A frequent question from investors is: How and where can I find an investment advisor who I can trust?
It’s an important question for anyone wanting to be successful in investing. And one would think that, surely, someone has a good answer.
But it’s a question that stumps even Stan Buell, president of the Small Investor Protection Association, which collects information for investors on its website (www.sipa.ca) and lobbies for changes to investor protection laws.
Despite all of his accumulated investment-industry knowledge and experience, or maybe because of it, he doesn’t have a comforting answer.
“I wish I knew,” Buell states in response. He says he doesn’t have a specific formula for investors to use in picking their advisors.
“You are going to be at risk – and not just market risk – in dealing with” an investment advisor or financial planner, he maintains.
He traces the problem to how the industry is set up, with conflict of interest pervading the relationship between the industry and the investors it is supposed to serve, partly related to the way investment professionals are compensated – either rewarded on volume or rewarded for pushing certain investment products.
As a result, when giving advice, they are not necessarily going to be thinking of their client’s best interest, and if they do, it may not be all the time.
“I see systemic problems in the industry that a lot of people succumb to. All in the industry know there is a problem. The good guys can’t do anything about it and the bad guys thrive on it,” says Buell.
In his opinion, the situation hasn’t improved in recent years, despite all the talk by the industry and various regulators about protecting investors.
Buell says he is not seeing any reduction in the complaints and problems with wrongdoing and inappropriate advice on the part of advisors.
“The lack of progress shows that governments and regulators are failing to take action to provide real investor protection,” he states.
“I perceive the problem being the industry generally seems to lack ethics and morality and they find ways of getting away with things.”
Buell says errant advisors and firms often get “exemptive relief” from the regulators, who are part of the industry. One example is the situation with forms that clients must sign. Sometimes, he says, the advisors say ‘sign here and I’ll fill it in later” or even sign the client’s name when the client isn’t there to do it. It is known as “window signature” and recognized by the industry as a fairly common problem.
“Why do people in the industry get away with it? Because they can,” Buell says.
“The fundamental issue is that small investors are losing their savings because of widespread industry wrongdoing and there is no agency with authority that represents these investors’ interests. Victims are left to deal with the industry or take civil action to obtain justice. Sadly, that right to civil action is being eroded.
“The extent of this tragedy has been covered up for far too long. It is not enough to talk about improved regulations, recommended best practices and new guidelines. Mandatory rules are being breached with impunity. Enforcement is lacking.”
Buell has a number of changes he’d like to see to provide investors with the protection that they deserve.
But while the current system persists, investors need to be extremely careful in who they chose among the thousands of financial planners and investment advisors wanting to help them manage their portfolios.
It’s still unfortunately the case, according to Buell, that if the advisor slips up or deliberately takes advantage, recovering losses (restitution) will be difficult, as the “industry vigorously defends situations that appear indefensible and uses delaying tactics that create additional costs for plaintiffs.”
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. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.
The URL for this page is http://www.smartinvesting.ca/articles/20060928010100.html .
©2006 Wayne Cheveldayoff