In recent years we have seen some high-profile cases where a few financial advisors have defrauded investors who have entrusted them to manage their money. Regulatory bodies have published information sheets, along with radio campaigns to help protect the public.
In the majority of cases, the people who are hitting the media are not even financial advisors – they are pretenders. In the cases actual financial advisors, most have not worked for large companies which closely oversee employee actions and have compliance departments to help monitor advisor practices.
We feel you protect yourself by working with a large institution. Large institutions have branch managers that monitor the activities of all employees. In the auditing world, an area that can prevent fraud is through the segregation of duties. Large firms have compliance departments that monitor all trading activity. They also have a reputation to protect.
In our opinion, there is greater risk if you are approached by an individual either by phone or in-person. The risk increases if the person is using high pressure tactics or is promising high investment returns. You can reduce your chances of fraud significantly if you initiate contact with the advisor, slow the process down, and ask the right questions.
The following are some questions that can help in your due diligence process of finding the right financial advisor.
- What is your educational background?
- What professional designations do you have?
- How long have you been in the financial services industry?
- When do you plan to retire?
- Are you licensed as a securities dealer?
- Are you licensed as a mutual fund dealer?
- Are you licensed to sell insurance products?
- How many clients do you have?
- Do you have a minimum account size?
- How often do you contact your clients?
- Do you have support staff?
- What are the types of services you provide?
- What makes your service offering unique?
- Do you work with other professionals, such as lawyers and accountants?
- What is your investment selection process?
- Do you sell proprietary products?
- What type of products do you primarily sell (i.e. individual equities, mutual funds, bonds)?
- Are there any restrictions on the types of investments you may offer?
- How liquid are the investments you are recommending?
- How do you monitor the investments?
- How is the firm compensated?
- What are the fees to sell and buy the investments you recommend?
- What portion of the fee paid to the firm is paid to you as the advisor?
- Do you offer fee-based options?
- Do you offer managed accounts?
- Do you offer commission only accounts?
- Do you have clients willing to speak with me about your services?
- Do you have professionals that may be willing to speak with me about your services?
- Have you ever had a complaint filed against you with the BC Securities Commission, IIROC or any other professional or regulatory body?
- Have you ever been disciplined by a professional or regulatory body?
We recommend that individuals looking for a financial advisor visit at least three different financial institutions. The more time that you spend at this stage the more likely you will find an advisor that is most suitable for you. We suggest that you present a similar list of questions to each advisor you meet with. By obtaining answers to these questions from at least three advisors, you can make a better comparison.
A fraudster is not going to tell you the truth. Regardless of the answers you receive in the above process it is important that you spend the time to verify them as best you can. The chances of fraud are extremely remote but the above process is not wasted time because it will also assist you in the decision process of selecting the right financial advisor.