Additional to the menu item “ Financial Advisors Fault”

The list in “Financial Advisors Fault” includes instances of financial advisors misconduct, raised by many investors to Robert Goldin during his 40 years experience in the financial services industry. Other instances have been taken from the rules and regulations governing the Canadian financial services industry, and from various other sources. Nevertheless it still is not fully inclusive. There must be many more instances of misconduct that you may know about and which we haven’t yet come upon. We need your help to list these wrongdoings, so that the list can always be current and up to date.
 
We hope from time to time to add to this list as and when new rules and regulations dictate, and as and when we receive suggestions, from the various financial regulating boards of Canada, and as and when we hear from investors such as you, as to what add-ons should be listed.

We cannot build Canada’s first comprehensive all inclusive and consistently up-to-date list of instances of financial advisors misconduct and/or negligence, leading to  investment losses, without your help
 
We believe that this list is of vital importance to all investors in Canada. The more comprehensive the list, the more helpful it will be to “burnt” investors who want to know whether they have an enforceable and meritorious claim so that they can recover their investment losses. The list will also serve as an “early warning alarm system” to other investors to make them more alert, diligent and aware of any possible wrongful acts by their financial advisors and to take steps to nip these wrongful acts in the bud, before they spiral out of control and cause investment losses. We believe that “ forewarned is forearmed”.

Financial advisors will also benefit from this list because it consolidates in one list, what actions generate investor’s losses and which may result in complaints and legal actions against them. Hopefully the list will motivate some financial advisors to keep on the straight and narrow and improve services to their retail investor clients.

So- With this list everyone wins!

If you are aware of any other instances of a financial advisors misconduct and/or negligence, causing investment losses that are not included in the list on this website, please let us know. E-mail Robert Goldin at robertgoldin@rogers.com with details, and we’ll add them to the ADD-ON list.
 
All information received will be treated as strictly confidential. If you want complete anonymity send us a letter giving us the facts. You need not include you name or contact information. Send your letter to MacGold Direct Inc 240 Green Lane Thornhill ON L3T 7H7or you can leave your suggestion (anonymous or otherwise) as a voice mail message on (905) 709 1892.
 
Naturally we reserve the right to edit, shorten, re-write where necessary (to make it more concise and understandable), your suggestions and in certain cases to censor some that do not  fit into the general nature of the list (i.e. investors didn’t lose any money because of such misconduct) and/or suggestions that in our opinion should not be added to the list. As the information contained in most of the items listed hereunder, have been obtained from the public, we have included an Add-on’s disclaimer which is incorporated in this website’s general disclaimer.

The words  brokerage house incorporates the words: mutual fund dealer, financial institution and investment firm

OK let’s start. Carrying on from the list in “Financial Advisors Fault”:-

Your financial advisor:-

157. failed to tell you that in mutual fund transactions in some provinces, if you don’t receive a copy of the prospectus and accompanying financial statements within two days as from the time your financial advisor received your purchase order for the mutual funds, your purchase order is not binding on you. This possibility remains open until the earlier of 180 days after you first had knowledge that you were entitled to the prospectus, or three years following the transaction date. 

158. failed to tell you that certain provincial securities legislation provides you as a buyer of mutual funds, with a further right to rescind the transaction within 48 hours of receiving confirmation that the securities have been purchased, when  the amount purchased does not exceed $50,000.

159. failed to tell you that if you elect to withdraw from the purchase of mutual funds, in terms of paragraph 76 ( See “Financial Advisors Fault), 157 and 158 above, you are entitled to receive a refund of the full purchase price paid, together with any sales commission or other fees paid in connection with the purchase of the mutual fund in question. Where you elect to rescind the transaction upon receipt of confirmation of your order, when legislation in effect in your province of residence allows you to, you are entitled to receive an amount equal to the net asset value of the mutual funds at the time your right was exercised, together with any sales charges or fees paid.
(Check with your mutual fund regulators, and your provincial securities commission to determine whether paragraphs 76, 157 and 158 are applicable to your province).
 
160. Private Deals: if you enter into a private deal with your financial advisor, such as agreeing to allow your financial advisor to “trade you out” of your losses, or you accept his/her guarantee that he/she will personally reimburse you for any loss caused by his/her mistakes or misconduct, or if you give an undertaking not to report your financial advisor to his/her brokerage house or to any regulatory body, your brokerage house could argue that by your conduct you could be considered to have ratified the transaction and your financial advisors wrongful conduct. Consequently you may not in these circumstances be able to recover your investment losses.

Strip Bonds

161. failed to tell you that a strip bond is more volatile than a conventional bond.
162. failed to tell you that a strip bond does not pay out any money until maturity, so there is therefore no cash flow.
163. failed to tell you that the best time to invest in a strip bond is when interest rates are high and conversely the worse time to invest in a strip bond is when interest rates are low.
164. failed to tell you that although you don’t get any money until the strip bond matures, you have to include a notional amount of interest( i.e. the interest accrued on the strip bond but not paid until maturity) in each year’s income tax return. Because of this tax problem strip bonds should only be bought for tax sheltered plans such as RRSPs and RIFs.
165. failed to tell you that if you decide to sell your strip bond before maturity, you may get more or less than its face amount, depending on prevailing rates of interest at the time.
166. there are liquidity risks that stem from the potential difficulty of the buyer of the bond to sell it before maturity, on the secondary market.
167. the purchasing power of the face value of a strip bond in ten years time, may, because of inflation, be less than its purchasing power today
 
Principal Protected Notes

168. failed to tell you that only a portion of your money invested in a Principal Protected Note is actively invested, the rest of your money is used to fund the guarantee.
169. failed to tell you that very often the guarantee portion of the investment is guaranteed by a bank, so that the regulatory supervision of the investment falls under  the Bank Act and not under the Securities Act. Consequently your investment in a Principal Protected Note is exempted from Provincial Securities Laws.
170. your financial advisor failed to tell you that in order to produce the expected returns promised in the Principal Protected Notes brochures, the investment managers have to be aggressive, use leverage, and often invest in high risk investments.( if leveraging is used you have to pay interest on the loan).
171. a secondary market may not exist for the Principal Protected Note, at which point the Principal Protected Note must be held to maturity.
172. if a secondary market does exist, you may not be able to sell the Principal Protected Note for a profit.
173. if you sell any shares in your Principal Protected Note, prior to the end of the guarantee period, you could lose the guarantee.
174. if the Principal Protected Note issuer allows early redemption, you may be charged early redemption fees. 
 
Hedge Funds

175. certain hedge funds may require lock-up periods during which investors are unable to redeem their investments.
176.          failed to tell you that hedge funds need not be registered with  the securities regulators, which could prevent full disclosure of financial information to the public.

Income Trusts

177. the underlying business that is intended to deliver a regular cash flow, may fail with the result that you may lose your money with an income trust investment.
178.          failed to tell you that an unprofitable income trust could be using the cash received from new investors to pay out high distributions to its existing investors. 
179.          failed to tell you that your income trust investment could be refunding investors their original capital or funding their distributions from operating lines of credit, long term credit facilities or reserves held back from prior periods.
 
180.          negligently telling you that your portfolio was in a profit situation, when it wasn’t ( had you known you could have stopped the slide by getting rid of the dogs in your portfolio and mitigating your losses)
 
Fee Based Advisors

181.since fees are based on the size of your portfolio, advice that otherwise reduces your portfolios size (i.e. buying rental property instead of buying securities) reduces the fees paid by you.
182. advisors who charge by the hour have a bias to maximise billable hours.
183.fee-only advisors can make more money by recommending passive portfolios ( investors often find that when they convert from a commission based, to a fee based account, the number of new investments made drop precipitously!)
 
Wraps

184. some wraps have too many funds in them that duplicate each  other i.e. the same stocks in various funds making up the wrap.
185. you have got both the individual fund manager and the wrap program manager each tinkering with the portfolio. Such continuous portfolio turnover and rebalancing can trigger unwanted capital gains liabilities outside a tax-deferred account.
186. a fund you like may be unilaterally dropped from the portfolio without your concurrence.
187. exiting a wrap or managed fund may be onerous. You may need to liquidate in order to affect an account transfer to another firm. There could also be early redemption penalties and capital gains tax liabilities created.
 
 
 
188. your financial advisor must respect your assets. They are to be used only for your purposes. Your financial advisor must not utilize your funds or securities in any way.
189. failed to tell you that if you withdraw part of your funds from a segregated fund before its maturity,  you forfeit your guarantee of repayment of your investment at maturity.
190. beware of an  off the books investment (i.e. where your financial advisor makes an investment for you, outside of your account with your brokerage firm.) Your investment cannot be monitored or supervised by your firms compliance department, for suitability and the investment recommended in all probability will not be one approved by your brokerage house.
191. never fall for a suggestion to extract money from your RRSP, RRIF and/or LIRA tax free accounts.

IPOs (Initial Public Offerings)
192. made guarantees that an IPO will open above the price that you paid or that the IPO would make a guaranteed profit or return on your investment, and it didn’t happen.
193. IPOs are often high-risk, speculative investments.
194. flat trading: If you notice a constant flow of new issue security purchases in your account, that are them immediately traded out at a small profit or loss, or on a break-even basis, your advisor maybe over-trading or flat trading your account because of the very good commissions paid on such IPOs. All this activity will also produce a nightmare for you at tax time, when you have to match purchases and sales to calculate capital gains or losses.

 
195. failed to tell you that any bond, regardless of whether it is a government bond or an AAA rated bond can lose money, if not held to maturity.
196. failed to tell you that he∕she has an extra incentive to sell variable and fixed annuities, due to the high commissions they provide.
197. failed to tell you that he∕she can make considerably more in commission by selling PPNs limited partnership, options, new issues and in-house mutual funds, than by selling stocks.
198. failed to tell you that not all bonds are conservative. Some are highly speculative and if the company issuing the bonds defaults on its interest payments or goes broke, you could lose everything.
199. failed to tell you that bonds  can trade as stocks, with the movement up or down dependant on fluctuating interest rates.
200. that your investment portfolio is compiled in terms of the Modern Portfolio Theory, and that it will consist of some investments that should make money and some investments that should lose money. ( most portfolios are based on the Modern Portfolio Theory)
 
201. that you can insure your whole portfolio against losses in certain cases.
202. that because of tracking errors, a ETFs performance may not exactly mirror the performance of the index that it tracks.
203. moved your money between your two mutual funds in the same family of funds, by redeeming one fund and then purchasing the other fund, rather than doing just a switch, (which would have been cheaper) thus generating a higher commission, than a typical switch fee.
204. when recommending leverage to buy mutual funds, failed to give you a balanced presentation, failed to disclose both potential benefits and risk and used projections that were based on unrealistic assumptions and that did not illustrate both potential gains and losses.
205. failed to tell you about the negative impact management fees ( in mutual funds) have for investors (see Ontario hits back at mutual fund industry over HST complaints-- Globe and Mail September 17, 2009 at page A9).
206. failed to tell you, that when investing in options, you could get a situation when the price of the underlying security goes up – and you still lose money ( This phenomenon is caused by the volatility of the security’s price).
207. sometimes financial advisors present illustrations to show how an investor’s average returns would be reduced, if the investors missed the 20 best up days in the markets. However financial advisors rarely tell investors that if they missed the 20 worst down days in the market, investors would avoid loses.
208. failed to tell you that in the eyes of the financial industry you are a profit centre. The often quoted advice that you should stay in the market for the long term may be more beneficial to the financial industry than to the individual investor.
209. failed to tell you that there are a number of risks associated with investments in leveraged and inverse ETFs, such as:-
210. Leverage risk: Both leveraged and inverse EFTs borrow directly against investments in the fund or use derivatives to achieve their objectives. Using leverage either directly through borrowing or by trading in derivatives can cause magnified losses.
211. Price volatility risk: The price of leveraged and inverse ERTs fluctuate much more widely than prices of conventional EFTs because of the use of leverage and daily re-balancing and compounding.
212. Counterparty risk: When leveraged and inverse EFTs use derivatives, they are exposed to risk that the person providing the derivative may default. If that person fails to perform the obligations under the derivative contract, the value of the investment may decline, no matter what the underlying index has done.
213. failed to tell you that leveraged and inverse ETF products are better suited to professional investors than they are to retail investors.
214. leveraged ETFs promise the possibility of double or triple the returns of an index or a commodity on a daily basis. Inverse products promise double or triple the reverse of the return of an index. If prices on the market go up and down over time, you will lose on these products whether you buy a leveraged or inverse ETF, if you hold it for any length of time.
215. Quota Bait: most financial advisors have monthly sales or quota gaols to meet. Look out for unusually heavy trading activities late in the month. Could be your financial advisor has not reached these gaols before the end of the month, and may try to generate some activity in your account, to help him/her reach these goals. Chances are that the investments recommended, may not be suitable or properly researched because of time constraints.
216. Boiler-room scams: Where unscrupulous “financial advisors” who you don’t know, try to peddle unheard of penny stocks with promises of big returns, and instant wealth.
217. Investment Seminars: Be leery of investment seminars which promise quick get-rich schemes. If it sounds too good to be true, it probably isn’t. 
 
Know Your Product (elaborated upon)

Your financial advisor failed to consider the two elements for determining suitability which are:

218. firstly, what your general investment needs and objectives and other factors are, to enable him/her to determine whether a proposed purchase or sale is suitable (i.e. the KYC form) and;
219. secondly, the attributes and associated risks of the products they are recommending (Know Your Product or KYP rule). Your financial advisors firm’s approval of an investment product alone does not of itself satisfy the KYP rule. In determining suitability, your financial advisor should consider other factors such as product features and structure, the product’s risk, costs, and the management and financial strength of the issuer. He/she should also determine whether expected returns are realistic, Your financial advisor will need to re-evaluate an existing product if a change to a key feature, causes significant changes to the risk and return profile of the product.
220. Before recommending an investment, your financial advisor must take into account the following:-

• the basis of the securities return (e. minimum return, dividends, interest rate).
• the use of leverage.
• any conflicts of interest arising from the compensation structure or other factors.
• the overall complexity, transparency and uniqueness of features of the product’s structure.
• the possibility that you may lose some or all of the principal amount invested.
• the risks relating to the product such as liquidity risk( including redemption rights or any features that lock in the principal and/or returns for a specified period) price volatility, default risk and exposure to counterparty risk.
• the risks related to the assets underlying derivatives or structured products.
• the fees paid to your financial advisor, or other parties such as commissions, sales charges, trailer fees, management fees, incentive fees referral fees, and early redemption fees.
• any embedded costs such as bid-ask spreads or other expenses.
• the product’s issuer’s financial position and history.
• the qualifications, reputations and track record of the parties involved in key aspects of the product, for example, the fund manager, portfolio manager, product manufacturer, sponsor, guarantors and significant counterparties.
• if the product is distributed under an exemption, whether the product meets the requirements of that exemption.
• the legal characteristics of derivatives and structured products (e.g. jurisdiction of special purpose vehicles) bankruptcy protection and RSP eligibility.
• the frequency, completeness and quality of the issuer’s disclosure.

221. you were talked you out of doing an options trade, (which you intended to use as investment insurance or to make you money), not because it was unsuitable, but because your financial advisor was not licensed to deal in options and because he/she didn’t want to refer you to another member of his/her firm who was licensed to deal in options, because this would mean splitting his/her commissions with another person. 
222. failed to re-evaluate any existing investment product or stock in circumstances where a change to a key feature caused significant changes to its risk and return profile i.e. failed to tell you that a low risk stock or investment product had, because of various circumstances, ceased to be a low risk but was now high risk, and as a high risk stock or investment product, it was unsuitable for you in terms of your original investment objectives and risk tolerance level. (This happened with Nortel which went from being a near blue chip stock to a highly speculative one.) 
223. if you are a shareholder in a public company, and the company issued false or misleading information either in press releases, in financial statements, oral statements such as conference calls or speeches, and you lost money as a result, you can sue the company even though you never actually read, received or heard about the false or misleading information. In such a case you are legally presumed to have received that information and to have been influenced by the false information to make the investment.( even if you knew nothing about it).
224. if an investment advisor or a financial services firm claims double digit returns each and every year for many years —get very concerned. Before investing, check out the advisor and the firm with the securities commission and regulatory bodies and then make sure that you understand exactly what strategy is being used, what types of securities are being traded and how much money is involved. Also make sure that you receive detailed quarterly statements. ( Remember Bernie Madoff!).
225. If your financial advisor has previously been disciplined for wrongful behaviour, your brokerage house has an increased  duty to carefully monitor and supervise his/her activities because of his/her previous behaviour and conduct.
226. Failed to tell you that you ( for investors who are looking for income) could rent out your stock and receive not only your dividends but a monthly income from your stock, while at the same time, continuing to own your stock and still benefiting from an appreciation in the stock’s share price.
227. Failed to hedge and manage your risk, thus lowering your risk of loss, for example: you are considering a gold producer as a take over target. You are prepared to bet on the take over, but want to hedge against the market, or the price of gold tanking. So---- you go long in the target gold producer while shorting large gold producers as a hedge.
228. Failed to tell you, as a growth (no income) investor, that instead of paying the full price of a stock, you could pay a fraction of the full price (say 3% to 4% of its price), you would control the share, enjoy any profits made, and if the stock drops in price, you would only lose the fractional payments made.
229. Failed to tell you, that as an investor who wanted to buy mutual funds that comprised mainly of securities included in the main market indexes (such as the Dow Jones 30, the Standard and Poor 500 or the TSX 60) instead of buying the mutual fund, with a high MER, you could buy a EFT on the index, and pay a very low MER.
230. Failed to tell you that instead of buying an ETF, you could buy a call option on the ETF, and only pay a fraction of what an investment in an ETF would cost you ---AND PAY NO MER.
231. Be concerned about Investment Letters that brag about huge returns from their recommendations i.e. “If you have bought this stock when we tipped it, you would have made 250%”. Investment letters usually tip a number of stock picks. They never tell you about their losses.
232. Ponzi Schemes: In addition to item 224, here are a few more pointers to  avoid becoming a victim of a Ponzi scheme:

· Never deal with a money manager or advisor who also has custody or access to your investments (assets). If he/she is employed by a large (preferable a bank owned) financial institution, they will hold your assets for you. However if you deal with a smaller “boutique style” firm, make sure that your assets are deposited with an independent reputable, third party custodian who is not connected to your money manager or advisor. 
· Never, never ever make your cheque payable to the money manager or to your advisor;
· Don’t be overwhelmed or swayed by the reputation of the money manager. Check him/her out as if they were regular financial advisors;
· When checking out the returns that the money manager “says” he /she has consistently made, look for the bad years. There has to be a few. If there are not--- be careful; 
· Check his/her annual returns, against the relevant benchmark (if you can’t do it yourself, ask someone to do it for you). If he/she beats the benchmark averages every year sometimes by big margins there may be a problem;
· If the money manager only invests in investments structured by his/her firm i.e. proprietary products, get full details, and see if anyone else is offering such structured investments. Its unlikely that if an investment product produces good returns every year, that other financial firms won’t jump on the bandwagon and offer similar investments;
· Never give your money manager a power of attorney to control and have access to your money (assets);
· Don’t expect securities commissions and regulators to always protect you against Ponzi schemes, Madoff was never caught, after doing what he did, for about 20 years ( he surrendered voluntarily to the police). The original Ponzi carried on for many years before being caught. Do your diligence yourself or hire someone independent to do it for you;
· If you draw any money out, make sure that the cheque comes from the firm, or third party custodian of your assets --- never from the personal account of your money manager or advisor;
· If money managers have a rule that they only take on clients who are prepared to invest a certain minimum amount, but then tell you that in your particular case they will make an exception ---- think twice before investing with them;
· Don’t be influenced by an advisor who is a member of a club or a group that you belong to. Check him/her out as if they were strangers.

233. Make sure that in your portfolio you don’t have too many holdings invested in the same companies or industries. Owning  a bunch of overlapping mutual funds is not diversification, its over-concentration which you don’t need in your portfolio
234. Make sure that your financial advisor puts your bonds and interest- bearing investments inside your RRSP and holds your stocks in an open account. That’s because interest is fully taxable outside your RRSP, whereas dividends benefit from a tax credit inside your RRSP.
235. When filling out a KYC form always specify a specific percentage i.e. 20%, 30% 60% etc. in respect of your investment objectives and risk tolerance levels. NEVER allow a range to be put in for your objectives or risk levels. A range would be for example: money market 0% to 40%, bonds 30% to 70%, equities 30% to 70%. A range is too wide and gives your financial advisor the latitude to invest in almost anything, irrespective of your investment objectives and risk tolerance levels. The rule is: Never agree to a range, always specify the actual percentage you want.
236. Your financial advisor sold you leveraged or inverse ETFs, and failed to rebalance and compound them daily. The result would be, that even after a few days, especially during periods of volatility, your returns would be completely unrelated to the return on the underlying index for the same period, and may even move in the opposite direction to the underlying index. With significant market volatility these leveraged and inverse products can lose money no matter which way the market moves over time. The rule is:  make sure your financial advisor knows what he/she is doing, understands the product, and carries out their duties in managing this type of investment.
237. Your financial advisor failed to rebalance your asset allocation in your investment portfolio, which caused the allocation to shift over time, from an acceptable risk level to higher unacceptable risk levels.
238. The 2008 stock market meltdown, once again proved that the Modern Portfolio Theory (MPT) that most financial advisors use to construct client’s portfolios doesn’t work. The MPT propagates a diversified portfolio comprised of correlated securities (those designed to go up) and negatively correlated securities ( those designed to go down) in order to limit risk. In 2008 all securities (both correlated and negatively correlated) dropped in value, i.e. all securities became correlated and they all dropped in value, rendering the MPT strategies useless.
239. Your financial advisor failed to tell you when recommending preferred shares, as an income producer, that there is a risk that these shares may become valueless, because of the bankruptcy of the company issuing such shares.
240. Failed to tell you that ETFs give you the benefits of dividend investing, with the low cost (some MERs as low as 0.5% and diversification.
241. Your financial advisor failed to tell you when buying mutual funds that in addition to the annual MER fee, there are also other undisclosed costs that are found in nearly all mutual funds. These costs are rarely, if ever disclosed in a fund’s prospectus. These undisclosed costs are:

· the market effects of trading big blocks of shares;
· idle cash;
· the tax consequence of embedded capital gains;
· early withdrawal and redemption fees.

Undisclosed costs can increase a mutual fund’s MER by a few percent a year. Add this to the 2.8% average MER charged by Canadian Funds, and the cost could be in excess of 5% to 6% a year.
242. Beware of buying a mutual fund with a deferred sales charge (DSC). A DSC penalizes you if you sell your fund within seven years of purchase. The chances of you keeping your DSC fund for seven years is remote, so when buying a DSC mutual fund factor in the possibility that you will be paying a penalty of several percent.
243. If you want to be a smart investor DON’T

· Expect to find high returns with low risk;
· Make decisions without considering all implications;
· Take undue risks in one area and avoid rational risks n another;
· Seek to reduce risk by simply using different sources and give no thought to how such sources interact;

· Copy the behaviour of others even in  the face of unfavourable outcomes;
· React to news without reasonable examination
· Believe that you are infallible.

244. Common techniques used by stock scammers:

· Target men. Women are more likely to seek outside opinions and advice. Men are more confident about making their own investment decisions.
· Flatter the victim’s investing skill. Even if he only has a pension plan at work, tell him he’s an experienced investor.
· Tell him you work for a big investment firm. Create an elaborate website showing offices in many locations. Set up a “virtual office” with a receptionist in a major European city to give the appearance of a global operation. Say you are the only firm eligible to sell a company’s shares.
· Suggest to the victim there is a time sensitive reason to invest in a company quickly before its stock soars. Typical reasons: a pending public offering, or the launch of a drilling or exploration program. Suggest there’s a limited amount of IPO stock left, so he has to decide soon.
· Reassure doubts about the legitimacy of the investment by inviting the investors to look at the company’s website—which has been created  as part of the scam. It will often show phony press releases stretching back years to suggest the company has been in business for a long time. 
· Suggest the victim send an e-mail to the company to check out the legitimacy. Victims will then get a return e-mail from the company’s “president” verifying the claims. Source: Ontario Securities Commission.

Let us know if you have any other add-ons to this list.