Investor Advocacy

Open Letter to Ken Woodard (MFDA) and Sandra Kegie (Federation of Mutual Fund Dealers)

2007-09-19T17:14:00.000-07:00

Sandra:

Since PureLogix Corp. specializes in this area, I thought I would pass on our thoughts to you.

Concerning using a calculator to calculate risk tolerance:

We agree, trying to mix investment objectives, time horizon and so on into a single score makes little sense. Prospects in the past have suggested similar 'all-in-one' calculations to us. We have always said 'no' for similar reasons to the MFDA; a computer should never replace human judgment, it should only replace repetitive number crunching.

For example, in our compliance software platform called Compliance Net, the computer calculates the risk of each fund (as well as the entire account) and compares results daily to the last updated KYC data for each client account. This is a simple, repetitive process that really cannot be completed better by a human being using a trade blotter. However, when reviewing possible churning issues, or reviewing investment objectives or client age (and so on), Compliance Net looks for unusual matches and asks the advisor to comment on the discrepancy. The notes entered by the advisor are then routed to a compliance officer to review and approve or request more information from the advisor if necessary.

We've gone this route because human judgment must be a part of the suitability process. For example, an 80 year old client should be allowed to invest in 100% high risk funds (assuming the risks have been explained properly to the client). We feel a computer assisted compliance program like Compliance Net should automatically flag the account and ask the advisor to detail the discussion and disclosure process that has been used with the client and a compliance officer should use their own judgment to decide if the disclosure is sufficient. A computer can never completely replace this 'second look' at an account, but a computer can and should make sure every account is addressed and every account has notes electronically documented (a problem human-only procedures often fall short on).

Concerning disclosing risk tolerance of individual funds or an entire account:

Here we only partially agree with the MFDA. First, with Compliance Net we opted to disclose the risk of each individual fund AND the entire account to the investor. Although we understand the MFDA's desire to disclose the risk of all individual funds to a client, we think it isn't a consistent rule, nor does it adequately disclose risk to an investor. Here's why:

Fund of funds and various wrap products are often made up of medium risk, high risk and low risk funds. Fund managers only disclose the overall risk of the umbrella fund. If that is considered good enough disclosure for a fund of fund, it doesn't make much sense it isn't enough disclosure for a portfolio of mutual funds put together by an advisor. Our guess is the MFDA is avoiding disclosing portfolio risk to the investor because the MFDA has no way to calculate this number themselves. (We have offered the MFDA access to Compliance Net and our other tools to help with this process, but we have not received any comment back to date).
If you say to an investor, 'your account is 90% medium risk and 10% high risk' the client is more confused than ever. Describing 'high risk' or 'medium risk' is difficult enough without throwing fractions into the discussion. PureLogix risk assessment tools display the historical risk AND return of all funds within a portfolio. On the same graph we display the historical risk and return of the entire portfolio.

Again, PureLogix agrees with disclosing the risk of all individual funds within a client portfolio, but also strongly advocates disclosing the risk of the entire portfolio. To not do so when tools are readily available is effectively ignoring fiduciary duty to Canadian investors.

Sincerely,

Edward Iftody, PureLogix Corp.

Describing Risk To An Investor

2007-06-14T11:20:00.000-07:00

Advisor.ca posted an interesting article discussing Know Your Client information the other day. I think it's definitely worth reading through: http://www.advisor.ca/news/article.jsp?content=20070607_140517_4976.

I thought the comment by Teresa Black Hughes about '...absolutely no consistency.' was the best comment of the article concerning the state of KYC forms in the industry, but I think it works equally well to describe the answers given by the advisors quoted in the article.

It's pretty clear no one really seems to know how to describe the potential for downside risk to their clients. All the suggestions from advisors were canned lines given to clients. No measurable facts. For example - 'what if you lose $120,000? How would you feel?' Client's typical answer is probably 'Bad, let's take less risk!' but the client's answer should be 'How likely is it I could lose $120,000? How likely is it I lose any money at all over the next year? How about the next quarter?'

What if a client did ask those questions? How do you think the average advisor would answer? Wouldn't it be a lot better if the advisor could present real facts to clients BEFORE a purchase is made?

Tools built into OASIS make accurate risk assessment of any portfolio simple and quick. We use graphical representation to make explaining risk to clients straight-forward and understandable. Compliance Net ties the whole process together so advisors and compliance departments are always talking the same language. Using PureLogix Corp. solutions lets the client decide how much risk they are comfortable with before the purchase is made.

Artful Advice

2006-10-03T15:16:00.000-07:00

Another great compliance advice article by Philip Porado was recently published in the September 2006 issue of Advisor's Edge Report. The article features the value of using graphs to show how much risk an investor is taking on in a suggested investment or group of investments. The article also features a couple of quotes from me...

The full article: Artful advice - click here

Upcoming Events

2006-08-29T10:41:00.000-07:00

PureLogix Corp. will be attending the Advisor Group conference at Blue Montain Resort September 21st and 22nd. Although not sponsoring a booth at this event, William and I will be mingling with conference attendants.

At this event we will be maining showcasing Compliance Net as a dealer-wide compliance software solution.

October 18th and 19th - PureLogix Corp. will be attending the RFP meeting in Victoria as a booth sponsor. If you're interested in taking a look at Compliance Net for your firm, please feel free to ask us about it. We will mainly be showcasing OASIS for individual financial planners.

Paperless Office Ideas

2006-07-19T13:39:00.000-07:00

Are you a financial advisor looking to reduce paper in your office to electronic files? OASIS will certainly help you approach paperless office goals. PureLogix was recently acknowledged in Advisor's Edge as one vendor of paperless office solutions.

Click the link below to download a copy of the article Paper Trained - What ever happened to the electronic office? from the June 2006 edition ofAdvisor's Edge.

http://ewwest.com/pdfforms/ae_0606_papertrained.pdf

Helping Firms Develop Better Compliance Practices

2006-06-05T10:54:00.000-07:00

Philip Porado has released a couple of excellent articles concerning how regulators are trying to deal with trade compliance infractions at memeber firms:

December 2005, Advisor's Edge Report: Me and My Shadow - IDA finds in-firm compliance consultants can help bring firms up to snuff

May 2006, Advisor's Edge Report: Hit for the Cycle - MFDA examiners are coming to visit, they don't like what they see

Philip's articles can be found at www.advisor.ca

In response, we have published a white paper, that we think helps answer some of the problems Philip points out in his articles.

Download white paper here.

Mutual Fund Buyers Focus on Fees, Performance, Risk

2006-05-22T16:15:00.000-07:00

An excellent study entitled 'Understanding Investor Preferences for Mutual Fund Information' recently commissioned by ICI (Investment Company Institute) http://www.ici.org and compiled by GfK NOP. A must read for any advisor or dealer connected in any way to the mutual fund business.

The ICI is the national association of U.S. investment companies. The ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interest of funds, their sharholders, directors, and advisers.

GfK NOP, is an independent research firm http://www.gfknop.co.uk/

To download the study, click here

Not sure how to fill out the risk portion of a Know Your Client form?

2006-04-25T10:23:00.000-07:00

Since its release in January of this year, Compliance Net has demonstrated itself to be a big step forward in risk assessment for mutual fund and investment dealers. So much so, PureLogix Corp. decided to ‘retrofit’ stand-alone units of OASIS with some of the risk assessment technology developed for Compliance Net.

A new risk assessment section has recently been added to single client statement of holdings in OASIS. To bring this special statement up, advisors must select ‘statement by client’ and view a single client plan.

In this new section, the 3 year annualized standard deviation of each security is calculated on demand using daily historical pricing. Calculated standard deviation is then compared to the standard deviation risk categories set by IFIC to determine whether a security should be considered low, medium or high risk.

All securities in a client plan are sorted by risk category, and each of the three risk categories are totaled for the advisors’ convenience. As a final risk check OASIS also calculates the annualized 3 year risk of the entire plan.

With this new addition to OASIS, filling out or updating the risk section of a client’s Know Your Client form has never been easier or more accurate.

Choosing Mutual Funds: Are iUnits and iShares the Ultimate Solution?

2006-02-22T09:37:00.000-08:00

There has long been debate over active and passive management – is there any value in active management? If so, how much return does active management add? If not, why do people buy actively managed mutual funds? Wouldn’t buying iUnits and iShares be the ultimate investing solution?

The Theory

Depending on which study you read (and there are a lot of them) you will get varying answers. If you want my opinion (please stop chuckling) I’d have to conclude there is no definitive answer to any of these questions. Luckily enough, for the average investor, the answer to these questions is not really that important. Let me explain why...

A couple of years ago, our firm was commissioned to analyze the universe of F-class mutual funds, iUnits and iShares (ETFs – Exchange Traded Funds) in order to produce portfolios with the best risk/return characteristics we could come up with. In my original hypothesis I assumed portfolios of all ETFs would produce the very best portfolios because of the ultra-low MERs associated with these securities. After weeks of analysis using proprietary software that mixed and matched the universe of Canadian mutual funds and ETFs together in millions of different combinations, we found the best portfolios were actually combinations of both managed mutual funds, and ETFs.

At first, we were a bit perplexed. How could managed mutual funds give a portfolio a better risk/return ratio than portfolios made up of only ETFs? As it turns out, there’s a very simple reason.

Morningstar released a report some months ago in which they reported managed mutual funds that consistently out-performed their benchmarks, also tended to have a lower R-squared value.

What’s R-squared? R-squared is a number between 0 and 100. The number defines how much of a mutual fund’s returns are due to market fluctuations. In other words, R-squared is a good measure of how much of a correlation there is between a mutual fund’s returns and the returns of the benchmark the fund is compared against.

Why did Morningstar discover managers with lower R-squared numbers tended to have better returns than managers with higher R-squared numbers? There are probably a number of reasons, but I would suggest the following: the higher a mutual fund’s R-squared is, the closer that mutual fund is to mirroring the index (otherwise know in the industry as ‘closet indexing’). Because of the management fees charged in actively managed mutual funds, the more a fund manager closet indexes, the harder it is for the manager to keep up with the index returns. For example, if a closet indexing fund manager’s mutual fund had an R-squared of 100, the fund would have a return equal to the index return minus the management fee.

If all investors had to choose from were ‘closet indexing’ mutual funds with 2.5% MERs, and ETFs with 0.8% or lower MERs, the choice would be very simple; buy the index and forget about managed funds. The problem with making this broad assumption is accounting for managed mutual funds with low R-squared. These funds sometimes differ so greatly from the indexes they are measured against, one could argue, they should be measured against a completely new index. But since there is no closer matching index to choose from, the best an investor can do is to invest directly in the low R-squared managed mutual fund if they want exposure to that management style.

So why were low R-squared, high MER managed mutual funds showing up in our analysis?

Very simply, the universe of management styles covered by all ETFs was smaller than the universe of management styles when managed mutual funds were also considered in the analysis. Some of the managed mutual funds were managed so differently from the index they are measured against, it was like adding a completely different index to the analysis. Bottom line: the managed mutual funds often diversified the overall portfolio risk enough to more than off-set their considerably higher MERs.

The Reality

OK, so now we know that in theory, the best portfolios are combinations of indexes and low R-squared managed mutual funds, but what happens when we apply theory to real life? Mutual funds can be purchased for free (minus the embedded MER of course) so if low R-squared mutual funds show up in a portfolio, we know all costs have already been considered. What about the index component of our portfolio? Are iUnits and iShares really as cost-effective an investment vehicle as we are led to believe, or would an investor be bettor off purchasing index mutual funds instead? The answer really depends on how much money an investor has to invest.

ETFs need to be purchased like a stock or bond with a commission cost on top of the ultra-low MER of the ETFs. This can make transparency of total costs for ETFs a little more cumbersome to figure out than for index mutual funds. Because of this extra cost, investors with smaller accounts may actually be better off purchasing an index fund with a higher MER instead of an ETF. Let’s look at a hypothetical example with numbers an investor should consider before selecting ETFs for the index portion of their portfolios:

Let’s assume we’ve created a mixed portfolio of three low R-squared mutual funds, and 3 indexes. Even if we buy the indexes through a discount broker, we can expect to pay around $40/transaction. If we assume we will rebalance our portfolio from time to time (at least once per year), we could reasonably expect to buy and sell ETFs in our portfolios at least six times per year. Therefore, we should assume we would spend at least $240/year in transactions for our ETFs.

We bought these ETFs to keep costs down right? Based on the MERs of comparable index funds (see table below), we really don’t want our yearly transaction costs to exceed 0.5% of our portfolio’s value invested in indexes per year. That means, with transaction costs of only $240/year, we would need to invest at least $48000 in ETFs to keep transaction costs to 0.5% or less. If we assume the ETFs only make up 50% of the total portfolio then the investor’s total portfolio size should be at least $84000 or more in value to make buying ETFs a good deal for the index portion of our portfolio. Any less money than that, and it might well be cheaper to buy index mutual funds instead.

Note: In this hypothetical example it’s important remember that if any of our transaction assumptions are too low, or if we purchase more than three ETFs we will need an even bigger portfolio to break even.

Now what about if a full-service advisor presents a fee-for-service portfolio to you either with all ETFs, or a combination of ETFs and managed mutual funds? As long as all of the mutual funds being purchased are F-Class mutual funds, an investor can safely pay up to 1% for equity funds and 0.5% for fixed income funds to the advisor without paying more than buying the regular retail version of the fund. Paying anything less than 1% for equity, and 0.5% for fixed income is generally a deal. Again, ETFs are different.

If the advisor is paying for all transaction costs of the ETFs out of the for-service fee, an investor again can safely pay up to around 0.5% of the accounts total value invested in indexes per year to the advisor and still be getting a slight advantage from the lower MER cost. If charged any more, the total cost of the ETFs will be approaching or even exceeding the cost of some index mutual funds (see table below). If transaction fees are charged separately from the for-service fee, then an investor will need to pay careful attention to their account size and the cost of transactions to ensure they can negotiate fees with their advisor low enough to avoid paying too much. If combined for-service fees and transaction costs cannot be negotiated down to under 0.5% per year for the index portion of a portfolio, an investor should consider index funds as a simpler, more transparent solution.

If total fees charged to the investor approach or exceed 0.5%, ETFs quickly lose their competitive cost structure advantage:

Canadian Indexes MER 1 Yr 3Yr

iUnit S&P/TSX capped 0.25 35.9% 24.4%
TD Canadian Index – I 0.88 31.1% 23.3%
RBC Canadian Index 0.78 31.0% 23.3%
National Bank Canadian Index 1.14 33.7% 23.0%
CIBC Canadian Index 0.96 31.0% 23.2%
Altamira Canadian Index 0.54 34.3% 23.6%

Canadian Bond Indexes MER 1 Yr 3 Yr

iUnit Broad Bond Index 0.30 4.4% 7.0%
CIBC Canadian Bond Index 0.96 3.8% 5.8%
RBC Canadian Bond Index 0.74 3.5% 5.3%
Scotia Canadian Bond Index 1.14 3.7% 5.7%
TD Canadian Bond Index – I 0.91 3.9% 5.7%

Conclusion

Although ETFs are very cost effective securities that should be considered for inclusion in an investment portfolio, it is a mistake to think ETFs alone, are the ‘ultimate solution’. Ignoring the vast universe of excellent managed mutual funds that can further diversify risk and increase overall portfolio performance clearly makes little sense. Compounded with the careful consideration to fees that must be paid to ensure account size is large enough to cover all commissions and service fees, ETFs are not always a good solution for every investor.

If an investor is planning to use a ‘buy and hold forever’ strategy, then purchasing ETFs through a discount or online broker is definitely a cheep, simple and effective way to get into the market. If an investor plans to rebalance their investment portfolio from time to time in order to lock in profits and dollar-cost-average into out of favour securities, or if an investor is dealing with a full service or fee-for-service advisor, much more careful research into all costs must be conducted by the investor. A combination of service and transaction fees can easily eat up all of the advantages provided by the low MERs of ETFs, leaving the investor with at best, the equivalent of index mutual funds, and at worst an overpriced, underperforming investment portfolio. However if investors do their research, and are careful to negotiate fees low enough, ETFs can make a very cost effective contribution to a well-diversified portfolio.

Providing problem member firms with the tools to improve sales compliance

2006-02-15T14:01:00.000-08:00

(Forwarded by email to both the MFDA and IDA)

In January 2006, PureLogix Corp. released a new Internet driven software platform called Compliance Net. Compliance Net is designed to help branch managers and compliance departments of MFDA/IDA member firms more quickly and accurately identify and follow up on a number of compliance problems, currently including:

1. Unsuitable investments
2. Stale-dated Know Your Client data
3. Over-concentration in a single security in a client account
4. Accumulation of a security in multiple client accounts
5. Trades in unauthorized products
6. Churning in client accounts
7. Unilateral mutual fund substitutions
8. Listed Persons under U.N. Suppression of Terrorism Regulations to help combat the financing of terrorism
9. Suspicious transactions for Proceeds of Crime
10. Accounts held in non-cooperative countries and territories as determined by the Financial Action Task Force on money laundering

On top of automatically detecting the above mentioned compliance issues, Compliance Net is also live-linked to individual advisor portals. This gives advisors in the field an on-demand solution that not only identifies accounts that require attention, these advisor portals also give advisors the ability to double-check suitability of suggested transactions prior to the trade being presented to the investor. Clearly, MFDA/IDA member firms considering leasing Compliance Net will have big advantages over member firms that continue trying to detect and follow up on compliance issues by hand.

PureLogix Corp. has noted the IDA decision to assign a compliance monitor to help get Union Securities Inc. to comply with MFDA/IDA policy. We believe PureLogix Corp. could provide a similar service for the MFDA/IDA by providing Compliance Net for a member firm’s compliance department, advisor portals for advisors in the field, and an MFDA/IDA management portal for Compliance Net.

This management portal would be a powerful tool that would give the MFDA/IDA the ability to monitor sales compliance conditions at the problem member firm in real time. As the member firm started clearing the back-log of compliance issues, Compliance Net would automatically report the improving conditions to the MFDA/IDA, thereby reducing the need for more frequent audits, and as well as the likelihood of a firm ignoring MFDA/IDA compliance review recommendations.

I think you will agree, providing the MFDA/IDA with a live monitoring service would be an invaluable tool for the MFDA/IDA to gauge whether conditions are improving or worsening at a problem member firm. And from the member firm’s perspective, by being provided Compliance Net, there is now a capable tool and a reasonable game-plan for getting all branches into compliance within a very short period of time.

I’ve attached marketing material for your review. If the MFDA/IDA would be interested in viewing an online demonstration of Compliance Net’s capabilities, please feel free to call or email for an appointment.

Sincerely,

Edward Iftody
President
PureLogix Corp.

Regulatory Effectiveness

2006-02-07T10:56:00.000-08:00

Will the MFDA back up its threats?

I think it’s fair to say, the financial industry is at an interesting crossroad. In the MFDA’s January bulletin, member firms were notified that MFDA staff is starting a second round of compliance examinations. In this second examination, the MFDA will be reviewing the various deficiencies they uncovered in their initial examinations at member firms. In the conclusion of the notice, the MFDA noted: ‘any deficiencies that were noted in the first examination that have not been rectified will be considered for referral to the Enforcement Department of the MFDA.’ The question is: what deficiencies will actually be referred, and how will the Enforcement Department handle the referrals?

The deficiencies found in the first examination were extensive, and in some cases, down right embarrassing. The MFDA found evidence of everything from churning and discretionary trading (issues that were immediately referred to the Enforcement Department of the MFDA), to simple but obviously critical issues like:

Trade blotters not being reviewed regularly
No evidence of follow up on issues discovered on the trade blotter
Not maintaining a log of client complaints and/or not responding to client complaints
No branch compliance reviews being conducted

After reviewing the ‘common deficiencies’ discovered by the MFDA, someone from outside the financial industry might reasonably ask, ‘since mutual fund dealers were monitored by the various securities commissions prior to the invention of the MFDA, how could these types of basic supervision issues be common?’

They are common, because prior to the MFDA, dealers were so rarely disciplined for such infractions. It’s hard for a dealer today to take these threats seriously. Although cheep, user-friendly technology exists to wipe out almost all of the more mundane day-to-day suitability and review problems pointed out by the MFDA, compliance departments have a tough time justifying the costs (or even the effort) to management, when the perceived threat is so low.

This lack of dealer motivation is not just an MFDA inherited problem. According to a BCSC’s 2002 audit of the IDA, ‘since taking sole responsibility for member regulation at IDA firms in 2000 (prior to 2000 the jurisdiction was shared by the CDNX, formerly the VSE), not only was the volume of proceedings not commensurate with the IDA’s new regulatory role, at the time of the report, the IDA had taken no action against firms in the previous 24 months.’ Even today, a review of discipline statistics on the IDA website shows an appallingly low number of investigations.

I’m not aware of the IDA releasing numbers from any audits they perform at member firms, but having personally been through a BCSC audit prior to the MFDA as well as an IDA sales audit, I can tell you the number of unsuitable investment cases randomly discovered by auditors makes the tiny number of complaints that actually get documented by COMSET look ridiculous. Why are the numbers reported to COMSET so low? Almost certainly because of the cost and effort required by investors to hire legal council to try and chase down losses. If you go into the IDA’s statistic page again, you’ll see another possible reason: the number of cases of investors that win arbitration are also frightenly low. In such an environment it is easy to see why dealers take these reviews somewhat lightly.

The IDA’s attitude appears to have changed little since 2002 in regards to suitability and supervision complaints. For example, someone not familiar with the financial industry might wrongly assume the IDA would consider fining a dealer for improper supervision when an audit detects a large percentage of randomly reviewed accounts containing unsuitable investments. Instead, the IDA issues a written notice to the dealer to ‘correct the deficiencies’.

Hey, I’m the first to admit, it’s a lot easier to deal with the handful of investor’s who lose their shirts each year to some crook than it is to try and stamp out all of the unsuitable investment problems before they happen. I’m sure it’s a lot easier to type up a deficiency report and walk away from the mess than it is to demand immediate action, but aren’t regulators in business to guard against such messes happening in the first place?

To be fair, I should point out both the MFDA and IDA are fining and banning obvious crooks in slam-dunk cases in which the advisor has simply stolen money from clients. But to be effective as protectors of the average investor, both regulators need to be far more proactive than regulators have been in the past. Regulators need to start fining incompetent advisors, and complacent dealers instead of just waiting for the investor complaints to roll in.

So, as I said before, we appear to be at a crossroad: what will the MFDA Enforcement Department do with the referrals it receives following this second round of reviews? Will the MFDA follow up on its threats and start issuing serious fines to make compliance with their policies and rules worthwhile from a business point of view? Will the increased pressure for positive headlines spur the IDA into doing more to protect the average investor? The MFDA notices look promising, as do the initial round of fines issued for serious rule infractions. But without follow-up, the threatening looking ‘bite’ will fizzle into an annoying small-dog ‘bark’ that can again be safely ignored by dealers.

Compliance Software Technology Advancements - Not Widely Known In The Financial Industry...Yet

2006-01-26T14:59:00.000-08:00

Response sent to Kate McCaffery at advisor.ca, to help clarify some of Kate's information in her article published in January, 2006.

Kate:

Great article: Asset allocation software: The next generation. We’re glad to see other competitors are finally starting to enter the arena. I think it helps validate what we’ve been saying to advisors and dealers for some time. However, I wanted to bring to your attention that this type of software is not exactly ‘the next generation.’ In fact, PureLogix Corp. has been marketing OASIS for the last year and a half to independent advisors across Canada, and have signed deals with advisors from 9 Canadian dealers (5 of them are national). We’re hoping you might consider doing a follow-up article to clarify that neither Equisoft nor Quantum are first to create such a products, but rather are continuing in a direction PureLogix Corp. started some time ago. We would also like to point out that the ‘next generation’ of software will likely be following in the footsteps of new software we have also already developed and are currently leasing. We believe the ‘next step’ in asset allocation software should directly connect the sales process with the dealer compliance department ensuring investors understand ‘risk’ in their investments the same way the compliance officer does.

Not only does OASIS already link with RPM, Winfund and Univeris, we also import client data from Dataphile and IBM MIPS as well. We currently support corporate deals but we started our business with, and we continue to support individual advisors regardless of what dealership they work with.

Since OASIS is completely web driven, any machine connected to the Internet will allow an advisor (and the entire admin team) to log into OASIS to work within the various modules simultaneously. Also, because we program Web 2.0 applications which use advanced AJAX technology (asynchronous javascript and XML), an extremely fast server response is executed making the user experience very similar to desktop applications. There is no need for advisors to update any price data. The universe of Canadian mutual funds, seg funds, the universe of North American stocks and the universe of American mutual funds are updated for the advisor daily. All electronic rebalancing is also completed every day, automatically, with no required input from the advisor.

OASIS is North America’s first EIM (Electronic Investment Management) process. Rather than focusing on only a couple of areas an advisor might have to work in, our platform allows advisors to run through the entire investment management process electronically. With OASIS advisors can:

Complete an artificially intelligent risk tolerance questionnaire with clients
Run through basic financial planning calculations to help determine long-term financial goals
Enter and save an unlimited number of model portfolios
Calculate correlation matrixes using daily data (the only firm in Canada we’re aware of going to this effort)
Historically back-test all model portfolio on actual daily historical data (adjusted for distributions automatically) – this allows advisors to tailor rebalance tolerances for each individual security in the model portfolio if desired.
Create a side-by-side risk/return analysis proposal, ready to present to the investor – all completed by the advisor with a point-and-click interface
Complete an investment policy statement in seconds
Complete all applications and transfers (including dealer specific paperwork) electronically in adobe format. Because all client data is imported into OASIS, there is no need to look up client information, account numbers, or unit or dollar balances. Even fund codes are automatically looked up by OASIS when advisors are trying to fill out trade tickets.
OASIS can calculate the cheapest and fastest way to move an old portfolio to a new one without charging the client any DSC charges
Lastly, not only does OASIS track every client portfolio daily against its personal benchmark portfolio to find rebalancing opportunities for the advisor, OASIS also powers Internet accessible statements so investors can view detailed analysis on their personal accounts. Multiple accounts can also be grouped together to analyze multiple accounts simultaneously.

When building portfolios, your article mentioned Equisoft’s solution uses asset classes and Quantum uses indexes. OASIS can rebalance using asset classes (mainly used by sector rotator advisors), but primarily, OASIS rebalances using individual mutual fund holdings. Why do we do this? Using the same logic as Chabot, although indexes are less vague than asset classes, doing analysis on the actual securities an advisor plans to sell to investors is less vague than either the index or asset class solutions your article mentioned. Obviously the processing power necessary to create models using individual securities is a lot larger, but we think the results are well worth the effort for out clients.

We feel the real ‘next generation’ of asset allocation software is what we are doing with our newest software release called Compliance Net. We designed Compliance Net to analyze every on-book account at a dealership, every day! Compliance Net scans for:

· Unsuitable recommendations using both Prudent Person and Prudent Investor Rules
· Stale-dated ‘Know Your Client’ data
· Over-concentration in a single security
· Accumulation of a single security in multiple client accounts
· Unauthorized trades in pro accounts
· Unauthorized trades placed in restricted accounts
· Churning in client accounts
· Unilateral mutual fund substitutions (IDA by-law 29.1a dn Regulation 200.1 (h))
· Listed Persons under U.N. Suppression of Terrorism Regulations (IDA Notices MR102, MR105)
· Accounts held in non-cooperative countries and territories (NCCT list) as determined by the Financial Action Task Force on money laundering

We have linked Compliance Net to OASIS, so now compliance departments have a direct link to advisors in the field. Advisors can now log into OASIS, complete a risk questionnaire with a client or prospect, select the portfolio that matches the client’s needs, and OASIS will then suggest how the advisor should complete the risk tolerance on the dealer know your client forms. This ensures that the investor, advisor and compliance department all have the same assessment of risk, substantially reducing the likelihood of misinterpretation by the investor.

I’ve attached marketing materials on Compliance Net and OASIS if you would like to review any of the software features in more detail. I would also welcome you to take a look at the live software demo over the Internet. If interested, feel free to call or email to book an appointment.

Thank you in advance for your time Kate. If you’re interested in a follow-up article, would you please let us know if we can be of assistance?

Sincerely,

Edward Iftody, BA, CIM
President
PureLogix Corp.

Discount Website Bucks Trend By Increasing Internal Sales Compliance

2006-01-25T14:43:00.000-08:00

NEWS RELEASE

Contact:Edward Iftody, BA, CIM
PureLogix Corp.
306 – 1140 Pendrell Street
Vancouver, BC V6E 1L4
Phone: 778-839-3758
www.purelogix.net info@purelogix.net

Discount Website Bucks Trend By Increasing Internal Sales Compliance

Vancouver, BC – January 26, 2006 – In recent years, the do-it-yourself investor, has continued to receive less and less help in regards to suitability of investments from the discount brokerages they do business with. One discount website is bucking that trend.

No newcomer to the investment business, Paul DuMoulin, CFP, a 13 year IDA veteran, and co-founder of portfolio4less.com is taking his discount website in a new direction. Instead of trying to ‘do away’ with suitability and know your client issues, porfolio4less.com is embracing sales compliance by contracting PureLogix Corp.’s new online compliance software platform, Compliance Net to help beef up internal sales compliance processes.

According to Mr. DuMoulin, "Compliance issues, and in particular suitability of investment issues are the main source of friction between advisors and clients. Compliance Net ensures that our portfolios are always in check with our clients’ risk and return expectations. It is our responsibility to our clients to ensure that they are invested properly and Compliance Net leaves no room for error in this department.”

“I think it’s great to see a discount website just as interested in protecting investors from inappropriate investment decisions as they are in offering great transaction pricing,” says Edward Iftody of PureLogix Corp. “We’ve very pleased to have been selected by portfolio4less.com to help them in this department.”

Mr. DuMoulin, CFP is co-founder of portfolio4less.com.
For information: www.portfolio4less.com or
Contact: portfolio@portfolio4less.com
Phone: 1-866-466-4745

Mr. Iftody, BA, CIM is president of PureLogix Corp., a financial technology firm dedicated to increasing investor knowledge and product awareness.

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Who Are Compliance Departments Protecting?

2005-11-18T12:24:00.000-08:00

Since the dotcom bust of the late 90s 'staying compliant' has become more and more of an issue. As dealers face the rising costs of investigations and litigation, due to allegations of unsuitable investments or improper supervision, ever more strenuous restrictions are being placed on the average advisor. Many advisors complain of the extra paperwork and time involved in satisfying compliance departments. Dealers justify the extra regulation citing fiduciary duty and investor protection. Who is the paperwork protecting; the investor or the dealer?

It is now getting popular for dealers to hire lawyers specializing in defending advisors and branch managers to lecture at advisor conferences. The lecture material is thorough and professional, and it tends to revolve around one basic premise: keep client paperwork up to date... or else.

The argument seems to make a lot of sense. If a client's know your client data is regularly updated, all disclosures are documented as received by the client, and the advisor has detailed and dated notes of all client meetings I think anyone would have to agree: the client will have little or no recourse in an unsuitable investment investigation.

For example, on April 18, 2005, Edward Graham, a co-branch manager with Credential Securities in Regina was found to have violated IDA regulation 1300.2 – he failed notice an over concentration of one particular security in the accounts of multiple clients. The IDA also wanted to make the point Mr. Graham should have been alerted to a potential problem in one particular account when updated Know Your Client data indicated 50% speculative for an investor over 60 years of age. Mr. Graham acknowledged that 50% speculative was high for someone 60 years of age, but he did not acknowledge that it was high for this particular client. The Hearing Panel had to agree with the point, and dismissed the allegation.

Here lies one of the big problems in Canada's investment industry; dealers are using regulation originally designed to protect the investor to protect themselves instead. Once this connection is understood, it makes perfect sense why a dealer would hire lawyers to coach advisors.

Unfortunately whether lawyers specialize in defending investors or advisors, neither group have any vested interest in making our industry better. Lecturing to groups of investors or advisors primarily serves to advertise the legal firm to potential clients. The lecture material serves to teach potential clients how to spot new cases for the law firm, and how to make those cases easier for the law firm to research and argue.

Instead of serving our industry on a platter to lawyers, why don't we start taking responsibility, and try to fix some of the problems internally? For example, instead of hiring legal coaches to avoid paying for problems after they occur, how about investing in education programs for investors, and better risk assessment technology for advisors to avoid unsuitable recommendation complaints before they happen? Why not institute standards of risk every member firm and advisor can agree on?

Our industry is at a crossroads. The money, technology and know-how all exist. So why don't we start embracing transparent disclosure of compensation, risk and potential conflicts of interest, and stop hiding behind ever longer application forms and lawyer created loopholes? It's time to stop paying lip service to fiduciary duty and to start building confidence in our industry again.

Advisors Acknowledge Investors Cannot Fairly Evaluate Risk

2005-10-31T15:21:00.000-08:00

In a survey of 50 advisors, and investment councilors from firms across Canada, advisors were asked two questions: ‘What percentage of your clients know the odds of losing money in their investments over the next year, and if there was a chance they could lose money, would your clients know how much money they could potentially lose?’ In 49 out of 50 interviews the answers were candid and surprisingly similar. Most investors cannot fairly evaluate the risk of their investments.

Hans Merkelbach, an advisor with Dundee Private Investors, well known for his outspoken support of disclosing accurate return and advisor compensation information to investors stated “I try to educate by regularly sending articles and letters to show clients what I’m trying to accomplish in their portfolios, but most clients could not answer those kinds of questions with any certainty.”

In a recent study conducted by Desjardins and published in the Investment Executive’s Special Supplement November 2005, almost 60% of surveyed Canadians believe they have limited or no knowledge about retirement savings or investments. The general consensus of the survey of advisors conducted by PureLogix Corp. in October of 2005 suggested a much lower number. According to advisors, perhaps less that 10% of investors have a clear picture of the risks they are exposed to.

These findings are partially confirmed by the Investment Dealers Association website. As of September 30, 2005, 1015 complaints had been received for the year. Out of all complaints received the IDA lists ‘unsuitable investments’ as one of the most commonly reported investor complaints. Although the IDA does fine a large number of advisors each year, the number of fines issued is a fraction of complaints received.

The discrepancy suggests the majority of advisors are filling out Know Your Client data adequately to satisfy investigators. If that’s the case, the only other reasonable conclusion that can be drawn is that complaint numbers are driven primarily by investor misinterpretation of risk.

Gamblers can easily find the odds of winning or losing a game of chance posted within casinos. Poker played on television calculates the odds of winning a hand in live time for the education of viewers watching the game. With something as important as investor life savings, why aren’t dealers providing tools to the advisors in the field to accurately disclose risk to investors?

Advisors interviewed cited many issues. First, the majority of investment dealers and investment council firms may not have the finances or expertise to develop adequate proprietary in-house systems. Second, there is a problem with awareness. Many dealers don’t realize excellent risk assessment technology can be purchased ‘off-the-shelf’. Others felt governance requirements were at the root of the problem. One advisor who asked not to be named said, ‘If investors aren’t demanding this kind of disclosure, then regulatory bodies aren’t interested in pursuing the issue even if it is the right thing to do.’

What can advisors and investors do to better understand the risk of investments if they don’t have access to software that calculates risk for them? Go back to your high school math text books and start applying basic statistics to evaluate risk. Using only a three year time-weighted return, a three year standard deviation and a basic calculator both advisors and average investors can start to get a better understanding of risk. Here’s how:

The basic premise when considering standard deviation is the bell curve. It’s not really important to know what the bell curve looks like or exactly how it’s calculated. What is important is knowing the statistics surrounding it. One standard deviation away from a security’s average return (known as the mean return) accounts for around 68% of all one year returns sampled in a three year period. Two standard deviations away from the mean return account for roughly 95% of all one year returns sampled in a three year period. Three standard deviations account for about 99% of all possible returns.

Let’s say for example, you are evaluating a security with a 10% 3-year compounded return with a 3-year standard deviation of 8%.[1] If a security’s average return is 10%, one standard deviation, or approximately 68% of the time an investor could expect the security to return a one-year return of between 10%+8% = 18% and 10%-8% = 2%. If we include 2 standard deviations, then 95% of the time an investor could expect the security to return a one-year return of between 10%+8%+8% = 26% and 10%-8%-8% = -6%. The remaining 5% of the time is where it gets a bit more critical. There is a 2.5% chance this security could produce a one year return in excess of 10%+8%+8%+8% = 34% or more. There is also a 2.5% chance this security could return 10%-8%-8%-8% = -14% or more. Admittedly, a 2.5% chance of losing 14% or more in one year is remote, but if an investor isn’t absolutely prepared to lose 14% or more of their life savings in one year, they really should be given the opportunity to ask their advisor to present a more conservative solution.

[1] Please note, that although the 3 year compounded return is not the mean return for the security, it is usually much easier to find than a three year mean return, and will suffice for rough evaluation purposes

Trade Compliance In Canada - Too Reactionary To Protect Investors?

2005-10-20T13:42:00.000-07:00

Are investors being properly informed of the risks associated with their investments? A quick review of the IDA website confirms both compliance officers and the firms they work for regularly show up in violation of IDA Regulation 1300.2 – Improper supervision. Although advisors (and indirectly the firms they work for) are hired by investors to help guide investment decisions and increase awareness in the products being purchased, it seems clear: too many investors end up not understanding the risks associated with the investments they are buying.

According to ComSet (a database built to receive and store client complaints, disciplinary matters, internal investigations, disciplinary actions, settlements, and civil, criminal or regulatory action against the firm or its registered employees), in 2003 there were 2670 events entered. Of those, 1936 were customer complaints, and 1249 complaints were specifically concerning unsuitable investments. This means nearly half of all ComSet events, or over 60% of all customer complaints are unsuitable investment complaints. In 2004 there were 1896 events entered. 1276 were customer complained, and unsuitable investments made up 776, or over 60% of all customer complaints.

With approximately 24000 registered IDA members, one would have to assume that between 3 and 5% of all advisors may be facing at least one unsuitable recommendation complaint at any given time. Even more worrisome, with 629 civil claims in 2003 and 500 civil claims in 2004, perhaps as many as 25% of all unsuitable investment complaints may actually be turning into expensive, drawn out civil claims. With the recent push from regulators to firms in an attempt to help smaller investors recoup losses from ‘rogue’ advisors, the number of complaints turning into fines could rapidly increase

At the root of this problem is the reactionary way many compliance departments are forced to deal with potential trade supervision problems. When it comes to assessing risk, investors, advisors and compliance departments are often not reading from the same instruction manual. Although an investor might sign an account opening form confirming they are 100% ‘medium’ risk, what ‘medium risk’ means to the investor, advisor and compliance department may differ greatly. In the absence of a solid representation of risk, investors are being forced to use their past investing experience as a guide. In this type of scenario the results are predictable; advisors and compliance departments often end up using signed investor documentation to defend themselves and the firm from litigation rather than to protect and educate the investor

To compound the problem, when an inappropriate trade is detected in an investor’s account, the compliance department will order the advisor in charge to either reverse the offending trade, offset the trade with a purchase of a lower risk security, or ‘update’ the investor’s Know Your Client information. Many advisors feel reversing or offsetting a trade make them look foolish in the eyes of the investor. After all, the investor is relying on an advisor’s investing experience and product knowledge. Instead, it’s much easier for an advisor to say, ‘If you don’t want my firm freeze your account, you’ll need to sign this Know Your Client update.’ Simply updating the Know Your Client does not solve the problem. The updated Know Your Client might now match the compliance department’s assessment or risk, but in such a situation it’s hard to imagine the Know Your Client matching the investor’s interpretation of risk.

For the trade approval process to protect the investor rather than the advisor or firm, thorough risk return analysis of an investor’s proposed account must be presented in graphical or numerical representation that the average person can understand. Risk category percentages or account standard deviation summaries mean little to the average investor. When approving a proposed portfolio, investors should be confirming a proposed portfolio (at least historically) has achieved a return suitable for long-term investment plans, within a level of downside risk acceptable to the investor. It should be up to the advisor and the sponsoring firm to determine what the standard deviation of that proposed portfolio is, how that standard deviation number should translate into Know Your Client data, and most importantly to continue monitoring the account over timeto ensure performance continues within the limits originally agreed to by the investor

Even though there may be considerable training or technology costs associated, what’s clearly needed is a commitment by the industry to a more proactive version of the traditional trade approval process. The proper training and tools to measure risk, explain risk and accurately transcribe that risk tolerance information onto dealer paperwork must be provided to advisors if firms want to ensure the proper information is getting into the hands of investors. Without such change, policy concerning trade suitability issued from regulators or compliance departments will ultimately continue to fail.

Goal Factoring: The Fairest Way to Evaluate Advisor Performance

2005-08-22T11:10:00.000-07:00

Not too many years ago, the average investor had very little idea what time weighted returns were. But today, there is a higher standard demanded by investors. Many advisors claim time-weighted or internal rate of return (IRR) are now required on statements for many clients. At first the trend seems to make good sense. After all, the days of buying one or two mutual funds for every client are long gone. No doubt about it, investing definitely has got a lot more complicated. That constantly increasing complication would naturally suggest reporting needs to be a lot more complicated for investors to keep up, right?

We don't think so. PureLogix is pioneering a new return measurement. We call it Goal Factoring. Why are we suggesting a new performance measurement? Current performance measurements are too unwieldy for average investors to use on a day-to-day basis. Unlike a portfolio time weighted or internal rate of return, Goal Factoring generates ONE easy-to-understand number that summarizes the performance of your entire portfolio. Goal Factoring separates itself further from other return measurements by incorporating an investor's preference for risk, and time horizon into the calculation at the same time. We think this helps investors put short-term losses more easily into perspective. Other return measurements tend to magnify short-term market corrections making investors more reluctant to stick to their long-term investment plans. Perhaps best of all, anyone can calculate their own personal Goal Factor with nothing more than a business calculator.

How does Goal Factoring work? It focuses on future performance rather than what has happened to the portfolio in the past. Why do we suggest focusing on the future? It 's simple: past performance is no guarantee future returns. So why fixate on the past?

To calculate your own personal Goal Factor, you need to know:
1. How much money you have saved right now. This number represents the present value of your savings
2.How much money you would like to have, or do you need to have for retirement. This number represents the future value your savings.
3. How much money you plan to put away each month between now and retirement
4. How many years you have left to save before retirement.

With these 4 numbers an investor can calculate the compounding return required year after year to reach their future value savings goal. This calculation is the basis for all financial planning. Without it, an investor may have very little idea what their retirement may look like. Although nearly every advisor will calculate this number for you early in your relationship, once your advisor uses the number to help determine the amount of risk you will have to accept to achieve your retirement goals, it is rarely referred to again. To PureLogix, this number represents the cornerstone of meaningful performance measurement.

The compounding return required until retirement is what we refer to as your Goal Factor. Here's how you use it as a performance measure:

Let's say your advisor determines that you require an 8% compounding return each year between now and your retirement 20 years from now. Based on that number you should purchase an investment portfolio that aims at returning between 8%-9% over a 3 or 5 year period. Here's how you evaluate your portfolio's performance: if your Goal Factor gets larger and larger year after year, your portfolio is doing poorly. If your Goal Factor gets smaller and smaller each year, your portfolio is outperforming.

It's that simple! You want to know if you're going to be ok when you retire? Take a look at your current Goal Factor. Does your Goal Factor still look reasonable to you or has it climbed way too high? Use your common sense. If your original Goal Factor was 8% and now your Goal Factor is 12%, you're going to have to take on a lot more risk than you originally agreed to. In this case your advisor has probably made a mistake. If your advisor doesn't address the problem, you should. If your Goal Factor was 8% and now your Goal Factor is 9%, that still sounds reasonably attainable, doesn't it? Stick to your investment plan.

Let's say after your first year in your new portfolio, the markets turn against you, and your portfolio is down around 15% for the year. Yikes! Time to sell that dog right? Well, let's do some Goal Factoring first to see how this short term loss has affected your long term plan. Re-calculate your Goal Factor with the 19 years you have remaining. Even if you were planning to contribute nothing to your retirement plan between now and retirement, your portfolio would still reach your retirement goal by achieving an average return of 9.3% for the rest of the years between now and your retirement. That's a mere 1.3% required return increase for your portfolio to still attain your retirement goal.

In this example, the proper course is to make a SMALL adjustment to your overall portfolio. This adjustment may be as simple as rebalancing your portfolio back to it's benchmark. Markets always revert back to their long-term mean returns. In this example, according to your goal factor, you have plenty of time to wait for the markets, and your portfolio, to return to a more normal long-term trend.
What you need to know about Goal Factoring:

AS A GENERAL RULE OF THUMB, if your Goal Factor climbs 1%, you should probably talk to your advisor to see what changes, if any, are required to keep your retirement plan on track. If your Goal Factor climbs 2% over the Goal Factor you originally set with your advisor, it's time to have a serious discussion. If there is no reasonable explanation for the increased Goal Factor, it's time to find another advisor.
If your Goal Factor falls 2% or more from the Goal Factor you originally set with your advisor, you may want to discuss moving to a more conservative portfolio. Generally speaking, if all goes well with your retirement plan, your portfolio should slowly get more conservative as you approach retirement. Remember, the shorter your time horizon, the more sensitive your Goal Factor will be to short-term market fluctuations.