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(March 31, 2004) The “oldest rule in the book” is one of the key rules for an advisor fulfilling due diligence obligations to clients. “It comes down to reading the fine print,” investment counsellor Steven Kelman told an advisor audience during his presentation at the Peel Institute educational symposium in Toronto earlier this week.
According to Kelman, who is also the author of IFIC’s “Ethical Conduct and Behaviour” course, the eyeball test is one of three crucial due diligence tenets for advisors. “Read the fine print and know your client,” Kelman said during a follow-up interview with Advisor. ca. “And know your product.”
Kelman’s recent presentation occurred 13 months after the Ontario Supreme Court decision in Abrams v. Sprott Securities Limited, and 11 months after a subsequent appeal. In the initial decision in February 2003, Justice David Stinson ordered Sprott and a broker to pay $150,800 to compensate Philip Abrams, an 82-year-old client, for half of his investment losses, interest and other costs related to his holdings in two private companies. Justice Stinson concluded that the broker had breached duties owed to Abrams by failing to advise him of some risks involved.
Justice Stinson held that “failure to discuss that aspect leads me to the conclusion that [the broker] failed to make a balanced presentation to him.” (He also noted Abrams’s failure “to take reasonable care…”.) Sprott and its broker lost the appeal in April 2003 and Justice J. Cronk stated: “…existence of duty to warn is dependent on standard of care owed to a particular client. Accordingly, the specifics of the relationship between the broker and the client must be analyzed to determine whether a broker has a duty to warn a client…”
Kelman noted that these decisions mean that “… the more dependent that your client is on you for advice, the greater your exposure to risk…”
Reading fine print can be “boring as hell” but crucial to due diligence, Kelman argued repeatedly. For example, a Royal Bank of Canada information statement dated January 19, 2004, and offering Olympus United Univest Principal Protected Hedge Fund Deposit Notes, Series I, states:
“There can be no assurances against fraud, misappropriation or other misconduct by the hedge fund managers. Such misconduct… would adversely affect performance of the [fund] and therefore the return on the notes. Royal Bank, [RBC Dominion Securities] and the basket manager assume no responsibility or liability for fraud, misappropriation or other misconduct by any hedge fund managers.”
In another offering, the Citigroup BluMont Man Multi-Strategy Series 2 Notes, the information statement dated January 22, 2004 states that performance “… will depend to a considerable extent on the performance of the strategies and individual trading advisors comprising its portfolio. The investment advisor, the manager and Citibank Canada cannot protect against the risk of fraud, misrepresentation or other misconduct on the part of any trading advisor.”
A careful advisor brings this kind of statement to the client’s attention, Kelman noted. “You have to do your due diligence, especially looking for [statements saying] there can be no assurances against fraud, misappropriation or other misconduct.”
Knowing the client means studying an investment and asking, “What kind of client is this suitable for?”
Knowing the product means scrutinizing the asset directly. For real estate limited partnerships, Kelman has a shopping list:
“The other thing is — if you’re going to go and put clients in one of these things — have somebody from the company go down and take a look. Nothing beats an arm’s-length inspection,” he said.
Kelman and Peel Institute registrar Jim Bullock apparently practice what they advise. Kelman’s appraisal of material from a donation program led Bullock to decline the organization’s participation at Peel’s symposium. The material suggested that those paying $1,000 would qualify for a tax deduction of $10,000 based on valuation of its products when donated to charity.
“It wouldn’t be in the best interests of advisors being pitched for product we don’t like, especially product that could conceivably get them and clients into trouble,” Bullock said.
Art Melo is a Toronto-based investment writer.
(03/31/04)
(March 31, 2004) The “oldest rule in the book” is one of the key rules for an advisor fulfilling due diligence obligations to clients. “It comes down to reading the fine print,” investment counsellor Steven Kelman told an advisor audience during his presentation at the Peel Institute educational symposium in Toronto earlier this week.
According to Kelman, who is also the author of IFIC’s “Ethical Conduct and Behaviour” course, the eyeball test is one of three crucial due diligence tenets for advisors. “Read the fine print and know your client,” Kelman said during a follow-up interview with Advisor. ca. “And know your product.”
Kelman’s recent presentation occurred 13 months after the Ontario Supreme Court decision in Abrams v. Sprott Securities Limited, and 11 months after a subsequent appeal. In the initial decision in February 2003, Justice David Stinson ordered Sprott and a broker to pay $150,800 to compensate Philip Abrams, an 82-year-old client, for half of his investment losses, interest and other costs related to his holdings in two private companies. Justice Stinson concluded that the broker had breached duties owed to Abrams by failing to advise him of some risks involved.
Justice Stinson held that “failure to discuss that aspect leads me to the conclusion that [the broker] failed to make a balanced presentation to him.” (He also noted Abrams’s failure “to take reasonable care…”.) Sprott and its broker lost the appeal in April 2003 and Justice J. Cronk stated: “…existence of duty to warn is dependent on standard of care owed to a particular client. Accordingly, the specifics of the relationship between the broker and the client must be analyzed to determine whether a broker has a duty to warn a client…”
Kelman noted that these decisions mean that “… the more dependent that your client is on you for advice, the greater your exposure to risk…”
Reading fine print can be “boring as hell” but crucial to due diligence, Kelman argued repeatedly. For example, a Royal Bank of Canada information statement dated January 19, 2004, and offering Olympus United Univest Principal Protected Hedge Fund Deposit Notes, Series I, states:
“There can be no assurances against fraud, misappropriation or other misconduct by the hedge fund managers. Such misconduct… would adversely affect performance of the [fund] and therefore the return on the notes. Royal Bank, [RBC Dominion Securities] and the basket manager assume no responsibility or liability for fraud, misappropriation or other misconduct by any hedge fund managers.”
In another offering, the Citigroup BluMont Man Multi-Strategy Series 2 Notes, the information statement dated January 22, 2004 states that performance “… will depend to a considerable extent on the performance of the strategies and individual trading advisors comprising its portfolio. The investment advisor, the manager and Citibank Canada cannot protect against the risk of fraud, misrepresentation or other misconduct on the part of any trading advisor.”
A careful advisor brings this kind of statement to the client’s attention, Kelman noted. “You have to do your due diligence, especially looking for [statements saying] there can be no assurances against fraud, misappropriation or other misconduct.”
Knowing the client means studying an investment and asking, “What kind of client is this suitable for?”
Knowing the product means scrutinizing the asset directly. For real estate limited partnerships, Kelman has a shopping list:
“The other thing is — if you’re going to go and put clients in one of these things — have somebody from the company go down and take a look. Nothing beats an arm’s-length inspection,” he said.
Kelman and Peel Institute registrar Jim Bullock apparently practice what they advise. Kelman’s appraisal of material from a donation program led Bullock to decline the organization’s participation at Peel’s symposium. The material suggested that those paying $1,000 would qualify for a tax deduction of $10,000 based on valuation of its products when donated to charity.
“It wouldn’t be in the best interests of advisors being pitched for product we don’t like, especially product that could conceivably get them and clients into trouble,” Bullock said.
Art Melo is a Toronto-based investment writer.
(03/31/04)
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