Opening An Investment Account As Easy As 1-2-3?

^‟The only thing I would say now is that I should never have come to a conclusion on the appropriateness of a financial advisor/dealer based on a first/initial meeting. What I feel would have been more reasonable is to have the initial meeting, followed by another where he/she actually shares his/her proposal for how they would invest my money based on the initial discussion” - disgruntled client

The IIROC Document Opening A Brokerage Account

[http://www.iiroc.ca/Documents/RetailAccountBrochure_en.pdf] is informative as far as it goes, but it doesn't go far enough. (Note that there is no requirement for the dealer to provide you a copy of all the documents you are asked to sign).This Bulletin will try to fill in the gaps. Carefully review all the information in the account opening agreement and related documents because this determines your legal rights, applicable terms, conditions and obligations regarding your account. Do not rely on verbal statements about your account that are not in this Agreement(s).

We've received far too many complaints from Fund OBSERVER readers about the process used by the industry to open an account. Many found out about hidden fees, the true level of advisor competency, poor account reporting and the use of high cost proprietary products only after signing up. When you see this sentence--“By signing below you confirm that you have read and understood this agreement and agree to be bound by it”—get your reading glasses on!

Introduction

There's a huge industry push to migrate investors to fee-based counts. In fee-based accounts, investors pay a percentage of the value of their account to cover the cost of advice and transactions. This allows dealers/advisors to have a steady reasonably predictable fee flow. This may be or may not be in your best interests, however. This Bulletin provides some cautions for you to consider before accepting the recommendation for a fee-based account and warnings about account opening in general.

Some in the industry assert that fee-based advice gives advisors flexibility in matching services provided to fees charged. This implies that the level of effort to support a client is linearly related to the size of the account—a controversial assumption. Some claim it's good for clients because it removes conflicts where investments are recommended to clients because of the fees and commissions they pay, but it may introduce new ones. With fee-based advice, the fee is transparently based on the assets in the account. When those assets grow, both advisors and clients benefit it is claimed. In effect this means that although you take all the risks, the dealer/advisor share proportionately in any gains—not exactly fair. Perhaps more importantly, an advisor may be tempted to take undue risks or use leveraging to grow their clients' accounts and thereby boost their own fees. They might also be tempted to discourage moves that benefit the client but take assets out of the account. For instance, an advisor might be tempted to refrain from recommending a client buy life insurance because that would mean less money to manage .A fee-based account may make sense in some cases (e.g., If you are a frequent trader and the account allows a number of free trades, such an account may be cost-effective for you), but you should be constructively critical before signing on the dotted line.

What Type Of Account(s) Do I Need?

You also need to make some decisions about the nature of the account. Is it to be a joint account? Is it to be discretionary or non-discretionary? Do you want a fee-only planner? Is it a cash account or a margin account? Do you want to be able to trade options? If you want access to exempt securities you'll need to open an account with an Exempt Market dealer and provide additional qualification information. Do you need and want advice? If not, an online brokerage account may fit your needs. It is essential that the dealer/advisor understands your investment goals and the type of relationship you desire.

If you have multiple accounts—say registered vs non-registered, with different objectives and constraints—you'll need to open multiple accounts. Be aware of any minimum account balance requirement, maintenance fees, account termination penalties/fees, transfer fees, trustee fees, etc. as well as availability of services like online access to account, independent research, tools/calculators and support.

Suitability or fiduciary relationship?

The great financial debate for investors is not about stocks vs bonds. Rather it is about a fiduciary vs suitability standard of care when it comes to investment advice. The suitability standard states that a broker only needs to check the suitability of a prospective buyer, based primarily upon financial objectives, current income level, risk tolerance and age, in order to complete a sale of a financial product. There is no requirement to act in your best interests. Advisors working to a fiduciary standard are required to act in the best interest of the client – this standard specifically states that they must put their clients’ interests above their own. The fiduciary standard also dictates that the Investment Advisor must divulge any possible conflicts of interest. Similar to a doctor’s Hippocratic Oath, the fiduciary standard holds an Investment Advisor to an ethic requiring higher standards and is more stringent than the suitability standard. Make sure you know what standard of care they are proposing and get it in writing. Be wary if they will only sign on as a fiduciary when choosing a discretionary account.

Look For Key Documents Ahead Of Second Meeting

At the initial meeting you will explain your personal situation, your financial objectives and risk/ loss tolerance. The Rep will respond by explaining his/her business practices, fee structure, investment philosophy, attitude to risk, reporting, etc. A good discussion of your goals and personal situation is key to allowing the advisor to make some initial account recommendations. The worst thing you can do is listen to a pitch and then immediately start signing a stack of documents that can amount to well over 100 pages of reading. Never sign a blank or incomplete form. Ask for a follow-up meeting, go home and reflect and consult with others. In preparation for your second meeting, make sure you ask for and have a copy of all the documents applicable to the account. This will save time for everyone and make the second meeting more productive. You could then come prepared with questions based on what was sent. Here's what’s in a typical documentation package (don’t be surprised if there is initial resistance to providing this):

A sample financial plan. See one here: http://www.theglobeandmail.com/globe-investor/personal-finance/article25867361.ece/BINARY/Finalist+Financial+Plan+-+Competitor+AME1505.pdf.
Fee schedule with price breakpoints; you may be able to negotiate more favourable rates than the posted rates.
Engagement agreement, and nature of advisory services to be provided and Investment Policy Statement (IPS) .
Discretionary Management Agreement or Fee-based Agreement (if applicable).
Conflicts-of-Interest disclosure/fiduciary relationship. Under a suitability regime, advisors are not required to act in your best interests.
Explanation of compensation document.
Rep's favoured product list with MERs or fees. Be alert for expensive packaged or proprietary products or products with early redemption fees.
An example of an account statement looking for items like breakout of fees and expenses and personalized performance reporting.
Investment philosophy and explanation of whether rep partakes in active or passive investing
Account type specific documents e.g. option agreement, margin agreement.
Any questionnaire(s) needed to be filled out about income and net worth, investment goals, risk tolerance, time horizon, loss capacity, etc. Be certain that you fully understand the distinctions among these terms, and be certain that the risk level you choose accurately reflects your investment goals. Be conservative in your self-assessment of investment knowledge and experience. Be aware that these forms are designed to protect the dealer, not you. If a broker tries to sell you an investment before asking you these questions, that's a bad sign. It signals that the advisor has a greater interest in earning a commission than determining whether the investment is consistent with your investment goals and tolerance for risk.
Complaint handling process and OBSI brochure.

At the second meeting, the advisor is given a chance to answer questions and reveal his/her detailed proposal for managing your account including a financial plan, initial asset allocation, choice of products, fees and other charges, etc. If you're satisfied with the responses and fees, you can then go ahead and sign the documents. Be sure to keep a copy of all signed documents. Taking notes during meetings and communicating by email is vital. Do not accept the assertion that they can’t communicate by email. That's nonsense. You simply have to keep track of assertions by way of summarizing conversations, etc. Even phone calls need to be documented. You may need them later in case of a dispute.

Conclusion

When comparing fees, remember to consider value as well. The higher-fee professional advisor who does financial, tax and estate planning may be a better value than the 1 % advisor who simply maintains your portfolio with an annual review. If you’re evaluating fees as an investor, you have to think about exactly what services your advisor is providing and if they are value-adds for you. For instance, he/she may claim assistance with tax planning but if you already have a trusted accountant doing this, you do not need this service. The bottom line is that you need to think carefully before signing on the bottom line—it can help you avoid a lot of pain.