April 7 2008 by Ellen Roseman
How did up to 2,000 Canadian investors get caught holding asset-backed commercial paper? Would they ever touch such a product unless a financial adviser recommended it — or at least introduced it to them as an option?
This is one of a long list of financial innovations that have exploded in investors’ faces. I was amazed to see how many people held principal-protected notes linked to risky hedge funds, which became clear after the collapse of Portus and Norshield.
As with ABCP, these products were exempt from prospectus disclosure. So even if you wanted to know more, you’d have trouble finding out anything, other than what your adviser said.
I’m not against using financial advisers. I have a long fruitful relationship with my stockbroker, who listens and never pushes me into anything. But then, I know her business almost as well (and sometimes better) than she does.
I also have a discount brokerage account for my non-RRSP funds. I can see the attractions of doing it yourself, but also the temptations of getting too involved (even addicted).
There’s research showing that people with advisers have a more patient, long-term approach. They don’t move into and out of investments as quickly. They’re more interested in planning for the future. Their results are better.
Still, a significant number of people get burned from following poor advice. When I get their complaints, I can see how they are led astray. Some don’t shop around and deal with a friend (always dangerous). Do they put too much trust in their advisers? Are they blind to the need to protect their own interests?
In my CBC radio commentary last week, I said that a lesson learned from the ABCP mess is not to trust your financial advisers or assume they have done research on their recommendations. They’re salespeople, first and foremost, trying to flog whatever makes them the most money.
That resulted in some interesting reactions, both from advisers and from clients. You can see comments below. Please feel free to add your own.