren't licensed to sell ETFs. They're not licensed to sell stocks. They're not licensed to sell reasonably priced products. They're licensed to sell segregated funds. Now, there's nothing wrong with a segregated fund in certain circumstances. If you're about to go bankrupt, if you want to take a long shot, and you want the guarantee in the audit, then perhaps it's appropriate. But those advisors had captured the fees of giving you advice that's in your best interest. The model doesn't work.

I know it's shocking, but this is something that has to change. We need a more modern regulatory system. We need something – people don't look for an investment advisor who has a specific license. They look for holistic advice. [Inaudible 00:35:52] regulated. It says, if clients have a level of sophistication, which really would make financial advice unnecessary. They wouldn't need the financial advisor if they had that level of sophistication.

I remember when I started in financial services, which is 11, I think years ago now or 12. I started with a mutual funds license, fine. Theoretically, even with a mutual funds license, you could still be a fee-based advisor using low-cost index mutual funds. But where I was at the time, they didn't have the infrastructure to offer fee-based accounts. You had to sell commercial. I think that part has gotten a little bit better over time, but I just pulled up the data. It's still, in Canada, fund assets, mutual funds, and ETFs, 66% are still sold in the commission – or owned in the commission-based advice channel.

Historically, you guys have all watched this debate. The most commons of form were on a deferred service charge, which are like handcuffs, so you can't change outside of the family if the family is having poor performance, the manager changes or something like that. Because if you do, the vesture is penalized. So the advisor is incentive to keep you with something that could be underperforming, unsuitable for you. Why did they sell that to you? Because it was a big upfront commission. I'm not saying that everybody was doing that for that express purpose, but follow the money. People are incented to make money, and so to advise on products that make them money.

If their dealer only offers certain types of products. So the example is the higher priced mutual funds, often proprietary products, branded by the own organization. Well, that's a bit of a red flag. Why are you getting that stuff? Okay. I mean, I know you guys have very different platform, where it's not that mutual funds are necessarily bad. It's just that you're not selling your own mutual funds as the only thing for a couple if client's portfolios.

Yep. Yeah, we've never manufactured products and that's one of the reasons. How frequently is leverage involved in the cases that you see?

Leverage tends to have different meanings. I'm going to use the broader term, not the industry term. Industry term is borrowing within your portfolio or using your portfolio to go to a secondary institution like B2B trust and borrowing money against it to invest. It's similar within stockbroker area being margin investing. That's one format. Regulators, even the insurance area have put out terribly worded warnings about how this amplifies risks and is unsuitable for many people. If you read the actual signing form, as put out by the regulators, it uses industry jargon. It's not an effective warning to most of us, but it's regulators, an industry recognized, it's a higher risk activity. There's another format that I see all too frequently, which is borrowing outside of that investment silo, going to a line of credit, taking up money of a mortgage and investing into your portfolio. It's equally risky. It's just a different format of leveraged investing.

Dealers are less concerned about it, because they can't track it very well. But we do find that there are some of the – I'm going to call them the rogue, although they're not necessarily fraudulent or bad people, but really believe in this myth maneuver and other ways of deferring or avoiding tax. Don't let that tail wag the dog. The question is, if that is a guaranteed expense to you, if you pay down debt, then you're guaranteed return effectively. Okay. Well, in borrowing to invest can make sense in certain circumstance. It's a sophisticated, high risk, or higher risk technique, and should only be done with the involvement of a tax planner, somebody who actually is – got the skills for the taxation and things like that, who have seen things go wrong and know how to fix it. It's all two together, all too common. The self-published, self-help books, borrow to invest. Remember that there's a conflict of interest when the advisor recommends borrow to invest, because that means there's more assets under administration. And often, they get paid as a percentage of assets under management.

What about in your practice? Do you see leveraged ETFs as being a problem?

Not yet? We're not seeing a lot of cases involving ETFs, yet. When will they blow up? When will there be problems? Well, I think that it's predictable, because of the incredible complexity and variation that's now available in the ETF market. At one point, it was much closer to a tracking of an index, or closer to a tracking of a subgroup of an index. For example, a dividend aristocrat, term for a company that year in year out have a dividend and are large. That was the old model of ETFs that were relatively safe, as more and more opportunities for sales have occurred, more and more ETFs have come onto the market with greater complexity. Crypto, ETFs, who knows what the valuation of – if there is any real value in all of that. I know you guys have struggled with the concepts as well on this great broadcast. But that's the type of ETF you could now get. You can get leveraged, and you can get things which are very untransparent. You don't know really what's going on in the ETF. I'm expecting that if a financial advisor is involved in recommending those, they're going to end up on my desk sooner or later.

Have you seen cases yet related to crypto?

Not in my particular niche, because most advisors, we're not recommending crypto as an investment within their portfolio. People were more doing that on the side. But at some point, I'm following advisors who are saying crypto is a gold mine. So sooner or later, it's going to end up on my portfolio. I don't really understand how that falls into a planned investment, other than as a speculative asset. If it's a portion of speculative, and that's a reasonable proportion for that person. But then, yeah, we're allowed to gamble at the margins with our own money. There's nothing wrong with that. We just have to be informed and have it within a more reasoned plan.

Yeah, it sounds like it's all about setting expectations, and it's when those expectations are not met, is when there's a problem.

Well, that's certainly part of it. Another problem is, and I know you'll find this hard to believe, but advisors go dark. When the market goes down, some of them simply aren't available. They're not doing when they're most needed to help reassure that this is part of the plan. And that should be part of the plan that though there's going to be stock market dives from time to time. We know they occur. We don't know when they occur. We don't know what will trigger them. But we know that they occur regularly, more often than once every 10 years with very few exceptions. Things blow up, and yes, they absolutely call me. When they blow up, if that's compared to what was expected, or what was explained at the time of the crisis. The largest single reason is lack of suitability. That can come in many different formats, but that's the largest overriding concern of clients, is how did I end up with this much logic? How was this okay for my investments?

It's rare that you get somebody calling saying, "I didn't make enough money." That's a different sort of thing, which I guess is theoretically possible to pursue a lawsuit for, "He promised me 15% returns and I only got 10% returns." I guess that is a type of claim that would be technically viable. But I'd have to say, that'd be an interesting case that I don't know about any precedent for. If you hear a lawyer say that's an interesting case, that means it's on your dying ticket, your pocket book, because it's going to cost you a lot and the lawyer doesn't know what the outcome is going to be.

We've talked a lot about risky investments and stuff that ends up being maybe riskier than a client thought. Can negligent advice also involve investments that are too conservative?

Well, that's some of what I was talking about. Yes, I think that they could conceivably involve that. But what's the argument that the investor's going to say. I was more of a gambler, and not enough of my money wasn't gambled. I wanted higher risk. She gave me something, which was conservative and allowed me to get from point A to point B. Now, we can see circumstances where people are in really bad circumstance. They don't have enough. They don't have enough to meet their goals. That's a really hard discussion between the advisor and the client. It's one of those times when the advisor really earns their money.

What is the job of the advisor in those circumstances? Is tell the client the facts. The advisor is not a miracle worker. It is not a problem of their creation. But the client is entitled, is due to have a straight talk from the advisory saying, "Here is what I can do. I might be able to get you better returns, but understand that this could mean you have even less money to meet your needs." This is a gamble because of where you come – how you come to me. I don't recommend these gambles. But maybe, it's your only choice you choose. But again, it comes back to warning of risk, informing the client about their choice. Communication, communication, communication. Benjamin, you said that earlier today. Sounds like a lot of it is about communication. Absolutely.

On the life insurance side, what types of products do you see most frequently as being negligently sold?

Segregated funds, and Universal Life is particularly on annual renewable term. Segregated funds, they are suitable for some people, but they're often sold because they're the only product the advisor has on his shelf, if they're only licensed. They’re high priced. The guarantees are rarely going to be exercised, so they're not a panacea and they're sold sometimes that way. They're also pretty complex products. If you actually read the segregated fund policies, they sometimes don't describe the product. Let me give you an example. We're looking at a segregated fund branded by a bank associated dealer, life insurance. When we tried to figure out why the performance was the way it was, in our clients account, we couldn't account for the numbers. What we found out was that, the segregated fund was a proxy for a mutual fund, except that it did not include dividends that were paid out. The policy didn't say that it was returned without dividends. The advisor didn't know it.

Frankly, when we cross-examined the insurer, they didn't appear to know. There were all sorts of objections saying, "Well, that's not relevant." Well, yes, it is relevant. It's relevant to the consumer. It's relevant to the performance. That's an area. I hope there'll be some class action work in that area.

The other one, which I gave you an example of is universal life, annual renewable term. These are very complex products. They're very sophisticated. They are very cheap in the early years, and they can become extraordinarily expensive. Let me give you an example. We had a client who had some money. They put $4 million into a universal life policy in 1990s. When she's in her late '80s, she gets a bill for $75,000 a month. She didn't have money. It was supposed to be self sustaining. It wasn't. These are highly risky products and they're not suitable. She didn't understand what had been bought. Was it her name? She was life insured, she was the owner, nobody explained this risk to her. That's another type. But a lot of these life insurance policies are actually very complex. And reading them, they are some of the worst written contracts I have ever read.

Frankly, if a first year lawyer brought these contracts, to me, as an example of their writing, I'd say, "Go back to school." They have defined terms that aren't defined. When you look at the definitions of the words or phrases used in the policies are often undefined, even though they're capitalized within them. I'll say, looks like people are asleep at the switch. Well, life insurance can be an important product for people, I suggest that they look at the guarantees that are available, and that they'd be very well aware that these as investments are extremely complex. They're really for later generations. They're not good financial planning for most people's retirement.

What are some of the things that financial advisors should be doing to make sure that their advice is properly understood by their clients?

Well, it's a human factors issue, and it's complex. First of all, they should give clients takeaways in plain language. We all walk away from meetings, which are not in our area of knowledge, our area of expertise. We wonder about some of the things that went on. Takeaways are helpful, but simple explanations of materials. Using plain languages, as I've said, but also a simple trick, which I try and use. Which is, ask the client what they understood as it goes through different segments. Ask them what they understood just to confirm that the communication has been effective. You're not doubting their intelligence. You're making sure that you've been effective in communicating, you're double checking, you're making sure that before you move on to the next concept, the client and you are on the same page, and follow up. Follow up with them once things have started going into action.

Onboarding is learning a lot about the client. What's the client experience in the first two months and the first six months, the first year, and the first couple of years. Checking with them how they're understanding the reports you're giving, the communication? Do they have any question? One thing I suggest to financial advisors is, embed a question at the end of your communications. The client is triggered to follow up with you in some way. That way, you know they've actually read your communication, because we do know that a lot of communication from lawyers, or from financial advisors are not read by clients. If you really want to make sure that you've got the message across, how can you double check it? Well, if you've embedded question, and they followed up with you, check, they must have right to there.

So the opposite of Ben's question, what can investors do to make sure that they understand what the advisor is saying to them?

Break the meeting down into chunks, and say this is what I understood of what you were saying. Have I understood the risks? Have I understood the benefits? Have I understood the options available to me? It's this iteration process of going back and forth, where people build learning blocks of communication, because every time you talk to a different person, the communication has different elements to it. Some people are very visual, some people are very oral, some people really can only take in information for a short period of time. Some people want to read in advance of meetings about the concepts. Every professional needs to do some learning about their client, and not just do this same thing every time, that in my hand is a hammer, everything looks like a nail. It's a real problem for all of us.

Ontario, which is the largest financial services market in Canada recently moved to regulate the titles of financial planner and financial advisor. I mean, it's amazing that it took as long as it did for that to happen. Now that it's happened, do you think that Ontario's implementation of title regulation goes far enough to protect consumers?

Well, it's not the implementation, which is the Achilles heels of this new law. It's the legislature. It was a really good proposal. A certain group of financial advisors lobbied against it, and watered it down to a broken start. So FSRA, which is the regulator responsible for rolling it out is trying their darndest to make something of a bad start. The problem is, is essentially the credentials, which financial advisor is called credential as his financial planner, these two terms and like terms are now being overseen by organizations that have no history of enforcement against their members who have our conflict of interest. They're not interested in what's good for the consumer, they're motivated, but what's good for their members. Their members are financial advisors. It's not a very good system. The credential is required, so the qualifications themselves have gone to the lowest common denominator.

So yes, you have to have some training to be called a financial advisor, and some different training to be called a financial planner. But it's almost like collect some boxtops, send it in a self-addressed envelope and you get your credential. Not quite that. Let me give you an example of this. Back when I was young in school, there was grade 13. In grade 13, I was a little board. My mother decided I should get some education, along with going off and becoming a small-quantities cook at George Brown, a good course. I became a stockbroker. I had never balanced a check book, I had never had a lease, I'd never had a mortgage, I've never had a real job. But because I had a great 13th education, I could study hard enough. The course is basically the same. The entry level for some of these requirements are so low as to be laughable.

Really what we need is a protection so that the people who have done additional studies, who have better credentials, who study about conflicts of interest, who have learned about risk tolerance, and the challenges of simply a form versus a robust process, that those are the people who are accredited. Because I truly believe that to most individuals, it's not their lawyer who's the most important professional they deal with, and it's only their doctor if they have a medical problem that requires attention. It's not their accountants. It's not the engineer who help build their house. It's their financial advisor, who helps make sure the money is there for them when they need it by helping them to plan for it. These low-level credentials that have been codified by these titles in Ontario are simply not fit for purpose to protect Ontarians against salespeople. So good idea. But Saskatchewan does better. There's some real debate about what they're going to do.

So to piggyback on that, what credentials then should the consumer be looking for in an advisor?

Well, I have a bias, and I have a bias towards planning. That's kind of through clearly here. The minimum standard I think for that is a certified financial planner. It's a good course, it's got good ethics, it's got a good oversight auditing programs for its members. If a member gets in trouble, they do have an enforcement process, they've used it. There are advanced degrees, like the registered financial planners. They have memberships in organizations like the IAFP, the Institute of Advanced Financial Planning, which I know you guys support. I've spoken at their meetings. They are higher level credentials. Frankly, I think that's what we expect of our financial advisors. These people with advanced training, CIM, and stock brokering is an excellent course. There are better courses. But let's face it, the entry level is really basic. I wouldn't want a doctor with the equivalent level of qualifications ever giving me advice. I want somebody who has had a rigorous study for a rigorous course, and has a rigorous process to help me get from point A to point B.

Good answer. That's a great, great way to describe it. We've touched on some of the bad parts of financial services in Canada. You've mentioned a few times the value of planning and what people can expect or should expect from their financial advisor. How do you articulate the value of good investment and financial planning advice?

I think we just spoke about it. It's that great professionalism, which is not focused on short-term earnings for the financial advisor or even for short-term returns for the investor. It's focused on a holistic approach, looking at the full universe of what's available out there, starting with, who is the investor, and then looking at what products would be suitable for them at different stages of their lives? How can the investor take better control of their own future by doing things like having expenses, cutting debt, increasing saving techniques? One of the simple things that my mother taught me as a child was that if I put regular amount out of my bank account into a separate bank account, I didn't look at regularly. I would end up with a whole bunch more money to invest than if I tried to save it within the first bank account. Little tricks, with financial planners, financial advisors often know that help people improve their investments and their future financial circumstances really is the hallmark of what I think consumers are looking for. If you think about it from the industry's point of view, where they should be heading, where the individual advisors and planners should be heading, is to these long-term thoughtful advisory processes and away from the old style, still hanging around, sales as everything processes.

All right. We've just got a couple more questions for you here, Harold. What motivates you to be such a strong investor advocate?

Well, a lot of it is because nobody else is standing up and doing it. I don't want to say nobody else. There are some great advocates like [Inaudible 00:59:09], Jason Pereira, yourselves for that matter. I mean, this is an important venue for educating investors. This very broadcast. But in speaking to regulators about what the standard should be, industry has lots of influence. There's a revolving door between industry advocates and regulators. They go back and forth between positions quite regularly. That's to be expected. There is a sort of a lens that goes on the regulator's eyes when they know that good people are in industry and attend good things. That they believe what they're being told by industry, even when it's somewhat self-delusional. It's buying into the system. It's a company perspective. There has to be somebody speaking up. Look at the committee membership of the Ontario Securities Commission, or the Investment Industry Regulator of Canada or the Mutual fund Dealer's Association, or the Financial Services Regulator of Ontario. I'm talking about Ontario-based regulators in this financial market.

You'll see that most committees exclude financial advisors and investors. So how is that in the interest of our community, Ontario, Canada's investment community. It isn't. It requires people to stand up and speak on behalf of investors. I don't think I am the best spokesman. I'm the one who's available and willing to take the time and do it. It's very fortunate that I have the ability to spend so much time, a third of my working day is in effect, advocating for consumers, for changes in regulations, for changes in legislation. I do it because it's the right thing to do, and I can fortunately afford to do it. We need a greater community of advocates. We need investors to be involved in explaining what it's like to work with financial advisors, to worry about your future, to bring home to decision makers what your experience really is.

I do it, partially because no one else does it. But I also do it because it's been like being Robin Hood. It's a wonderful thing that my training skills and experience have given me, which is, really did help people. But remember the story of Robin Hood is not selfless. The money, what's people's and John takes. Robin Hood gets it back. But Friar Tuck needs some wine. Big John or Little John needs a staff. Everybody keeps them. I look forward to the day when there's much less work for lawyers like myself and advocates like myself, because investors are more integrated into the regulatory system and protections which are available or should be available to them.

You partially answered this, Harold, but how do you define success in your life?

Success in my life is a two-part. One is education to regulators, to investors, to our community. The other part is helping people get their money back. I wish it wasn't necessary, but given that, people will always make mistakes. That's what I want to see, is just mistakes that happen, human mistakes, helping people recover their lost money. Because when they come to me, they're usually in bad situations. They've trusted somebody, they follow their advice. Now, they've got an unexplained often loss. I help them understand what went on, and where suitable, I help them go and get their money back. I say where suitable with some emphasis, because after reviewing the advisor's files, sometimes I agree with the advisor. I don't think that there was anything wrong done, except that there was a communications break. Okay. I actually filter through, and between two and three, or three and four bases, I turn around because either I don't think there's a wrong or hiring me as a lawyer would revictimize. Because it cost too much sometimes, and I can't take everything on a contingency paid when get paid basis.

Wow. All right. Well, Harold, this has been a fantastic conversation. We really appreciate you coming on our podcast.

Well, I'd like to thank you for your investor education. Just focus on that, although there's many things that you provide. This is how people can help take better control of their future, their financial future. This is an invaluable assistance to our community. Thank you.

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