Simple Do’s and Don’ts for Investors by advisor Bruce Loeppky

I am in contact with some investor advocates and am shocked that things are still happening that I hoped would disappear or at the very least be very infrequent events by this point in time. Investors are still being ripped off by rogue financial advisors; clients are still buying DSC mutual funds and still borrowing to invest when they shouldn’t. These are three of the most common problems plaguing the financial services sector.

1. Rogue ‘Financial Advisors’

There are a number of things you can do (or look for) to ensure that you never get put in the position of losing your nest egg to an unscrupulous ‘financial advisor’;

Don’t EVER sign a cheque to your ‘financial advisor’. Always to the firm or fund company. That way you will have the company’s protection if things go sideways. If you sign a cheque to your ‘financial advisor ‘he will deposit it into his own bank and it won’t go through the companies normal processing so they will be unaware of its existence. If it goes through their system they have a record of it and can probably rectify the situation. Is he living an extravagant lifestyle? That can be a sign. Sometimes where people get too successful. they feel they are untouchable.

2. To DSC or NOT DSC?

Why are people still buying DSC mutual funds when they essentially lock you into a fund company for 6-7 years, unless you pay the penalties for early redemption? Don’t invest with a Front End (FE/or ISC) Option that takes away 1-5% of your investment before the starting line either. ONLY invest FE 0% to give you full flexibility.

There is NO advantage to purchasing mutual fund with the DSC option. It limits your flexibility and costs you money if you redeem early or move to another fund company.

If your Financial Advisor forces you to decide between DSC and FE 3-5% for example, look for somebody else or go to the bank until you find somebody that offers that option. Banks and credit unions always offer FE 0%.

The DSC option should go the way of the dinosaurs in my opinion. The ONLY time I would OK its use is if you are working with a newly licenced advisor and he needs to use it to stay in business while he build his practice. The option does provide more immediate income to the financial advisor.

3. Borrowing to Invest (Leveraging)

This is the most over used strategy in the industry and I saw it abused many times while at investors Group where the use of it was promoted frequently as a method of earning more money and growing your book of assets faster, but at whose expense?

Only examine this strategy IF; you have a good/steady job, you maximize your RRSP’s every year, your home is paid off or you have a very low small mortgage, high income(s) and you have no debt. I have seen too many people come to me who borrowed $100,000 only to have it sitting at $65000 after a correction and are upset about the method in which the leverage was sold to them.

Most people can deal with a loss IF one of your potential scenarios showed a 30%-40% loss one year. The problem is that most projections show a steady 7% growth rate and the numbers all look very rosy and unrealistic.NO markets or investments rise as a steady 7% year after year. Every 10 years you will see a major correction and illustrations should reflect that reality.

Trust your Gut

If your gut is telling you something, listen to it.If the numbers sound too good to be true they likely are. If you have had investments work well (or not) for many years and somebody (often a new financial advisor but not always) advises a drastic change, check with your accountant or another financial planner/advisor to get a second opinion. Don’t put everything in the same investment. Stay diversified with different bonds, and both Canadian and foreign equities. Don’t rush into anything.

Don’t move forward if you feel pressured or must make a quick decision. I read recently about a gentleman who owned a business and had about 2 million invested and made a change (Exempt Market product I think) and within’ 3 months lost everything and was forced to sell his cottage to stay afloat. He was coasting along wanting for nothing after a successful career and ONE mistake changed his position dramatically and it will never go back to where it was.

All it takes is ONE big error and you’re in trouble. Make sure you (or your parents/grandparents) don’t make it.Nobody needs that stress, especially when you’re retired.

NOTE: The views expressed here represent the views of Mr. Loeppky and do not necessarily coincide with our position. We thought it important to allow advisors to let their voice be heard.