DEATH OF A SALESMAN | the role of the dealing representative in the modern era of the exempt market
By: Darris Cameron
It has been 2 two years since National Instrument 31-103 was put into full effect, and we have a problem ladies and gentlemen, a big one.
Very few of us, who are fully licensed and registered to do business in the exempt market understand what our roles actually are. There are a number of reasons for this, and not all of them have to do with ignorance, but rather the fact that most of the industry comes from a place where their previous roles were different. A good majority of those who are licensed come from a background marketing and distributing mutual funds, stocks, life insurance and/or real estate where their obligations to their clients and prospects is different than what one may perceive their role to be in the exempt market. They come from a world where there is little to no transparency, and where we were spoon fed information through prospectuses and large group meetings. Indeed these are fantastic means in which to indulge in the collection of information, and quite frankly, not a lot more information is needed to market a balanced fund to an investor. We are no longer in the business of handing out ‘set it and forget it’ style mutual funds, we are in the business of raising capital for privately funded and owned business deals that have a lot of moving parts. Deals that are not all created equal, but all fall under one category, they are exempt, exempt from passing on the easily digestible information found in the prospectus. In one man’s opinion, simply put, the role of the Dealing Rep. is to live up to a higher standard, be an advisor, one who has a fiduciary duty to provide the best solutions possible for a clients wants and wishes. As an advisor, your role is three fold:
Protect your clients capital
Make your clients money
Educate yourself, then the client
There are over 700 different projects raising capital on a prospectus exempt basis in this country at the moment, many of which have the potential to make money, and perform the specific tasks outlined in the Offering Memorandum. Some will not work out for a variety of reasons, the main reason being underfunding.
In order to protect your clients capital, in the exempt universe, you must go above and beyond to ensure you know every detail of any particular investments strategy to meet its advertised returns. Hopefully you are already, or are planning on joining a well respected Exempt Market Dealer (EMD) that has a rigorous due diligence process that leaves no stone unturned in the endeavor to provide you and your investors with the best possible investments in which to indulge. However, there is no reason not to do your own due diligence too.
The first step; read the OM, read it over, and over. You will not understand a portion of it, and that is ok, because the people who vetted, and produced the document should know its nooks and crannies, and should be able to answer any lingering questions you may have. It is imperative that you know your product. Knowing your product does not stop at the OM, it never stops, especially in an open-ended investment such as a MIC or REIT. The managers of these funds are generally happy to share with you their future plans, in detail, if you ask them, so ask them. Get to know the people you are dealing with. The people who are asking you to help fund their project should be people you can trust, whom with which you can build a relationship with over a period of time. The good ones will never leave a door closed to you, the best will ask you to come see what’s behind the door before you have a chance to ask. You will want to ‘kick the tires’ so to speak. An Offering Memorandum may contain all the numbers and explanation to get the gist across to you, but have you seen the project in action? Have you talked to the managers about their widget and seen it move? Have you been to the dirt where the project will be built? Have you spoken to the scientists, and gotten their perspective? This extra step will ensure you that you KNOW exactly what you’re getting yourself (and your clients) into.
I myself, along with my father and partner have spent thousands of dollars of our own money flying from coast to coast to meet with the right people and see the deals for my own eyes; meet with the ‘scientists’* and perform due diligence further to that which our EMD has provided. This process is not limited to Exempt Market Products, but also to all of our financial dealings.
With this level of education you will be able to inform your client base on all possible outcomes for the projects you wish them to be involved in. We can no longer just advertise that we can make our financiers a certain percentage, only to watch their capital disappear, along with their trust. With knowledge comes confidence, which you as an advisor can pass onto your clients. Once you have educated your client on the whole story, you can do a much better job of protecting their capital, and in the event that the investment is successful, and you have made them money, you will both be much more confident on a go forward basis.
It has not been stated yet that we as advisors have a duty to comply with the above; likely it never will be a requirement. Nevertheless, it would be my hope that if you are reading this, that you would heed the text held herein, because if you remember, there are 700+ exempt market products on the go right now, and even if they are all good ideas, managed by good people, not all of them will succeed.
To put everything into perspective, your client is asking you to find the ones that will work out, and make them money. If you cannot discern which projects will make any money, how do you expect to protect their capital? You will not. Therefore, as an advisor your only option is to educate yourself and advise based on that information, whereas in the past a dealing rep will just sell whatever is put in front of them. A dealing rep was no better than the used car salesmen, just looking for their next target. An advisor takes the steps necessary to protect their investor, their career and their industry.