The warm and fuzzy feeling of protection

Why it matters
Gestures, symbols, rights


I have that warm and fuzzy feeling again. The nanny state is looking out for me. Yet again, I got some extra protection I did not ask for.
I received an e-mail with the following message:

Dear Zork,

The Canadian Securities Regulators have announced the adoption of certain amendments which may impact your future investment in exempt market products in Ontario.

 As of May 5th, 2015, the MINIMUM AMOUNT INVESTMENT EXEMPTION ($150,000.00 minimum) will no longer be available to prospective investors who are Ontario residents.

 Should you wish to make an investment in XXXXXXXX or XXXXXXXX under this exemption, we must receive your subscription by:

MAY 4TH, 2015

 If you have any questions or would like more information concerning this notice, please contact Your Advisor or XXXXXXXX at:………….

 The rules

The rules that changed were stupid to begin with. Canadian Securities Administration, in order to protect me, determined that unless I am wealthy enough, I cannot invest in certain securities. Just to make sure that some evil entities (that are already heavily regulated by them) will not take advantage of idiots like me. I, as an individual investor, cannot be trusted with the management of my own money.

Let’s just see what I CAN be trusted with:

If I wish to invest my money on the stock market, I can.
If I wish to buy whatever stocks for whatever amount of money, I can.
If I wish to buy options (which are very risky investments), I can
I can walk into a casino with a $100,000 and gamble it away in one night.
Nothing can stop me from giving my money to that nice gentleman who is entrusted with the sale of the Brooklyn Bridge. (If you think about it, for $150,000 it is a great deal. I should go for it.)
Nothing can stop me from opening a restaurant, with a 90% probability of failure within a year.
…and I could go on naming all the ways I can find to lose my money far more effectively than I could in a REIT.

I cannot be trusted with the management of my own money, unless, of course, if I have a lot of it.
According to the old rules, if I had a $3,000,000 net worth or $2,000,000 net financial assets I would be called an ‘accredited investor’ and no limits would apply to what I can or cannot invest in. Let me say it again: If you are a millionaire, your minimum investment is $5,000.- if you are not, it must be $150,000.-
Just to protect you from overinvesting in one security.
How much sense does this make to you? Does it really look like something that was designed to serve our interest?

My investment history

I got seriously irritated a couple of weeks ago when I made my RRSP contribution for the year. I had to go through the investor profile interview again. Something similar to this one.
I made my first investment into my still existing CIBC RRSP account in 1996. That was the first time I had to go through the process of establishing my investor profile. I was asked some really stupid questions about my ‘risk tolerance’, ‘investment horizon’ and ‘investment goals’. She was not able to explain to me what they all mean. I went through that interview several times since, but I have yet to find a financial expert who can make sense of it for me. The more I learn, the more I understand about investing, the fuzzier they look. (But this should be the subject of a separate post).
A few years later, on the advice of a friend I handed most of my money to an investment professional from a reputable organization. I took it back from him 15 years later, when he tried to give me yet another “you have to think in the long term” speech explaining why he cannot produce more than half a percent yearly average return on my investment. I decided to manage it myself. It was a scary idea and it is scary still, but so far I am doing better than either the bank or the professional investment advisor. If I lost 25% of my investment tomorrow, I would still be doing better than either.

Most of my RRSP at that point went into a Real Estate Investment Trust, the one that sent me the letter. I would not have invested as much as I did if it was not for the rules. The ones that were supposed to protect me from over-investing in one sector. Thanks to the stupid rules, that one investment at that point was 75% of my portfolio.  It’s below 50% now, which is still too much, but I am bound by the rules protecting me.

What appealed to me the most in the REIT is the fact that it owns buildings that I can go to look at. I can calculate exactly how many bricks I own in it. I can see the people who are renting its units. It seems far more tangible than a mutual fund and the main income from it are the regular payments, not the gamble over its perceived value as it’s the case with most stocks and mutual funds.

What changed?

When some rules really don’t seem to make any sense, when the explanations really stink of BS, you have to ask yourself what’s going on. What happened and who benefits?

We live in the age of the Internet. Middlemen of all types are disappearing. We don’t need travel agents and bank tellers any more. Luckily, they do not have the power to suggest that your plane might crash unless you buy your ticket though them or that you may lose all your savings if you make a mistake in your on-line transfer between your accounts. They do not have the power to ‘protect’ you, but some professions apparently do.

You can do a lot on the internet. You are not limited to the quarterly prospectus, you can even research every single principal of the company you chose to invest in to see whether they have a trustworthy face next to their trustworthy numbers.

We don’t need the middlemen. An accountant friends of ours, for example, says that he stopped investing in mutual funds. If he likes one, he looks at its top holdings and buy them directly saving himself the cost associated with mutual funds. I work in IT so I would buy companies whose products I believe in.

There is another likely contributor to the situation that led to these changes.
The point of the artificially low interest rates is to ‘stimulate the economy,’ to discourage savings, but politicians can’t fool everybody, people know that they still have to save. Since the returns from the banks and big investments houses barely cover inflation, there is an exodus from them to alternatives that – thanks to the Internet – are far easier to monitor by even a dilettante as I am. My bank and my broker were both disappointed when I took my money back from them. They do not like the alternatives. They want to feel needed. They don’t want us to invest directly. They know that they are smarter than us and they want to take care of us. They want our money back!
Which leads us to the point of this post:

Who benefits?

It is a libertarian truism that regulations serve the interest of the regulators.
There is no clearer example than this change to the rules. Take a look at the list of the commenters in the document (Annex A & Appendix D – list of commenters) Banks, bankers’ associations and a lot of Limited Liability Partnerships. (I wonder why they need to limit their liability………)
(If you wish to look at the full document, it is here. If you search for the document for “$150,000”, you will find all the passages referenced on this post. )

Most are clearly far more concerned about my welfare than their own. How do I know? From their comments.

One commenter suggested that an investment of $150,000 is a poor proxy for sophistication and ability to withstand financial loss. The commenter therefore recommended further amendments to restrict the use of the MA exemption by small companies or family trusts.

Still, there were more comments against the proposed change then for it:

  • there is not a demonstrable reason to restrict it
  • for many investors, $150,000 is a significant amount and, in the commenter’s experience, these investors take due care when choosing to invest that amount in a single investment
  • the amount demonstrates that the investor has sufficient resources to conduct due diligence when making the investment decision
  • investors are not forced to invest under this exemption

…….. but the CSA summarily dismissed them (emphasis mine):

The CSA has seen instances where individuals have invested more than is suitable for them under the MA exemption solely because the investor is required to invest a minimum amount of $150,000 to satisfy the requirements of the exemption. We see less of this concern with other exemptions because the investor may choose the amount they want to invest. Given the relatively small amount of capital raised under this exemption from individuals and the devastating loss suffered by some investors because of this exemption, the CSA has determined to proceed with this amendment.

The net result of these changes is that a number of investment choices will not be directly available to people like you and me; that we will have no choice but to rely on the services of the middlemen. To use the Sicilian idiom, “we have to let them wet their beak.”

In the end, this is just another example of the politically connected bending the rules to their own advantage.
The document linked above identifies 37 people who should be ready to address our concerns. Let them know what you think.

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