Q: My father lost a large sum of money when the company holding his investments in his home country defrauded its clients. As a result, I worry whether it is safe to keep all our investments in one institution. What would happen to investors if these companies became insolvent? Should we diversify across fund providers and financial institutions the way we diversify our investments? — M.T.
Canadians have many legitimate gripes about their financial institutions, but compared with most other countries we’re pretty fortunate. Fund companies and brokerages may charge too much or provide lousy service, but they aren’t likely to defraud their clients. And in the extremely rare cases when they become insolvent, there are safeguards that should prevent investors from significant losses.
It may not be necessary to diversify your holdings across multiple fund providers or financial institutions. But every Canadian should understand how investor protection programs work and be aware of their limits.
Your online brokerage
Every major online brokerage is a member of the Canadian Investment Protection Fund (CIPF), which was established by agreement with the Investment Industry Regulatory Association of Canada. (IIROC is the self-regulatory organization that oversees investment dealers in Canada.)
The CIPF maintains a pool of money that can be used to compensate investors in the event of a member’s insolvency. Since 1971 there have been 20 of these: the most recent include the Canadian arm of MF Global in 2011, and two small firms in 2012.
If you’re a client of a CIPF member, you’re covered for up to $1 million per general account, but there is additional coverage for what they deem “separate accounts,” which include RRSPs, RESPs and certain trusts.
Your advisor’s firm
If you work with an advisor who uses ETFs, there’s an extra layer of coverage. For example, PWL Capital is a CIPF member, and its client accounts are held at National Bank Correspondent Network, which is also a member. Using a third-party custodian also means the advisors have no direct access to clients’ money.
Make sure any brokerage or investment dealer you work with is covered CIPF. And don’t just look for the logo on the firm’s website, since some have been known to falsely claim membership. Look for the firm’s name in the CIPF’s member directory.
Be aware that mutual fund dealers in Canada are not licensed by IIROC and are therefore are not covered by the CIPF. However, the Mutual Fund Dealers Association provides similar coverage through the MFDA Investor Protection Corporation.
Your index funds and ETFs
It’s important to understand that the CIPF and the MFDA Investor Protection Corporation only provide coverage in the event of a dealer’s insolvency. They don’t apply if the fund provider itself—such as iShares, Vanguard, or Tangerine Investment Funds—goes belly-up. In that case, would investors see the value of their holdings fall to zero?
No, they wouldn’t. In the legal jargon, fund providers are called “trustees,” and they are responsible for the day-to-day management of the portfolios. However, they are required to keep investors’ assets with a third-party custodian, which means if the fund provider becomes insolvent its creditors have no claim on your money.
You can learn the name of the custodian of your specific fund by looking in the prospectus. (For example, State Street Trust Company is the custodian for both Vanguard and iShares in Canada.)
Your GICs and savings accounts
If your portfolio includes GICs or investment savings accounts, there’s one more safeguard to be aware of: the Canadian Deposit Insurance Corporation (CDIC). This crown corporation provides coverage for up to $100,000 per member institution, although registered accounts and trusts are considered separately, so your total coverage may be greater.
This is one area where it definitely makes sense to diversify to stay within CDIC limits. For example, if you’re planning to build a five-year ladder totalling $100,000, it would be wise to use two or three GIC issuers, even if it means accepting a slightly lower rate.
Remember, too, that the CDIC limit applies to both principal and interest. So if you’re buying a five-year GIC that yields 2.5% annually, you may want to keep the principal amount to about $88,000 so you’ll stay under the limit even after accounting for accrued interest.
How about Mutual fund salesman defrauded his/her clients?
http://www.cbc.ca/news/canada/toronto/mutual-fund-salesman-faked-signatures-couple-out-80k-1.2659909
@WS: Fraud is fundamentally different from insolvency. When investors are defrauded, criminal charges can apply and the courts can order restitution. (In this case it appears charges have not been laid.) Self-regulatory organizations don’t have that power. In some cases (like the Earl Jones affair), the “advisor” wasn’t even licensed, so the SROs would have no role in compensation.
There is one very important point red flag raised in the CBC article. It says the mutual fund salesperson “had them write an additional cheque up front — payable to him personally.” Investors should never be asked to write a cheque to their advisor personally.
Some other helpful advice here:
http://www.securities-administrators.ca/investortools.aspx?id=88
Thanks for the information. How about credit unions? Am I correct they are not covered by CDIC?
@Fran: Great question. Credit unions and caisses populaires (and GICs issued by them) are typically covered by provincial versions of the CDIC. Some of these place no limit on the insured amount, though investors will need to decide for themselves whether they are comfortable keeping very large amounts with a single credit union.
I live in MB. My understanding is that MB credit union deposits are guaranteed with no limitation as to amount, but that the guarantee isn’t given by the provincial government. It’s given by MB credit unions collectively. Also, I don’t know if it applies when the account holder lives outside MB.
@CCP: Thanks Dan. A wealth of information as usual.
Looking at ETFs, I’ve got a question: What if the custodian goes into insolvency?
@Leslie: All your questions should be answered in the link below. You’re correct that the Manitoba government does not provide the coverage. Investors outside Manitoba are still covered:
http://depositguarantee.mb.ca/faq/
@ccpfan: I’m not going to pretend I understand all the legal structures, but assets held in custody are separate from the company’s own assets, so there would be no claim on them. At some point all safeguards can fail if enough things go wrong, but losing custodied assets would be a failure of epic proportions.
@CCP: Thanks!
@CCP: Another excellent and informative piece to digest and remember!
BTW, you note that in Canada we’re fortunate because, “Fund companies and brokerages may charge too much or provide lousy service, but they aren’t likely to defraud their clients.”
Technically you’re correct, but I would think that most of us current Couch Potatoes have had years of past experience of seeking professional advice from “advisors” who have then given us misleading if not outright bad advice and then exploited our vulnerability. While I admit that this was only possible because of our own ignorance and passivity (in the bad sense), which we have since taken responsibility for, the fact that as consumers we were bilked and milked by an industry that saw fit to keep us in the dark, all the better to keep us forking over an unreasonable percentage of funds under management for poor returns leaves just as bad a taste in our mouths as real fraud, but without any recourse except to remember the old adage “Fool me once, shame on you; fool me twice, shame on me”.
Fortunately, one benchmark that reassures me that my investing education has come along a significant distance is the fact that your April Fool’s post this year caused me to initially gasp in shock, and then to burst out laughing. I am embarrassed to admit that a couple of years prior, a plausible response might have been me reaching for my wallet :(
per the cbc news article
if a couple can be that uneducated about investments they shouldn’t whine about losing money. sure it appears the dealer did some wrong but the couple is taking no fault for putting money in to some mutual fund, i don’t know of any mutual fund that won’t lose a cent which they want, money market mutual fund is about as close as you can get to not losing a cent. and if they were only looking to invest it for a short time why not just stick it in some savings account or cashable gic. i don’t believe we are hearing the whole story, more to the story than what we are hearing and the big question is, if the market didn’t tank would we even be hearing about this, i bet the couple would have taken the profit and be along their marry way.
@Jake: If you are saying this couple were woefully uneducated and unwise and paid for it, I agree with you. But this dealer did wrong, and badly exploited this unsophisticated couple. I cannot agree with you that “they shouldn’t whine about losing money” except in a pragmatic sense for them, as a brutal reminder of the need to thoroughly educate themselves, so as not to be in the same helpless situation again.
You and I know this investment vehicle would have been a bad choice under the circumstances even if the expenses and sales charges had been minimal. If someone is that uneducated and unsophisticated, then the members of any ethical industry should try to take special care to educate, and not exploit this innocence when expert advice is sought. The fact that we are not surprised that this happens all the time, or that yes, this couple’s pathetic ignorance (by our standards) became an obvious invitation to being fleeced does not make it acceptable.
Your article states: “The CIPF maintains a pool of money that can be used to compensate investors in the event of a member’s insolvency. Since 1971 there have been 20 of these: the most recent include the Canadian arm of MF Global in 2011, and two small firms in 2012. In these three cases, the total amount returned to investors was just over $8.3 million.”
This is somewhat misleading to say that these amounts have been returned to investors. The heading at the top of the CIPF page says: “Unaudited Schedule of Claims and Related Expenses Paid and/or Provided Net of Recoveries at at December 31, 2013” I suspect that most of these funds would fall into the ‘Related Expenses Paid’ category paying for the CIPF lawyers and such who work to discount claims so they don’t have to be paid. The CIPF is like any other insurance company-they do not want to pay claims. Unless the CIPF makes claimants sign a non disclosure agreement I personally know of one of these companies’ insolvency and not a penny has been returned to investors.
Another quick comment/question regarding the CIPF – on the link to the CIPF Members Insolvencies in 2002 Thomson Kernaghan & Co. Limited show as minus $677.000. How does that work? Did CIPF take money from investors rather than paying claims?
After reading this article I contacted my broker to make sure I was properly covered and he phoned back to explain in detail — the CIPF only protects against losses of cash held in accounts due to brokerage insolvency. ETFs are not held by the brokerage (of course, above we were told they weren’t held by the fund provider, either) — they are held by the custodian, and therefore are protected against insolvency of the broker, just as they are also protected against insolvency of the fund provider. I must admit I had not fully understood this completely, although it was explained correctly above, and required a specific explanation to get it straight.
@Darby: I accept that it may be inaccurate to say the money in question was “returned to investors,” because as you point out, this is not explicit on the CIPF site. I’ve changed the original text to reflect this. I can’t comment on the Thomson Kernaghan case as I have no knowledge of the specifics.
@Oldie: Note that the CIPF website says: “Such loss must be in respect of a claim for the failure of the Member to return or account for securities, cash balances, commodities, futures contracts, segregated insurance funds or other property, received, acquired or held by, or in the control of, the Member for the customer, including property unlawfully converted.”
Good timing on the article.
My wife has been looking at setting up a mutual fund account with TD (Not TDWH). The plan is to purchase the TD E-Series funds and nothing more.
I’ve called them numerous times to see what protections are in place, and every time they tell me they are not protected by the MFDA. Each time I’ve asked, it was always a direct NO. But TD is a member of the MFDA. So what am I missing?
http://www.mfda.ca/members/members.html#T
@Paul T: The MFDA is the self-regulatory organization for mutual fund dealers, not mutual funds themselves. TD Investment Services is a dealer and an MFDA member. TD mutual funds are operated by TD Asset Management, which is not an MFDA member.
In terms of what protections are in place, it depends on what you mean specifically. What is your primary concern?
I’m not worried about the underlying assets in the E-Series Funds, but that the account itself is protected. Similar to CIPF insurance on the TDWH side.
Overall, I’m not very worried that TDIS or TD will go under. But if :
– MFDA membership means account protection.
– TDIS is a member of the MFDA
Why would the front line reps tell me differently? Is it possible to have a MF account with TD that isn’t with TDIS? (Say with TD bank directly)?
@Paul T: Good questions, but I think only someone at TD can answer them. I am not familiar enough with their corporate structure.
Just a follow-up on my previous comment on CIPF. I contacted an investor who lost in the insolvency of one of the companies who were listed as returning money to investors and he subsequently contacted CIPF to inquire about the funds in there chart. This was the response he received:
You can bet that CIPF is like most other insurance companies and not interested in paying out claims but rather will spend millions to avoid doing just that. If you have investments that claim CIPF protection don’t put much stock in it.
I finally got to the bottom of the MFDA and TD question.
TDDI (TD Direct Investments) is listed as a recognized MFDA member. TDDI is the new name for TD Waterhouse (TDWH). I confirmed with TDDI / TDWH that Mutual funds purchased through them are indeed covered by the MFDA / CIPF protection.
My previous calls had been with TD Bank (they offer branch based mutual fund only accounts). Accounts held with TD Bank are not MFDA protected. I guess this is why they were so quick to answer NO. They’ve probably been asked this question quite a few times over the years.
@Paul T: “I confirmed with TDDI / TDWH that Mutual funds purchased through them are indeed covered by the MFDA / CIPF protection.”
Trying to remember who is responsible for what, my understanding is that TDDI, as the Dealer, doesn’t actually hold the actual Mutual Funds; neither does the Fund Provider (the “trustee”). The Mutual Funds, as are all assets, are held by the “third party custodian”. So in the event of the insolvency of TDDI (the Dealer), the MFDA and CIPF protection applies to everything else that is held by the Dealer, presumably cash and all monies in interest bearing accounts. Is this also your understanding?
@Darby: I followed up with CIPF regarding your concerns. I received a response from the same Paul Blasiak, who explained the following:
I’m concerned about statements like “if you have investment that claim CIPF protection don’t much stock in it.” Protections like this are fundamental to the decisions Canadians make when investing. I would argue the opposite and encourage people to make sure their dealer is a CIPF member. I have not seen any evidence to suggest it cannot be relied upon to meet claims within its specified limits.
@CCP
Do you know how investments are insured/protected when you invest directly with a mutual fund company? E.g. directly investing with Mawer, PH&N, Steadyhand, Tagerine, etc. There is no brokerage in this case. Is this the case where we are relying fully on the custodian or is it more complicated than that?
Also, is there any way for an individual investor to check with the custodian that their records match what the MF company is saying just to double check that there is no funny business going on?
Secondly, a while back Questrade went to a self clearing model. What does that mean? Is that one less third party check and balance or nothing to be worried about?
Thirdly, there are companies that sell GICs. How are investors protected with them? I get that the individual GICs are as you described, but how does one know that the GICs truly exist and are not just printed on some statement fraudulently like has happened in the US with Madoff, etc.
@Brian: Yes, in the case of mutual funds, the assets are held by the custodian, who is named in the prospectus. The custodian is the one who sends out the tax slips, etc. so it should be fairly obvious if something unusual is going on.
I can’t claim to be an expert on the details of brokerage models, but in general a “self-clearing” brokerage looks after custody, settlement, and record-keeping themselves rather than farming out those jobs to a third-party. The big-bank brokerages are all self-clearing, I believe. That differs from a firm like PWL Capital: we’re the “introducing broker” who works with a “carrying broker” (in our case, National Bank Correspondent Network) who handles the transactions, custody and record-keeping. I don’t think a self-clearing model is necessarily more risky: these brokerages are covered by CIPF protection.
As for GICs, as long as the firm is member of CDIC that should be all the protection one can expect. I would make a point of checking the CDIC website to confirm membership.
A very important point to understand is that programs like CIPF and CDIC are designed to protect investors from insolvency, not fraud. There’s really no way you can be fully protected from fraud, though there are obviously red flags to watch out for. The Madoff case had many, including investors writing cheques to Madoff personally, an air of exclusivity (“you can invest with me, but don’t tell your friends”), and the promise of extraordinary returns.
Reading through all of above comments, one thing is still not clear: does anyone have a proof/past cases for below statement to be true? It is very hard to believe that creditors will not be able to touch that money when insolvency process starts.
“they are required to keep investors’ assets with a third-party custodian, which means if the fund provider becomes insolvent its creditors have no claim on your money.”
Speaking with both Questrade and CIPF was a fruitless exercise. They all say that I am not protected if iShares/Vanguard go under, regardless of custodian business…what if ETF’s unit price itself goes down to zero with bankruptcy and/or cannot be traded/delisted?
Canadians need to know that CIPF behaves like an insurance company. They will go to extreme lengths to avoid paying canadian investors who have suffered as a result of an insolvent member. The history is that settlements result only rarely and only after class action suits are brought forward by the destitute investors who have suffered. Saying Canadians are protected is a joke.
So you need to open another separate account whenever you hit 700000 and have more than ten years left: a lower amount would trigger the need to open another account if you had thirty years left ,etc? If you fully owned your corporation then that money would count as part of your up to one million compensation? Note that CIPF goes out of their way to say they never compensate over a million. Note that questrade has an extra ten million but insurance companies go broke too. In my work we often get blindsided by things no one though possible until it happened and then it was obvious
Hello Dan,
What options are there to protect portfolios with asset values beyond what is covered by CIPF in the event the brokerage (ie RBC) becomes insolvent? For example, are there insurance products we can purchase to protect our portfolios (specifically a portfolio of ETFs if that makes a difference)?
Thanks and hope you’re staying healthy!
@Pierre: I’m not aware of any such insurance. It’s important to understand that if your brokerage becomes insolvent, your ETF holdings do not automatically disappear. Clients’ assets are protected from the brokerage’s creditors, so it’s highly unlikely that exchange-traded assets would be at risk. Typically what would happen is the account and holdings would be transferred to another brokerage.
This means the $1M CIPF limit does not mean that you are at risk if you have more than $1M in holdings at any brokerage. The CIPF coverage does protect things such as cash balances in investment accounts, which would be seem to be at higher risk.