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OSC report highlights questionable scholarship plan sales tactics

by Wayne Cheveldayoff, 2004-07-29

A recent Ontario Securities Commission report highlighted some very disturbing findings about how scholarship plans are sold in several provinces across Canada.

After reading the report, my conclusion is that Canadians are not well served by the scholarship plan dealers that operate at the periphery of Canada’s investment scene.

Given that we don’t know exactly which of these dealers were caught out, parents would be better off avoiding the group altogether and instead investing directly in stocks, bonds, income trusts and mutual funds via a self-directed RESP, possibly with the help of an advisor employed by a reputable, major financial institution if they don’t feel comfortable doing it themselves through a discount broker.

This is not a judgment on the merits of any individual scholarship plan, some of which have been around and serving Canadians well for many years, but rather a serious concern about the apparently ingrained tactics of some of the selling representatives of those plans.

The OSC report reflects the compliance reviews of scholarship plan dealers conducted in 2002 and 2003 by regulators in Ontario, Manitoba, British Columbia, Alberta, New Brunswick and Nova Scotia. In some cases, the regulators warned the dealers to clean up their act and then found a year later that they hadn’t.

Here are some of the worst practices of some within the unnamed group of scholarship plan dealers as itemized in the 17-page report:

· “Sales representatives lacked adequate knowledge of the product being sold to clients, and its associated costs.
· “Enrolment fees were misrepresented in some cases, leading clients to believe that the potential for loss was nil.
· “Enrolment fees and the related consequences of terminations were not always discussed with clients.
· “The 60-day grace period was not always explained to clients.
· “In some cases, there was no mention of other types of fees incurred by the plans.
· “Some sales representatives indicated to clients that they work for the (sponsoring) foundation, a not-for-profit entity, rather than for the dealer which is a for-profit organization.
· “Training manuals and other reference tools used by the sales representatives encourage them to hold themselves out as working for the foundation and to inform clients that they are not selling anything.
· “Outdated information was used in pamphlets and brochures, such as the value of assets under management and the total amount returned to subscribers since inception.
· “Actual rates of return provided in the marketing materials did not contain adequate disclosure regarding the assumptions used and whether the returns are gross or net of fees.
· “Within the same dealer firm, there was no consistent methodology for calculating rates of return. For example, rates of return were calculated using creative calculations to make the returns appear higher, or were based on selected returns for only some periods, or were grossed up from net returns using estimates of fees paid rather than actual fees paid by clients.
· “Projected rates of return were not reflective of recent performance of the plan, or were based on inflated percentages for assumed interest rates.
· “Marketing materials claimed ‘superior returns’, ‘excellent rate of return’, ‘earns the highest income’ and ‘exceptional returns’ without any support to substantiate these claims.
· “The products were (mistakenly) represented as ‘risk-free’, ‘guaranteed’, ‘government insured’, ‘safest funding methods’, ‘fully protected’ and overall, as bearing no risk to clients.
· “Materials (mistakenly) indicated that security regulators had endorsed the product. Others included letters from government agencies and Commission (regulator) registration letters which may mislead clients to believe that they are government or Commission endorsed.
· “Materials claimed that only guaranteed securities were invested in by the plan, however, other types of non-guaranteed securities were also purchased for the plan.
· “Client statements of account did not include all necessary information such as price per unit or units purchased to date.
· “Client statements of account contained mislead information.
· “The trade confirmation was incomplete.
· “Sales representatives were allowed to complete the proficiency exams with the assistance of others.
· “Training materials were inadequate in areas dealing with regulatory requirements.
· “Training materials encouraged high-pressure sales tactics.”

It’s important to note that the findings itemize what was found with some within the group of dealers as a whole. Since the OSC doesn’t name the dealers, it’s therefore impossible to know which dealers were at fault or what it was that any particular dealer did that it shouldn’t have done.

Nevertheless, the high number and seriousness of the dealer transgressions, and the fact that some persisted after regulators ordered a cleanup, suggest that there is a lot rotten with the way such dealers have operated and supervised their sales staffs. Unfortunately for the industry, it has earned its questionable reputation and its post-report statements that it is working closely with regulators to ensure the highest standards ring hollow.
Not knowing if a particular scholarship plan dealer can be trusted leaves parents in a bind.

Saving for a child’s college or university education is difficult enough for some families without the problem of having to worry about whether they are being misled by a scholarship plan dealer as noted in the OSC report or in some other way.

A better, safer option is for parents to keep control by using a self-directed RESP and investing the education savings directly in stocks, bonds, income trusts or mutual funds.

In response to the study, the OSC updated its brochure “Saving for Your Child’s Education”, which is available from the OSC at

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2004 Wayne Cheveldayoff