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Mad investors get even with errant stockbrokers

by Wayne Cheveldayoff, 2003-10-25

While investment firms don’t want it publicized, Canadians investors are successfully getting redress for the wrongs perpetrated by stockbrokers and other investment advisors.

The behind-the-scenes activity has even spawned a new service called Stockbroker Busters, which recently advertised in a Toronto newspaper that it would recover investment losses for any “victim of excessive or unauthorized trading, misrepresentation or omitting facts, recommendation of unsuitable investments, (and) failure to follow instructions.”

Investors who have suffered any of the above or any other kind of loss-generating behaviour would be wise to consult a lawyer or other investor advocate. Just because you haven’t heard of anyone being successful in recovering losses, doesn’t mean it isn’t happening.

The main reason for the lack of publicity is that investment firms are insisting on a non-disclosure agreement for any cash settlement they make with clients. Under such a non-disclosure agreement, if you tell the media or even your friends and family that you have received a settlement, let alone how much, you would forfeit it.

At the same time, the investment firms and the errant investment advisors/stockbrokers involved keep it quiet for fear of scaring off new or existing clients.

Most cases where firms settle out of court are hushed up. The only cases that might get into the news are those that involve fines or suspensions and that are deliberately publicized by regulatory authorities like provincial securities commissions or the Investment Dealers Association of Canada (IDA).

Hoping to deter advisor wrongdoing, the IDA recently upgraded its web site (www.ida.ca) so that investors can easily check online on whether a stockbroker has faced IDA disciplinary action at any time since 1996. By completing an information form, investors can trigger a search back to 1984. This information was previously available but only if you knew who to call.

While an important step forward, the upgrade in the IDA database doesn’t cover all advisors. Those specializing only in mutual funds are usually regulated by the Mutual Fund Dealers Association (www.mfda.ca), which doesn’t have a searchable online database, although association staff will respond to phone inquiries.

Investors may also get some helpful advice from the Small Investor Protection Association (www.sipa.to), which was founded in 1998 by angry investors who witnessed the abuses of unscrupulous brokers.

The success of many complaints against advisors hinges on what the client investor told the advisor about the type of investments wanted and how the advisor interpreted this instruction in filling out the Know Your Client (KYC) form.

This mandatory KYC form is crucial in any case involving unsuitable investments. It contains a section where the advisor indicates the percentage of funds allocated to such categories as income, growth, conservative, and speculative.

What is unfortunate is that most investors don’t even know about the KYC. It is filled out by the advisor and the client usually does not see it until, of course, a complaint is made. A few advisors have made a point of having the client view the KYC and sign it, but this is not the general practice.

If, for example, you told the advisor you wanted “only” conservative investments and he or she accurately indicated “100% conservative” on the KYC and then put your portfolio into a speculative mining stock, it would be a cut-and-dried case that you would win. On seeing this, the investment firm’s compliance people would probably just write you a cheque to make up the loss and take it out of the broker’s pay.

However, a lot of situations are not clear-cut. What if you said you wanted “mainly” conservative investments and the broker indicated “70% conservative, 30% speculative” on the KYC and put 30% of your portfolio into tech stocks, which then proceeded to collapse? The broker and investment firm might say you have no case because your instruction allowed for speculative investments. It would be up to your professional help (securities lawyer or investor advocate) to argue otherwise.

Given the importance of the KYC, in determining both the portfolio and whether any losses can be recovered, it makes a lot of sense for investors to ask to see it, even if they have dealt with a particular advisor for years. You would be wise to keep a copy and give a written instruction to the advisor to notify you and provide you with a revised copy anytime it is changed.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at wcheveldayoff@yahoo.ca.

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©2003 Wayne Cheveldayoff