If you have never had a close look under the hood of the self-regulating, Investment Industry Regulatory Organization of Canada, it is certainly worth taking the time (and there are some really interesting stories under what I call the "bad advisors" section under Enforcement Notices.
I do check there, from time to time, just to see who has done what to whom, so I can shake my head in wonder.
Here is a good one:
A Vancouver couple, aged 63 and 64 receive a million dollar plus inheritance, have had no previous investing experience and hook up with a Financial Advisor with the intention of investing to generate income for their retirement and the desire to leave the principal to their children.
Nothing overly demanding, the kind of thing thatwe see on a regular basis.
The advisor sets them up initially with margin accounts, which should always raise a red or yellow flag, but these folks trusted this fellow and followed his advice. They stated objectives that were 50% low risk and 50% low to medium risk.
8 months later, the advisor, likely wondering how he was going to generate more revenue from these unsuspecting clients (because in the investment industry you are paid a greater per cent of the fees and commissions you generate when you attain certain revenue targets, called "the grid"), had them adjust their objectives to moderate growth (medium risk), increased short-term trading (medium to high risk) and speculative (high risk). Definitely more warning flags.
You can read all of the gory details in the above report, but basically it appears that the advisor began to use margin (borrowed money) to trade in some junior Canadian resources stocks (probably suggesting great gains to be had).
Great gains were not had. In fact it appears that great losses were had, to the tune of $700,000!
So much for protecting the principle.
In the end the advisor was fined $45,000.
I am not certain (because I could not find any other details and if there was a settlement, it was likely not made public) but hopefully there was a civil suit that followed. Even then, the likelihood of getting all of that money back (after legal contingency fees, etc.) is limited. even more likely is that it is still in the system, so many years later. The big company lawyers know how to drag it out.
You do not recover from a breach of trust like that.
A portfolio manager (not regulated by IIROC, but by the more stringent Ontario or other provincial Securities Commission) has a fiduciary duty to protect you from that kind of financial abuse.
The investment industry has an enormous conflict of interest and bank and investment firms (self-regulated under IIROC) simply do not offer fiduciary responsibility to their clients. Advisors are paid based on the fees and commissions that they generate. That is, for the most part, the investment industry's motivation. I have seen it first hand.
That is why we started the High Rock Private Client Division, to offer an alternative that is different and better (and probably costs less and provides a very strong personal service commitment). I am never too busy to come to visit you, if you need to see me, face to face, no matter where you live in the country.
Fiduciary duty (safety), low cost, high level of service, not driven by revenue goals, but by doing right by our clients: It is possible and we are doing it.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist