What to look for in an EMD
If you would like to research exempt market dealers and the
products they offer, simply type “exempt market dealer” in your
favourite search engine and you will see three to five dealers to
research. The question is: how can you find out if they are the
right dealer for you, as a client?
There are a few things you should focus on in your research.
The most important thing to learn is how the dealer selects the
products on their shelf. Many exempt market dealers are built
around their own, “in-house” product. This creates an instant
conflict of interest. A dealer with an in-house product has an
added incentive to sell their product over other third-party
product. They are also less likely to put products on their shelf
that are better or more attractive than their own offering. In a case
like this, the dealer is putting their needs ahead of their clients’
needs. Unfortunately, this is the traditional modus operandi in the
financial world. Most mutual fund dealers, stock brokerages and
insurance companies are built around their own product. It is one
of the reasons investors find it so difficult to make money on their
investments. Decisions are rarely made in the best interest of the
investor. Corporate initiatives and greed almost always come first.
Some exempt market dealers are attempting to do something
unique. They are putting the clients’ interests ahead of their own
by offering only third-party investment offerings. Because of the
fact that they don’t offer an in-house product there is no conflict
of interest in selecting the investments they offer. The mandate
in building their shelf of products is to simply seek out the best
Also, when looking at an exempt market dealer you should
examine their due diligence process. Are they putting the product
through a number of rigorous tests or are they approving them
without digging too deeply? Some dealers use third-party analysts
to do their product due diligence, some dealers do it in-house
and others use a combination of both. Most farm out at least a
portion of the due diligence. In order to do it properly you need
the services of a combination of a securities lawyer, a chartered
accountant, a business valuator and a chartered financial analyst.
These are qualifications that are rarely found at one company, so
if a dealer tells you they are doing all of their due diligence on
their own, it would be prudent to question them on their methods.
How does this affect you, the investor?
The exempt market world can appear to be both appealing
and intimidating to investors. It’s appealing because the
investments are usually backed by a tangible asset and target
substantial returns for their investors. It’s intimidating because
most investors don’t have the ability to properly differentiate the
good investments from the bad and can be taken advantage of by
unethical investment groups.
The new regulations have already done a lot to weed out the
sub-par investments. Assuming you are investing with a reputable
and proficient exempt market dealer and trust in their methods
for delivering safe and sound investments, there may be an
opportunity to realize above average returns without taking on
It will be interesting to see how Western Canada deals with
the opportunity at hand. There is an opportunity for true change
to the investment community in Western Canada and, if done
properly, these changes may have a positive impact on other
regions in North America.
The financial world has never been more ripe for change than
it is right now. Only time will tell if the exempt market world can
gain enough traction, legitimacy and recognition to have a true
impact on the investment community.
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“When looking at an exempt
market dealer you should examine
their due diligence process.”