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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