What's it all about? Nowadays it
seems almost everyone is investing in RRSPs, mutual funds, shares, or
other form of investment rather than GICs or bonds. Some are investing
with brokers, some with financial advisors, some with the banks, some
with mutual fund salespeople, some with insurance salesmen, and the list
All investors should demand a monthly report that
shows the annualized rate of return for their investments.
This rate of return should be compared to a benchmark. We suggest that
if your investments are not providing a rate of return above that of
Canada savings bonds you need to get a second opinion. If you invest in
funds or other investment products with risk and your rate of return is
not comparable to that of the Toronto Stock Exchange index then you
should get a second opinion.
At SIPA we do not give investment advice. However, we believe it is important for all investors to gain sufficient knowledge of investing so they can determine how they should be investing and in what types of products. Investors have different needs and one approach is not the best for everyone. Your investment strategy should be based on your individual needs.
About "Financial Advisors"
Investors should be aware that registered representatives until recently were registered by the regulators as sales representatives as they were responsible for selling investment products such as mutual funds or other structured products to consumer/investors. The industry follows a practice of providing titles to instill confidence in the consumer/investor that they are getting sound financial advice.
In many cases these so-called "Financial Advisors" may be approved to sell only mutual funds while an expert who provides investing advice would normally advise diversification amongst various investment vehicles.
Many consumer/investors have adopted a do-it-yourself approach and invest bonds, shares and Exchange Traded Funds (ETF) to provide diversification. Others are opting to hire Financial Advisers, to provide financial advice only, who are paid by the hour and do not receive commissions. This approach eliminates the possibility of commission influenced advice.
Most consumer/investors may need a financial advice. The first step is to check whether the representative is registered and what investment products he is qualified to sell. You should also check whether they have been disciplined and this can be done on the Canadian Securities Administrators (CSA) website that now provides an alphabetical list of disciplined persons. Ontario was not initially included but the CSA website provides a link to the Ontario Securities Commission (OSC) website to check on Ontario registrants.
Common elements when investors lose
Investors need to be aware that
many investors have lost all of their savings when they trusted blindly
in their advisor. It may have been an insurance salesman, a mutual fund
salesperson, a broker with a large bank owned full
service broker, or any other financial
How can investors avoid losing?
There is always some risk to investing. Fixed income investments may have a guarantee, but the guarantee is only as good as the institution backing the guarantee. Most investors will have some investments in equities, equity based mutual funds or indexes in the hope that returns will be higher. That may generally be true in the long term but there can be short term volatility.
On the basis of the experience of those who have lost all or a significant portion of their savings it would seem that to protect yourself you must:
- Check with the regulators
that your broker/advisor is properly qualified and registered and what
type of securities he can sell.
Selecting a broker/advisor
While there are good and bad
broker/advisors in most investment dealers, mutual fund companies and
dealers, and insurance companies, many of the
firms have operating philosophies that emphasize profit at
the expense of their clients.
Why do investors lose?
The investment industry is largely commission motivated. With the amount of money involved and the ease with which broker/advisors are able to use other peoples money to generate commissions, the temptation is great for broker/advisors to breach the rules.
Although a regulatory system is in place and the rules appear to provide appropriate protection, the sad reality is the rules are often not followed. The penalties for beaching the rules are generally not sufficient to discourage practices that are well established in the industry.
The regulators are not empowered to order restitution and seldom order disgorgement of profit. The biggest fines seem to be imposed when they can not be enforced, or when a broker/advisor cheats his firm. Sadly, it really is "Buyer Beware" for investors when it should be a professional industry with sound morals and good ethics because they are dealing with the life savings of investors.
Financial predators abound in the industry. There are high-rollers working for major firms who take advantage of their clients as well as the small independents like Patrick Kinlin who died in jail. There are penny stock dealers who sell worthless stocks to small investors, and there are larger firms who either buy up stock and sell it to their clients, or sell their clients shares in new unproven companies which sometimes tank.
The industry feeds off investors by charging fees for trading or for holding assets. The latter as management fees or trailer fees in the case of funds. These fees are not related to how much the investor makes.
Will it ever change?
As investors learn more about how the industry operates and become empowered by the world wide web, the industry will be forced to modify its behaviour. Already we are seeing signs of change. Information is now available to the public that in the recent past could not be obtained through official channels. The regulators are now discussing openly changes that would not be aired a few years ago.
Some of the interesting things
that are happening in the investment industry which should help small
investors are some companies see the writing on the wall and are
beginning to look at different ways of providing a service where the
small investor will not have so much risk of his broker churning
accounts to generate commissions.
Also, they can sell different types of securities including bonds, mutual funds and shares to enable asset diversification.
Some registered representatives have chosen to offer services as a financial planner and offer a professional advisory service based upon a fee that is not effected by the amount of trading or choice of product. This removes the incentive to churn your account or to select products based upon commission levels rather than quality of product. This service seems particularly appropriate for those with limited investment knowledge or the desire to have someone look after their investments.
Should you monitor your account
Investors dealing with
established firms may receive early warning of trouble if they monitor
their account statements. However, there have been cases of advisors
issuing fraudulent statements to unsuspecting investors. Most firms will
provide a monthly report if requested. However some firms provide
reports only on a quarterly basis unless there has been account
You should ask your advisor for a monthly report that
shows the annualized rate of return and a comparison to established
benchmarks or indices. Many firms have better reports that are available
for the asking. Their philosophy appears to be to provide the minimum
amount of information to clients unless they request more. Sophisticated
or large investors will demand appropriate reporting or will move their
accounts to firms that will provide adequate reporting.
You need to be aware of the general market trend. If your account value is going down when the market is going up you should make inquiries as to why this is happening, and also should seek independent advice.
It is much easier to prevent major loss than to effect recovery. Remember, it is your money and your future.
|© 2002 Small Investor Protection Association | DISCLAIMER | page updated: January 27, 2010|