Streetproofing Guide for Senior Investors

Every October is investor education month in Canada. All the securities Commissions will remind investors to check the registration status of their “advisor”. You should do that but be forewarned the process isn't easy. Be aware that the title “advisor” has no legal meaning – it won't match any of the registration categories. If you see they are under “strict supervision”, it's time to change advisors.

Our concern is with those “advisors” that are registered and how senior investors can be exploited. Yes, they are required to follow IIROC and MFDA rules but the rules aren't as tight as you'd think and they aren't enforced to the necessary degree by the industry self-regulators. As Vanguard founder John Bogle has remarked “The scandal isn't what's illegal, it's what's legal”.

Advisors are required to sell you suitable investments but they are NOT required to act in your best interests. Senior financial abuse and exploitation continues to be one of the most prevalent and “lucrative “enterprises in Canada.

Approximately 30-35 % of all complaints received by regulators involve seniors. I suspect the elderly statistics are distorted as it’s my experience that the elderly are usually reluctant to formally complain for many reasons. Seniors often avoid publicity or litigation due to the embarrassment of having been bilked. They may unduly blame themselves for losses, are reluctant or unable to formulate a complaint or unaware that something is amiss.

A 2007 Canadian Securities Administrators Investor Study: Understanding the Social Impact of Investment Fraud, estimates that over one million adult Canadians have been the victim of investment fraud. The study shows it is a common occurrence in the lives of many Canadians, with almost one-in-20 having been victimized.

Regulated “advisors” also are quite capable of fraud but the real abuse is more subtle- unsuitable investments, undue leveraging, high cost products,

account churning and lately, reverse churning and pension commutation.

1. Check registration: Engage with registered dealers and advisors with good reputations.

2. Don’t fall for investments that promise “guaranteed” or exceptionally high returns: If an investment seems too good to be true, Run.

3. Avoid investments that are advertised as “risk free”: All investments have risk. As a general rule, the greater the potential return, the greater your risk of losing money.

4. Don’t be rushed into an investment by high pressure sales tactics .Always take the time to evaluate and understand an investment before purchase. Always be leery of “once in a lifetime” opportunities, or investments that are only available “for a limited time.”

5. Be wary of inflated titles: A few advisors may use inflated titles to market themselves such as Vice President , Seniors Specialist and the like. Too often, these are meaningless. Don’t be intimidated by the titles.

6. Be wary of professional designations: Some advisors may use professional designations to market themselves as retirement or senior specialists. While real professional designations require rigorous study or extensive education or experience, some may be relatively easy to attain, and

may even be available to individuals with no experience.

7. Avoid “Free lunch” financial seminars for seniors: These seminars may be carefully scripted sales presentations designed to prey upon seniors’ fears. Some of these seminars may pitch investments that may be unsuitable or fraudulent.

8. Make sure that you clearly communicate your investment objectives to your advisor: Don’t let him/her steer you into investments that are not in line with your investment objectives, risk profile or time horizon.

9. Never sign a blank or incomplete document: Always take the time to review documents you are asked to sign, and ensure the document is filled out completely and signed/dated.

10. Take great care in filling out the NAAF/KYC form .Anything you declare can and will be used against you in the event of a complaint. Don't exaggerate investment experience or risk tolerance.

11. Never make payments to an advisor: When making an investment, use a method of payment that can easily be tracked. Make payments only to the registered dealer, NEVER to an individual.

12. Avoid any personal financial dealings with your advisor: You are not a bank so don’t start lending out money. Avoid assigning POA or executorship to an advisor.

13 Get a second opinion: If you have questions about an investment and the advisor fails to fully or satisfactorily explain things, consult a different financial professional.

14. Ask questions: Some advisors may use language or jargon with which you may be unfamiliar. If you don’t understand something, ask for a clear explanation.

15. Contact your provincial securities regulator . Every province has a Commission/agency devoted to protecting people from financial abuse and fraud. Contact your provincial securities regulator if you suspect you’ve been treated badly or targeted as part of a financial scam.

And above all, read your account statements and trade confirmation slips. If something appears amiss, act quickly to get it resolved. Do NOT let problems accumulate.

The following are the most basic questions that seniors, and investors in general, should ask when facing the decision to make an investment:

· Do you have a fiduciary duty to me? If yes, get it in writing on Company letterhead.

· How are you compensated?

· Can you explain the investment to me without using industry jargon?

· Do you use Investment Policy Statements?

· What risks are associated with the investment/program?

· What are the investment cost in terms of commissions and fees?

· Are there additional or ongoing fees?

· Are there early redemption charges associated with this investment?

· What are the pros and cons of this product re taxation?

· Why is this investment suitable for me? What are the alternatives?

· What type of reports will I receive and how frequently?

· How easy is it to sell or convert the investment to cash if I need money quickly?

· What happens if I have a complaint?

If the salesperson can’t or won’t answer your questions in writing and to your satisfaction, the investment may not be right for you. Ask questions and stay informed about your investments. Seek help if you believe you are being targeted or have been a victim of financial fraud or abuse.

Some light reading to protect your assets:

Pursuit of a Financial Advisor Field Guide – v13 A MUST read for retail investors.

http://www.napfa.org/UserFiles/File/FinancialAdvisorFieldGuidev13.pdf

Understand Investment Jargon The Steadyhand Investment Dictionary

http://steadyhand.com/forms/2014/03/07/steadyhand%20dictionary.pdf

The Responsible Investor http://faircanada.ca/wp-content/uploads/2011/03/The-Responsible-

Investor-MoneySaver.pdf  

Why Your Financial Adviser Should Be a Fiduciary http://www.aaii.com/journal/article/why-yourfinancial-

adviser-should-be-a-fiduciary  

Kenmar Guidelines for regulator inquiries Offices

                     

Inquiries offices at securities regulators play an important role in the investor protection chain. When handled effectively many issues can be put to bed quickly and painlessly. People who take the time to inquire/complain should be viewed as invaluable sources of information. An inquiry or complaint should be welcomed as an opportunity to resolve a problem, revise a rule or change a policy. Yet in our communication with retail investors, they tell us the satisfaction level with inquiries Offices is less than satisfactory. Complaints range from non-responsive, impatient and dismissive to abrupt and insulting. The most frequent complaint by far are responses that investors perceive as bureaucratic bafflegab that fail to answer the specific issues raised. This can result in a chain of communications that result in caller frustration and even anger.

Here's some ideas for improvement:

·         Access - phone, mail, email, FAX - physical offices – convenient operating hours

·         Languages-provide most common in the region

·         Response times to inquiries- state target times clearly and keep to less than 3 days for most inquiries : explain if a delay is necessary

·         Know your caller - elderly, vulnerable investor, veteran, recent immigrant, despondent due to losses....Tailor response to the type of caller.

·         Understand the issue (s)- realize retail  investors need help articulating the issue(s)

·         Listening- apply assertive listening principles – try to understand the underlying issue(s)

·         Respect- never insult the intelligence of  callers , never ridicule

·         Clarity- avoid use of  investment industry jargon, acronyms and legalese in communications

·         Plain language- use plain language principles.

·         Remember, the majority of Canadians have low financial literacy.

·         Linear response - answer  specific questions asked, not questions not asked ; be forthright and straight to the point

·         Patience- retail investors, especially complainants, need to be treated with a lot of patience- this is a new process for most ; do not close file prematurely

·         Compassion and empathy  - show understanding and be tolerant of  occasional outbursts of caller frustration 

·         Facts and evidence- use objective material and references;  do not ignore or dismiss caller evidence and paperwork

·         Updates- provide periodic updates as required

·         Responses- address the issues raised point by point in easy to understand terms; invite caller to contact you for further information

·         Referrals- explain why referral is being made to another agency, provide full and clear contact information to referral

·         Nest steps- if caller unsatisfied , explain/ suggest escalation procedure

·         Satisfaction Survey - conduct  caller annual satisfaction survey , publicly release results and commit to addressing issues identified

We believe that Inquiries Offices have an important role to play in investor protection. Taking the time to listen to the Voice of the Investor is a WIN –WIN for all stakeholders.

DISCLAIMER

Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document and others in the series is to educate investors by bringing together personal finance information from a variety of sources. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.

 

The Discretionary Account

There are two general types of investments accounts: Non-discretionary and discretionary. A non-discretionary account requires the representative to obtain client consent before he/she makes any investment decisions. With discretionary accounts, investors delegate day-to-day investment decisions to their portfolio manager (PM). That differs from non-discretionary accounts where clients must make final trading decisions on each transaction.

Because a discretionary account allows a dealer representative to make account transactions without the client’s prior approval, a common law fiduciary duty will virtually always arise with such an account. A fiduciary duty may also arise where the client has a non-discretionary account depending on the actual power or influence that the representative or dealer has over the client, and the extent to which the client relies on the representative or dealer.

Discretionary accounts are suitable for investors, such as busy executives, business owners and others who don’t want to be involved with portfolio management. These accounts are most suitable for investors who prefer a balanced approach to investing and have a long time horizon. Discretionary accounts usually have higher minimum investment requirements, often starting at $250,000. Fees are usually based on assets under administration, which at least in principle, motivates portfolio managers to perform well because their fees are linked to portfolio performance. Do not hesitate to negotiate fees. Fees are generally tax deductible in non-registered accounts.

In a fast-paced financial world, delegation can make a difference. Consider an advisor with a 150 clients in non-discretionary accounts, each holding a particular stock. Should the markets take a turn for the worse or the company post unfavourable results, the representative must contact each of those clients for approval to sell the position. This can be a serious disadvantage when a situation warrants immediate action. A good PM can take emotion out of the equation by making the decision for the client in a timely manner.

Likewise, the PM is better positioned to seize buying opportunities. When the markets dip and a good quality stock inexplicably drops in value, he or she can again act immediately.

Portfolio managers use different investment management approaches and styles. Some managers are product specialists, some adopt a certain style such as value, growth or momentum, and some offer a combination of products and styles.

As with any account, the PM will need to know your KYC parameters such as net worth, time horizon and risk profile (tolerance and loss capacity) and your investment objectives.

The PM doesn’t invest without restriction, but is bound by the parameters outlined in a jointly developed Investment Policy Statement. Investors may even establish constraints based on such things as personal principles and specify stocks to avoid from industries they feel are socially undesirable. You can instruct your personal PM that you don't want to invest in booze companies, or you don't want to go near junk bonds, or that you want half of your holding always in GIC’s .The investor has more peace of mind knowing that discretionary accounts are subject to greater governance and oversight .

But for some investors, discretionary accounts aren’t suitable. Passive Investment management strategies, which are characterized by low portfolio turnover, are generally more compatible with non-discretionary accounts. The same would be true of a “buy-and-hold” strategy. The fewer the trades, the less client meetings or phone calls necessary to gain authorization to execute transactions. Clients who like to be hands-on with their investments will also be better served by a non-discretionary account.

The qualifications to be a portfolio manager require higher levels of education and experience than other advisors. However, when choosing a portfolio manager, investors should seek even more distinctions, including access to high quality research and freedom from any influence toward proprietary products. The PM should have a clear communications plan and be readily available to answer clients’ questions. Above all, you need to be able to trust your PM and the dealer. You can check registration and disciplinary history at http://www.securities-administrators.ca/nrs/nrsearchprep.aspx

Here's some questions to ask before signing up for a discretionary account:

        ·         What services are provided?

·         What are all the fees and expenses associated with such an account? Obtain in dollars and percentage terms.

·         Are you a fiduciary? If yes, obtain confirmation in writing, If no, reconsider this type of account. See this sample fiduciary form from the Small Investor Protection Association http://www.sipa.ca/fiduciaryOath.html

·         What are your qualifications and experience?

·         Can I see a sample Investment Policy Statement?

·         How do you manage cash in the account?

·         What is your trading strategy? Expected portfolio turnover?

·         How do you effect tax optimization?

·         Have you ever been sanctioned or disciplined by a regulator?

·         Can you supply references?

·         What information and reports will I receive? On what frequency?

·         Can I access my account online?

·         What is the complaint process in the event of a dispute? Is OBSI available?

If your account is not discretionary and your advisor has been making trades in your account without your permission, contact the Compliance department of your investment firm right away and document your complaint. If you are not satisfied with the response of the Compliance department contact your provincial securities regulator for more information about your options and where to go for help.
Be sure to take the time necessary to review carefully all the information when filling out the applicable account forms. And do not sign them unless you thoroughly understand and agree with the terms and conditions and fees they impose on you.

DISCLAIMER

Information contained herein is obtained from sources believed to be reliable, but the accuracy is not guaranteed. The material does not constitute a recommendation to buy, hold or sell. The purpose of this Document and others in the series is to educate investors by bringing together personal finance information from a variety of sources. It is not intended to provide legal, investment, accounting or tax advice and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained.