Geller Law
A great deal has been written about financial scams and frauds. The American case of Bernard Madoff and the Canadian case of Earl Jones both involved large-scale Ponzi schemes. In both cases, clients suffered substantial losses no matter how the cases resolve.
Here are some "red flags" that consumers can look for:
1. Is it too good to be true? If a financial advisor promises to accomplish a lucrative retirement, the consumer should ask how this can be accomplished. The consumer may start with little or no savings. No one can create a lucrative retirement without capital.
Tip
Consumers should use their common sense. They should not believe promises. They should insist upon explanations. They should consider a second opinion.
2. What about risk? If a financial advisor promises a profit with no risk, there had better be a written guarantee from a large financial institution to back it up.
Tip
Consumers should always look for the risk involved in any transaction. If there appears to be none, something is wrong.
3. Is there borrowed money involved? Borrowing money to invest is called "leverage". This is not bad all by itself. Many clients, however, do not know how much they borrow, how much they have to repay, what interest rate, and when it has to be repaid. They do not appreciate the risk, as the investment must earn enough profits to pay the interest and costs associated with the investment. And there are always costs of the investment. They do not know that the advisor earns a fee or commission from the investment made with the borrowed money. In other words, the advisor profits from the loan transaction whether it succeeds or fails. Will the client?
Tip
Consumers should read carefully everything the financial advisor gives them to sign. If anything looks like a loan application or warns of the risk of borrowing to invest, the consumer should insist upon a second opinion and think long and hard about the proposal.
4. To whom is the cheque payable? Financial advisors should never be named on the deposit cheque. If the consumer buys a mutual fund, stock, bond, or life insurance policy, the funds should be made payable to the institution that looks after the transaction. The consumer loses control of the transaction as soon as funds are made payable to the advisor. How can the consumer be sure that the advisor uses the money as promised? If funds are payable to the bank, insurer, stock brokerage, or mutual fund dealership, then that institution is responsible. If funds are payable to the advisor personally, who knows what will happen with money?
Tip
Consumers should look for a recognizable brand name. The chartered banks, national stock brokerages and mutual fund dealerships, and life insurers have offices across the country with websites, help desks, and bureaucracies. Financial advisors who are not part of these national institutions must rely upon those institutions to handle the money that comes from their clients. Consumers should insist upon details of who is looking after their money. If they did not recognize the name of the institution, their money may be at risk.
2. Who is the advisor’s regulator? Financial advisors should be regulated by one or more of the insurance and securities regulators in Canada. The advisor should explain this to the consumer.
Tip
The consumer should be able to search for the name of the advisor in the database available on the Internet. If the advisor does not appear, that is certainly a red flag.
3. What is the investment? Although mutual funds, stocks, bonds, and insurance contracts can be difficult to understand, they are not rocket science. The advisor should be able to explain them in common sense terms and leave the consumer with written material that explains the investment. If the consumer has no idea what is being purchased, something is wrong.
Tip
The consumer should be able to search the name of the investment on the Internet and find it in a national exchange, in a mutual fund database, or on the website of a national insurer. The point is that there should be an independent way for a consumer to check on whether the investment is for real.
