In the last few years the media has exposed many situations where investors have lost money. There are fraudsters who have taken peoples money and spent it themselves or hidden it away. There are the penny stock dealers many of which were forced out of business by the Ontario Securities commission. There are the high rollers with major brokerage firms who have used their clients accounts to generate high levels of commission, and in some cases defrauded their clients. There are firms that have acted either incompetently or fraudulently and ended up declaring bankruptcy. In all cases it seems it is the small investor who loses.
Investor education has become a focus for the regulators and the industry has created the investor learning center (ILC). There are several ILCs across Canada and the ILC website is a good source for information. The regulatory agency and stock exchange websites are also good sources. A list of helpful websites is provided below. Most regulators provide information for investors, and the Canadian Securities Administrators (CSA) website now provides an alphabetical list of disciplined persons so consumer/investors can check on registrants.
However, investor education will not provide sufficient protection for the investor. Most people are so busy with earning a living, practicing a profession or bringing up a family that they do not have time to become an expert investor.
There are so many products available on the market today that even those who are full time working in the industry can not know all the products. The best of advisors will normally recognize that limitation and work within those constraints.
Every investor should gain sufficient investment knowledge to enable them to avoid many of the pitfalls that await the unaware. Remember that it is your money, and it is easier to avoid losing your money than it is to regain it after it is lost. Take the time to learn about the industry and how it works.
The investment industry is largely commission motivated. When you invest you are generally dealing with a sales person who is interested in selling you a product. A few of them are more motivated by earning commission than providing you with sound investment advice.
Many of the professionals who sell financial products are trying to help their clients to invest wisely and for this they deserve compensation. However there are acceptable levels. When these levels are exceeded it generally results in problems for the investor.
Paid financial advisors who do not sell financial products should be objective in making recommendations. Sales persons who sell only one product or one type of product may have difficulty in being totally objective for your interests.
Every investor needs to know how the industry operates and how it is regulated in a general way. They should be aware of common problems and know how to monitor their accounts. They should be able to measure their accounts against an appropriate benchmark. Investors generally need advisors they can trust but need to monitor their accounts. There is no one who should be more interested in protecting your investments than you.
You should attend a trial or a hearing as part of your investor education, even if it is not your broker. Hearing what industry participants say will have more impact on your investing than anything else you read or hear. Refer to our Hall of Shame and the section on hearings and trials to determine current events.
Before you invest ask the regulators if your proposed advisor is properly registered. Ask if there have been any disciplinary actions against him or his company. Find out what can be done in the event there is a complaint.
Once you are satisfied that you will be dealing with a reputable company ask them about the statements they send to clients. The best statements will be provided quarterly or monthly, depending upon the type of investments and the company, and give you the status of your account at the end of the period compared to the previous period. It should also provide with an annualized rate of return.
You should compare this annualized rate of return with an appropriate benchmark. If you are invested in fixed income instruments you can compare to Treasury Bill rates or Canada Bonds. If you are invested in equities or equity based mutual funds you can compare to the TSE 300 index for Canadian equities, or other appropriate indices. It is worthwhile comparing your rate of return to the rate of return on Canada bonds and the TSE 300 index. For example if you are taking some risk with your investment and the rate of the return does not exceed that provided with Canada Bonds you must determine whether your investments are appropriate for you.
You should also have an understanding of risk with the various investment vehicles. If promised rates of return appear significantly higher than generally established benchmarks you need to investigate carefully before making any commitment. Many investors have bought into schemes that promised a high rate of return and found out to their sorrow that they were unable to get their initial investment back.
Links to Investor Education
Canadian Securities Institute - Education for financial services professionals.
Investor Education Fund - Provides Resource Guides for investor education.
Investor Protection Trust - U.S. investor education questions & Answers.
MSC Investor Education - Manitoba Securities Commission investor education.
NASD Analyst Guide - Understanding Security Analysts Recommendations.
Securities & Exchange Commission - Tips on selecting Brokers/Advisors.
Toronto Stock Exchange - S7P/TSX Composite Index, stock prices, etc.
|© 2002 Small Investor Protection Association | DISCLAIMER | page updated: June 09, 2012|