March 9 2014 by Ellen Roseman
CBC Marketplace recently tested advice given by 10 banks and investment firms. Using hidden cameras, it showed what happened when a potential client walked into each firm and said she had a $50,000 inheritance to invest.
While some firms performed well, others gave advice that Marketplace’s expert Preet Banerjee described as atrocious. Here are highlights:
In some cases, information was incorrect or misleading — even in response to direct questions, such as how fees are calculated.
Some gave unrealistic promises about returns, including one adviser who said that a $50,000 investment should increase by $10,000, $15,000 or $20,000 in one year.
Others failed to adequately assess the customer’s risk profile, which advisers are supposed to use to ascertain the suitability of investment products they recommend to a person.
I have my own story to tell about Maddy (not her real name), who works at the Toronto Star and told me of her dilemma.
Nine years ago, she met a friend of a friend who sold mutual funds. At the adviser’s urging, she took out a $50,000 line of credit to invest.
She was losing sleep because she hadn’t repaid any of the $50,000 — and she hadn’t gained much ground with the mutual funds purchased on her behalf.
Maddy didn’t understand the strategy, but did trust the adviser. She only started questioning things when her adviser quit the firm.
She decided to pay off the line of credit. But this wasn’t easy to do.
The adviser had invested the money in a dividend mutual fund. Each distribution was used to buy more mutual funds inside her RRSP.
Maddy had to pay deferred sales charges (DSCs) on the dividend fund. While DSCs disappear after seven years and she held the fund for nine years, each distribution started the clock running again.
Since she couldn’t sell her RRSP funds without incurring a big tax bill, she decided to transfer the portfolio to another adviser.
As a result, she could repay the line of credit only by contributing more money. The DSCs reduced her initial capital and the modest growth didn’t offset them. Meanwhile, she spent thousands on interest over the years.
Borrowing to invest rarely makes sense, except for sophisticated investors who can hold securities for years without being tempted to sell. Maddy was inexperienced and agreed to a leverage strategy when pushed to do so by her adviser.
The Investment Industry Regulatory Organization of Canada recently put out an investor bulletin on borrowing to invest. I don’t think it goes far enough.
Here’s a comment by Lindsay Speed, legal counsel and corporate secretary of FAIR Canada, an investor advocacy group. (I’m chair of the board.)
In my view, the warning language should be stronger. We have been advocating for regulators to take the position that leverage is only suitable for the most sophisticated investors.
This seems to suggest that the suitability onus is on the investor, not the adviser. And there is no mention of why an adviser would be motivated to recommend leverage.
If you pay for advice separately from products, you get better recommendations. Look for a fee-based adviser if you want a plan suited to your needs.
Otherwise, you can become a victim of incentives that put the advisers’ interests ahead of your own.