Quick, what do these terms mean to you?

A. Nondiscretionary investment advisory accounts, directed accounts, discretionary accounts, execution-only accounts, advisory accounts, margin accounts, managed accounts, arbitration, assets under management, assets under administration, separate accounts;

Credit facility, front end charge, back end charge, deferred sales charge, custody fees, trailer fees, 12b-1 fees, point breaks, redemption fees, surrender fees, defined contribution, defined benefit, voluntary contributions, locked in, non-locked in, annuity, joint and survivor annuity, single premium annuity, beneficiary, indexed pension, nonindexed pension, asset allocation, risk tolerance profile, risk premium;

And consider this question. Which of the terms below describes a person working in the investment industry who provides both investment advice that a client relies on, and buys and sells investments on a routine basis?

B. Financial consultant, client relationship manager, financial advisor, registered representative, insurance agent, financial planner, stockbroker, broker, trader, pension consultant, financial representative;

Chartered Life Underwriter, Chartered Financial Analyst, Certified Public Accountant, Certified Financial Planner, Chartered Accountant, Registered Financial Consultant, portfolio manager, investment advisor.

If you know the answer to each and every one of these definitions, you pass. Relax, have a nice English breakfast, scones and strawberry jam, and several cups of steaming is that many smart and successful people (in their own professions) cannot competently explain each and every one of these investment terms, including some who work in the investment industry. For the individual client investor just entering the complex investment world, comprehension of industry verbiage and investment choices to be made is just overwhelming.

When meeting with an advisor, clients are faced with trying to understand capital market nomenclature - let's face we all tend to talk the jargon forgetting the client may not know what we mean; understanding and then deciding if it is the right investment choice for them; what the service expectation requisite is due to the client, if any; what the responsibility of the advisor is to them and vice-versa; what their liabilities assumed are, if any; and what the advisor's liability may be to you.

That's just for starters, then just when a new investor thinks he she has the process figured out, a bunch of almost indecipherable forms are placed in front of them to be filled out.

In Bermuda's capital marketplace today, there remains inconsistency in investment messages delivered to the public, lack of understanding of the investment process by the small investor, and little equable grounds for comparison of advisor attributes among the individuals providing the investment advice (or lack there of). There appears to be little in the way of protection for the individual investor, other than what may be expensive legal recourse.

Seeking redress for a perceived wrong can be a daunting task for most small investors since the burden falls to them to document an investing process they didn't fully comprehend to start with. Unless they can afford to hire an attorney who is an investment specialist, it may be almost impossible for them to even attempt the process of filing a grievance.

Currently, many investors feel frustrated and discouraged; it's pretty hard not to when looking at a shrunken portfolio, low interest rates, and the general recessionary gloom clouding the horizon. Some terrible investment stories have circulated; there are firsthand reports of brokers calling and e-mailing less than two hours after the World Trade Center crumbled, pushing panic selling in the form of financial advice.

How many investors in an emotional state took that advice, only to see the market correct less than six weeks later? There have been some good stories, too, but overall the events of the last year and a half represent a reality check to the investment industry, both here and abroad. While much of this investor cynicism and disillusionment may be self-inflicted, some investors, who felt they followed an advisor's direction, are bitter and are looking to the process and the advisor to blame. Was the advisor to blame?

Did the client truly understand what they were buying? What kind of a contract did the investment firm have with the client? Who knows? What we are hearing is that we need a more clearly defined set of investment standards that can be uniformly applied to all investment companies and advisors doing business with the general public in Bermuda.

At the recent Speech from the Throne delivered by Governor Thorold Masefield, it was stated that there will be amendments to the Investment Business Act 1998 to ensure compliance with the required international standards and that the Bermuda Monetary Authority will also receive increased supervisory and intervention powers. This is a good thing.

The Bermuda Monetary Authority is a remarkable forward-thinking, and now autonomous, organisation that represents the best of public interest vehicles.

It is well documented that other major international finance jurisdictions spend enormous sums in the business of regulating the flow of capital markets and those companies and personnel who work in them. Significant amendments have been made in the United States alone this year, with the increased scrutiny of business analysts (and their purported conflicts of interest) right at the top of the list. Financial industry regulators provide this service under the law to ensure ethical, fair and competitive markets and to protect the investor consumer and shareholders from misleading information.

In Bermuda a few years ago, committed and sincere legislators, volunteers and other interested parties from the investment, legal and accounting fields did a wonderful job of compiling, drafting, submitting and obtaining ratification of the Bermuda Investment Business Act 1998. These people whose names I do not know should all be thanked publicly for their vision and commitment to elevating investment professionalism in Bermuda .

Whether you realise it or not, their foresight played a real part in the statement made a few days ago by Morgan Stanley Analysts when reviewing the reinsurance industry "Bermuda: the clean capital, good aggregate exposure management practices, investing advantage, and low level of reliance on retrocession/reinsurance of most Bermuda players is being rewarded handsomely by the capital markets".

The Act has accomplished a great deal, setting broad standards for regulating investments and investment companies. However, times continue to change rapidly, there are more investment players that ever before, with the loosening control of the 60/40 rule, there may be even more competitors entering the marketplace. The Act should have even broader powers, more clarity and more specific guidelines.

In the General Business Conduct and Practice Code of Conduct, there are three particular areas where most of the comments and complaints from the investing public emanate and where amendments would be appropriate. Note that the Code applies to all holders of investment business licenses issued under section 7 of the Investment Business Act 1998.

It is unclear at this time if hedge funds, whose numbers are also increasing, are defined or will be defined under the Act. Let's start with Code of Conduct 7.0 Acting with Agreement 7.1 General Need for a Client agreement Subject to Codes 7.2 and 7.3 an investment provider which conducts investment business with any client shall do so by means of a written agreement which shall set out the basis on which its services are to be provided.

The agreement shall be easy to understand, not likely to be misunderstood and conform with this Code. Unless the agreement specifies to the contrary, the client will be deemed to be a private investor.

If the client is not to be treated as a private investor, the client shall be informed in writing that the level of protection afforded to him is lower than that offered to a private investor......

Further, code 7.2 (d) says no client agreement is required for deals effected or arranged on behalf of an execution-only client.

and then there is discretionary portfolio management 7.6 where an investment provider is to exercise discretion for a private investor in the management of investments a greater degree of trust is involved.....whether or not there is any restriction on the categories or amounts or proportions of investments.

Some contracts use the term nondiscretionary investment advisory services, does this mean the same thing, or does it not?

Confused, already? Guess what, everyone thinks they are a private investor, even those that place a few trades once a year. How come my advisor never calls me, they say? I offer a prize of The Wall Street Journal Personal Finance to anyone who is the first to successfully explain these sections, since it is open to interpretation. By the way, investment provider is not the advisor, but the investment firm.

While Code Section 7.5 does a nice job of stipulating the necessary items in an investment contract, we need a uniform investment contract which spells out in plain English exactly what the client's is getting no matter which firm they decide to do business with.

Our nephew's first job was creating compliance models to monitor just that, irregular trading patterns on client accounts. Infractions of due diligence by advisors are also monitored. Punishment is swift and enforced, public notice, loss of securities license, banishment from the profession, and felony charges in worst cases. Even though signing an investment contract limits the client to the right of arbitration to settle a case, no investment firm can afford the negative publicity generated by a disgruntled investor.

Next week we cover the last two areas on the wish list of changes to the Bermuda Investment Business Act 1998. If you are interested in reading both, please save this weeks article for content flow.

Martha Harris Myron CPA CFP( is a Bermudian Certified Financial Planner( (US) practitioner, with an NASD Series 7 license, and United States tax practitioner. She is the winner of The 2001 Bermudian Bermuda Gold Award for Best In Bermuda Investing Advice.

Opinions, concepts, and ideas are those of the columnist alone, and not to be construed as solicitations, authorisations, or endorsements by any organisation, commercial or non-profit. The Editor of The Royal Gazette reserves the final right to edit content or consolidate where appropriate in any circumstances. Under no circumstances are the comments in this column to be taken as specific recommendations on the purchase or sale of securities or any other investment, nor as specific financial planning advice and recommendations.