How Not to Lose Your Life Savings to Fraudulent Investments.
As a former stockbroker turned fraud examiner, I am always dismayed when I hear about another investor getting swindled out of their life savings. It hurts the reputation of not only the firm involved but the industry as a whole. The securities industry is one of the most highly regulated industries in Canada with Investment Advisers being carefully screened, regulated and monitored. The firms are also highly regulated, by Provincial Securities Regulators, National Securities Regulators and their in house Compliance Departments. So with all this regulation, how can investors lose their life savings to bad investments and dishonest advisers?
I just read an online comment about a well publicized case in Halifax, where the blogger asked “What do we pay the Securities Regulators for, when investors continue to lose their savings” by bad advisers and investment scams. In my opinion that is like blaming your local Police Department when your house gets broken into or your car gets stolen. By saying they should have been there to prevent it. The Securities Regulators are in a similar position; they do not have the resources to monitor each and every investor account.
While this may seem to be a long-winded explanation, I use it to drive home the point that investors must take at least some responsibility for their investments. No one will look after your money better than you will.
Here are some suggestions to follow to help you sleep a little better at night, at least when it comes to your investments.
1. Determine your investment objectives: By identifying your short and long-term goals. Determine how much risk you want to take and what kind of return would you like. Keep in mind the higher the return the higher the risk.
Once you have developed your investment objectives, stick to your plan. Don’t allow your advisor or relatives to talk you in to taking more risk than what you set out to take. Stick with investments you know and understand, if it is too complicated then pass on it. Make sure your advisor knows your objectives and it is reflected in the New Account Application Form. Advisers have to follow the Know Your Client rule (KYC). Review your investment objectives annually and update the KYC form. As an example; if your investment objective is 60% Income and 40% long-term growth, do not be forced into short-term trading or borrowing to invest.
2. Do your Due Diligence: Your Due Diligence should be done when selecting a new adviser, when choosing a firm and when selecting appropriate investments.
Selecting an Adviser – Most investors choose an adviser by either someone referring that person to them, by calling a firm and getting transferred to an adviser or by receiving a cold call from an adviser. It doesn’t matter how you got the name, your job is to ensure that you trust the adviser and you feel comfortable working with them.
You are hiring someone for one of the most important jobs, managing your money. So instead of being interviewed by the adviser you should interview them for the position. Just like if you were hiring someone for a job placement. Tell the adviser you are looking to hire someone to manage your money and have some questions you would like to ask, to ensure a good fit.
Here are some due diligence questions to ask; remember to take notes of your interview.
1. How long have you been in the business and what is your educational background and credentials.
2. What is the value of the assets you manage for all of your clients? This can be important because advisers with big books of business are more established and probably have a more stable income. Some advisers will have a minimum account size, so if you do not meet that minimum size, find someone else to deal with.
3. What is your investment philosophy? Are they traders, speculators, or asset gathers?
4. What percentage of your clients assets are in stocks, bonds, mutual funds.
5. What is the annual turnover of your client’s assets? The turnover determines how frequently the adviser trades stocks or mutual funds.
5. Have you ever been subject to an investigation by the securities regulators? Do you have any pending complaints or investigations open now?
This information can be verified by going to Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA). For IIROC enter www.iiroc.ca then click on IROC Advisers Report and enter Advisers name. For MFDA enter www.mfda.ca click on For Investors, and then Check an Adviser.
For investors in the United States enter www.sec.gov then go to Education, Check Out Broker or Adviser, Then Central Registration Depository and Broker Check. Then add broker name.
Do not be intimidated and ask any questions you feel are relevant. If you don’t get the right answer, go somewhere else.
3. Check Your Account Statement Every Month: This is extremely important for two reasons;
1. Early detection of errors and unauthorized trades or account withdrawals.
2. As a possible deterrent. Advisers may be more hesitant to tamper with an investor’s account that checks the statement every month and calls and asks questions.
Your monthly account statement is a summary of your investment holdings, their value, any buy and sell transactions, any dividends or interest paid and any account withdrawals or deposits.
When your monthly statement arrives, review the asset summary section to verify the securities in your account are correct, including cash held. Then check the total value for this month compared to the previous month. Review the account activity section. This will show any purchases or sales of securities and dividends or interest received and any other fees charged to your account.
For each transaction, you should compare the statement with the buy and sell transaction slips you receive for each purchase or sale. Save all your confirmations and statements.
Some other Do’s and Don’ts:
- Do not make any check payable to the financial adviser.
- If an adviser pitches an investment and says you have to act right now, pass on it. Any good investment will be available later. This tactics is to instill a sense of urgency in the investor.
- Be aware of pitches from individuals who are selling to a specific group that you belong to, such as religious, nationality or hobbies. While this is a legitimate prospecting tool for many advisers, the unscrupulous adviser will prey on a specific group. This is called infinity fraud, and the investor’s justification is that so many other people you know have invested into it. It must be alright.
- Be aware of unrealistic returns, either for one year or over a period of years.
- Be aware of guaranteed returns, especially higher than market rates of similar investments.
- Check to see if the firm is registered with the regulatory agency and if the specific investment is registered.
Many of us spend more time looking after our cars than we do our investments. Do your home work; ask questions and most of all trust your instincts.
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