NEWS ARTICLE
When the grieving is over
Financial Post - Saturday, May 29, 1999
When the grieving is over
A growing group of first-time investors, including widows and divorcees,
complain that advisors are not giving them good counsel, and that no
regulator is protecting their interests
Next Wednesday marks the 16th anniversary of the death of Salah-Eddine Rahal of Montreal, the husband of Catherine Rahal. He and 22 others died when an Air Canada DC-9 jet, bound from Dallas to Toronto, caught fire and landed in flames in Cincinnati.
After his death, Ms. Rahal, 49, left with two young children, thought life couldn't get any worse. It did. By 1991, the $1.6-million she'd received in insurance payments and legal settlements was largely gone -- lost in lousy investments that went sour. She had to sell her six-bedroom home on Montreal's leafy West Island -- for which she'd paid cash -- and move to a rental downtown.
But this story has a happy ending. Turning adversity into opportunity, Ms. Rahal went back to school and earned a licence to sell mutual funds. Today, she is the proud, busy and happy owner of her own brokerage, CSR Consultants, with 160 clients. She has started two investment clubs, she owns a duplex and she writes a weekly investment column on the Canoe Web site. Her own investments average an 8% return, she says.
Ms. Rahal now teaches her clients to think before they invest, and gives them the kind of advice she wishes she'd had 10 years ago.
"I believe people have to take responsibility for their own well-being," she says. "The only one who cares about you is you. And your mother, if you're lucky."
With interest rates low and the stock market hot, Canadians are bombarded with ads exhorting them to buy equities.
Investment advisors are trained to tell people about risk. But since they work on commission, their goal is often to sell -- not to spread caution. In their defence, they argue that many investors are all gung-ho to take risks, until the market sours, at which point they blame the advisors.
Still, a growing group of first-time investors, including widows and divorcees whose husbands had made all the investment decisions, complain that advisors are not giving them good counsel, and that no regulator is protecting their interests.
"A good financial advisor should spend a couple of hours and discover what your risk tolerance is," says Stan Buell, a crusading engineer/real estate agent who last year founded the Small Investor Protection Association. "But most financial advisors put people into leveraged investments, whether they are appropriate or not."
Anna Nekanovic, 46, is another widow who blames poor advice for her investment losses. A native of what is now Slovakia, she came to Canada in 1984 as a refugee with her husband, Jaroslav, after slipping secretly across the Austrian border. Everything they owned, they left in Bratislava.
The Nekanovics first settled in Medicine Hat, learned English, then moved to Cambridge, Ont., a town of old stone buildings in southern Ontario. He worked as a glass installer; she in a factory making anaesthetics for dentists. They bought a two-storey house worth about $150,000 and paid off about half of it.
In 1995, Jaroslav died of leukemia. By this time his wife was working two jobs -- as a housekeeper at the Holiday Inn and as a caregiver for an ailing local man. The man paid her in a lump sum, $100,000, which he and Ms. Nekanovic invested through Regal Capital Planners Ltd., a company with 750 representatives and offices across Canada. They put the money in a Canadian short-term asset fund, a money market fund that pays interest of about 4% and is essentially risk free.
By June of 1998, the sum had grown a bit, to $101,649. But then came a string of events that will leave the widow, if she decides to exit her investments and go back to cash, with just half the money she had to begin with. Ms. Nekanovic has consulted a lawyer and the case is unresolved; Regal insists it did nothing wrong.
"In a second you can make a terrible mistake with a stroke of a pen," says Ms. Nekanovic today. But she ruefully accepts part of the blame for her misfortune, admitting: "I didn't go for a second opinion, or do any research, or have a plan."
A year ago, in June, Lloyd Robinson of Regal Capital Planners visited Ms. Nekanovic at her home and, she says, suggested she double her investments by getting a $100,000 loan, and invest it all in equity and bond funds.
"Basically he said, 'Trust me, this is what you do, you don't have to understand everything,' " Ms. Nekanovic says. She says the meeting lasted half an hour. She also says the broker promised to return after he had devised an investment plan for her, but did not.
"I told him, 'I don't want to lose a dime. I will put this money away for a rainy day. Put it in a secure investment. I didn't want to be aggressive. I didn't want growth. I am not a greedy person.' " Mr. Robinson did arrange the loan, she says, and invested the total, $197,000, in a variety of funds.
Come September, when the market started to fall, she called her broker and asked for a statement, but did not get one. In October, she instructed Regal to switch her from equity funds into bond funds, which was done. Her investment was then worth $169, 650.
Mr. Robinson declined to speak about the case. Jeff Rockel, the president of Waterloo, Ont.-based Regal, strongly defended the broker's actions. He says the idea to leverage the investment came from the client, not the broker, and calls Mrs. Nekanovic's story, "a snow job beyond belief.
"She bought these investments for the long term. She had great funds, very diversified, nothing volatile. And four months later, she panicked." He says her mistake was transferring into bonds, that had she stayed in equities, she would have by now recouped her losses.
"She was a very emotional person," Mr. Rockel says. "She panicked. When people get emotional they can make a whole bunch of mistakes. It's like when somebody buys a bad car and blames Ford."
Mr. Rockel heartily defends the concept of borrowing to buy funds. "Leverage is a very big thing in this business. I talk about leverage to all my clients and about 10% of them do it."
Last December, Ms. Nekanovic complained to the Ontario Securities Commission, which enforces Ontario's Securities Act. After reviewing her case, last month Kim Lucas, a complaints officer with the OSC, wrote back that, "staff's review finds that Mr. Robinson's recommendations to you were not unreasonable based on the information you provided to him and endorsed on various application and disclosure documents."
A portfolio statement last month put the value of Ms. Nekanovic's investments at $168,438. If she exits the funds she has to repay the loan and pay deferred services charges on all the funds. A rough calculation shows she would be left with about $50,000.
Regardless of whose version one believes, the case illustrates the dangers of borrowing to invest. Leverage is good for financial advisors, since if a client doubles her investment with borrowed cash, the broker earns twice as much in commissions and mutual fund trailer fees. But leverage is very risky, says Warren MacKenzie, a broker in the private client group at Merrill Lynch Canada Inc. in Toronto.
Merrill Lynch offers discounts to the 400,000 members of the Canadian Association of Retired Persons; in exchange, the group recommends the brokerage to its members. Mr. MacKenzie's advice to his clients, most of whom are retired, is conservative.
"The markets are very volatile and I'm concerned about the volatility for the rest of the year," he says.
As for leverage, he says, "I have two clients who are leveraged but these are extremely sophisticated clients who know more about it than I do. As a general rule I think leverage is a bad thing when the stock market is at an almost all-time high. You'd be surprised how many people are doing it, though."
In general, he advised investors to follow their instincts. "Don't do anything if you don't understand it. It's the financial advisor's responsibility to make things clear. If they can't, then talk to a couple of others who can make it clear."
Mr. MacKenzie also defends his profession, saying brokers know it is in their best interest to build a long-term relationship.
A third widow in Windsor, Ont., who asked not to be named, also lost a substantial sum and her house, after trusting the investment advice of a family friend. She sued, and won back her money in an out-of-court settlement.
"I blame myself," she says. "You have to take part of the blame for trusting too much. I did win the case and I was very, very lucky."
Ms. Rahal of Montreal has a low opinion of most brokers. At one financial planners' office where she worked in Montreal, she says the company locked up the stationary every night and removed the wire connecting the receiver to the fax machine, so employees couldn't make long-distance calls.
"I mean honestly -- and these are the people you are trusting with your money?"
She also worked as an insurance salesperson, but left that job because, "they were always saying, 'don't educate your client because you will educate yourself out of a sale.' The training is products and sales training. How do you get in and get out in one visit and close the sale? Go for the jugular."
Glorianne Stromberg, a former commissioner of the OSC, criticized the training brokers receive in her report last October for Industry Canada, Investment Funds in Canada and Consumer Protection.
Entry level courses in the securities and life insurance industries, Ms. Stromberg writes, "were designed for a transaction-related sales activity rather than for the provision of the ongoing financial planning and investment advisory services on a continuing basis that industry participants now hold themselves out as providing."
Ms. Rahal says her own losses of about $1-million came after she mortgaged her house, on advice of an accountant, to go into limited partnerships. She has filed a legal claim against the accountant and the case is before the courts. "I have written it off," she says. "If it comes through, great."
Business has been slow this spring, but she is upbeat about how things have worked out. "I got a career out of it." And the silver lining of the huge investment losses she suffered is that she has been able to write off her income.
These days, everyone has to learn a bit about investing, she adds. "One guy, a diabetic, is dragging his wife into meetings with me. He wants her to have a clue of what's happening, because his lifespan might not be that long."
Reprinted from the Financial Post
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