According to the Canadian Securities Administration, 38% of Canadians have been approached with a fraudulent investment and 11% actually invested money.

You may be aware of Ponzi schemer Earl Jones who swindled around 160 clients out of an estimated $50-$100 million in 2009 and was labeled the Canadian Bernie Madoff.  Jones wasn’t even licensed to sell any financial products, so how was he so successful?

The main reason was that he was trusted.  His investors were a tight group of friends from his church and social circle.  After all, if all your friends and family members have invested with him, why bother to check for credentials?  They only caught on when, in the summer of 2009, their cheques started bouncing.  Trying to recoup lost funds from schemes is nearly hopeless.

Other fraud cases involve outright theft of cash, selling bogus securities and borrowing money from clients

Protect Yourself

We’d all like to find a great investment that guarantees financial security, especially those close to retirement with a less than stellar portfolio.  Unfortunately some offers are too good to be true.  Look at some of the red flags that can indicate a fraudulent scheme.

  • Consider that generally the higher the return, the greater the risk.  No investment is entirely risk free.  Be careful of claims of guaranteed above average returns with no risk.
  • Offers of loans or suggestions of ways to finance the investment should be closely looked at.
  • Beware of claims of secret or exclusive techniques or insider tips.  (What your broker doesn’t want you to know.)
  • Don’t let anyone pressure you into making a decision immediately because of a limited time offer. (Don’t miss this opportunity – act now!)
  • Think again when an offer of tax avoidance by moving money offshore is the hook.
  • Watch for high membership fees.

Ask The Right Questions

You have every right to check out your financial advisor with your provincial securities regulator.  Watch out for misleading titles.  Anyone can call themselves Investment Advisors, Financial Advisors, Account Managers, Portfolio Managers and the like, and they range from commission based salespeople to fee-only professionals.  During the initial interview it is your right to ask questions – don’t be shy.

  • What are your qualifications?
  • Are you (and your firm) registered with a securities regulator?
  • What is your education and professional experience?  Do you hold any licenses?
  • What products and services do you offer?  Which are you licensed to sell?  Are you limited to certain types of investments?
  • How are you paid?  Incentives can skew the type of products offered.
  • How will you help me reach my goals?
  • Can you provide me with references of clients with similar goals?

Ask for written information about any investment you are considering.

  • Prospectus
  • Recent Annual Financial Report and Quarterly Report
  • Example of the statement you will receive.

Ask about the level of risk.  How will you be able to get your money back if you need it?  Never sign anything unless you clearly understand it.

Financial Misconduct

You don’t need to be the victim of fraud to experience financial and ethical misconduct.  The top investor complaint in 2010 to the Ombudsman for Banking Services and Investments was the lack of suitability of investments.  Other issues involved:

  • Providing bad advice to generate commissions.
  • Failure to provide a portfolio that mirrors investment objectives and risk tolerance.
  • Failing to conduct periodic reviews and update the Know Your Client Form with new information.
  • Failing to monitor the performance of the portfolio and assessing risk.

How To Avoid Financial Advisor Risk

Don’t be blinded by smooth talk, free weekend seminars and fancy brochures.  Deal with a reputable firm and work with an advisor who actually works for the firm.  Review your statements on receipt and deal with any discrepancies immediately.

There has to be some level of trust between financial professionals and their clients.  However, don’t take the relationship too personally and stay with someone simply because you’ve been with them forever, your minister deals with them or it’s your best friend’s son.  If they don’t value your business you need to RUN.

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8 Comments

  1. Robert on January 12, 2012 at 4:51 am

    Thanks so much for the ideas on protecting ones self from bad investments. I am definitely afraid of becoming a victim of fraud as I am new to investments. That is why I am trying to educate myself wherever I can. Keep up the good work Boomer.

    • Boomer on January 12, 2012 at 4:07 pm

      @Here: Thanks Robert. A lot of people think that others get ripped off because of greed – getting something for nothing. While that is true, I think that some of the time it’s because people are just too nice. They don’t want to look dumb or cause any trouble and are easily sucked in by fast talk and a nice smile.
      With any investment purchase, you need to have time to evaluate and understand it to make sure it fits your objectives. If it doesn’t, don’t be afraid to say “no thanks” and let it go with no regrets – especiallly when you hear of others making tons of money.

      • Robert on January 17, 2012 at 5:55 pm

        I agree about getting sucked in by a nice smile and a fast talker. I appreciate you taking the time to give me a detailed response. I am sure everyone really appreciates how you give a personal response to many of the comments. Thanks Boomer.

  2. Juan on January 12, 2012 at 2:19 pm

    It is sad how fraud tends to so common when it comes to all things financial. Coupled with the number of people that buy high fee mutual funds money is stolen left and right from unenlightened consumers.

    • Boomer on January 12, 2012 at 4:11 pm

      @Juan: I’ve said before – no one will care as much about your money as you will. It makes no sense not to take the time to learn some financial basics and ask questions. People shouldn’t just blindly had over their money to someone else.

  3. W-at-Off-Road-Finance on January 12, 2012 at 4:12 pm

    Those 38%/11% numbers seem incredibly high. That suggests it would require an industry with 10s of thousands of scammers just to approach all those people. While fraud is unquestionably a part of the financial landscape, and your tips are good ones to avoid it, either the magnitude is overstated or law enforcement needs to get busy here.

    • Boomer on January 13, 2012 at 11:02 am

      @W: I don’t know if those percentages are based on actual reported incidents or include people who just think that they have been approached by a fraudster. With the prevalence of all the telephone and internet scam artists out there and the difficulty of policing them I don’t doubt that the numbers could be quite high.

  4. Simon on January 14, 2012 at 1:10 pm

    When you have worked with an advisor for some time or they are well known to your circle of friends this should not prevent you from asking difficult questions and if necessary taking your business elsewhere. It is best only to do business when you are completely comfortable as it is your money and future at stake.

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