Last week’s Investor Clinic Q&A with Stan Buell, president of the Small Investor Protection Association, elicited a wide range of feedback from readers.
Several wrote to tell me about their own experiences with unscrupulous brokers.
“In 2008, my financial advisers cleaned me out to the same degree as Stan Buell,” a physician, in Ontario told me. “I didn’t see it coming. Four years of a trusting relationship and then boom.”
I also heard from an investment adviser who said the column was “inflammatory” and depicted the industry unfairly, and from a portfolio manager who prides himself on “trust” and “integrity” and said he hoped I would write a column that “highlights the value of a good adviser/client relationship.”
Plenty of advisers treat their clients fairly, of course. They provide solid advice that leads to good returns, and they’re rewarded with referrals from satisfied clients. But that doesn’t help the unfortunate investors who are victims of fraud or abuse.
The problem, as investor advocate Ken Kivenko writes in the June issue of Canadian MoneySaver magazine, is that Canada’s labyrinthine complaints-handling system “requires significant knowledge, resources and persistence to navigate properly. It all too often leaves investors frustrated and angry.”
Preventing abuses before they happen is the best strategy, but those who have suffered a loss do have options. Here is part two of my Q&A with Mr. Buell. His comments have been condensed and edited for clarity.
How can investors protect themselves?
The first step, before you invest in anything, is to check with the Canadian Securities Administrators website to see if the person is registered. If he’s not registered, don’t deal with him. You can also check to see whether he has been disciplined. The next step is to find out what sort of registration the person has. You should look for an “advising representative” or “portfolio manager” because they have a fiduciary duty, which is a legal obligation to look after the client’s best interests.
Don’t all investment representatives have a fiduciary duty?
No. Most financial advisers are registered as a “dealing representative – a sales person.” All they are required to do is sell products that are “suitable,” which is not the same as having a fiduciary duty to the client. The definition of “suitable” is very loose.
We don’t want to send the message that we’re against everybody in the industry. Some of those who are registered as a “dealing representative” do a good job for their clients. Some do not, and it’s a failure of the regulators to provide adequate regulation and enforcement.
What should people do if they feel they have been mistreated?
They should talk to a good securities lawyer to find out whether they have a case and how they should proceed.
For large claims – say in excess of $100,000 – people should be in civil litigation. One of the things we promote is group action. If you can get together with a number of victims – say five people who have lost $50,000 each – they should be able to get a good securities litigator who will work on a contingency fee basis. We have some tips on our website on how to find a securities lawyer.
As an alternative, if your loss isn’t big enough to justify the cost of civil litigation, the Ombudsman for Banking Services and Investments (OBSI) provides a dispute-resolution service, but first you have to complain to the firm directly. OBSI can make recommendations for compensation, but they aren’t binding and a growing number of firms are refusing to accept OBSI’s rulings.
It’s important to understand that the national self-regulatory organizations – specifically the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – have the power to discipline members and levy fines but they don’t order restitution. IIROC can refer you to arbitration but it can prove costly and the feedback from mediators suggests this is not a good option for small investors as the decision is final and binding. The system is better if you live in Quebec, where the provincial regulator, the Autorité des marchés financiers (AMF), has the power to provide compensation with its indemnity fund.
Want more information?
- Small Investor Protection Association
- Canadian Foundation for Advancement of Investor Rights
- Ombudsman for Banking Services and Investments
- Federation of Law Societies of Canada
- Canadian Securities Administrators
- Investment Industry Regulatory Organization of Canada
- Mutual Fund Dealers Association of Canada