Can you trust your financial adviser?
February 26 2009 by Ellen Roseman
Financial advisers are getting no respect from clients these days. Instead, they’re getting hostility from clients whose portfolio values have crumbled.
This year, their phones are still ringing off the hook - but instead of calling to invest money, many clients are calling to complain.
That’s from a Globe and Mail story earlier this week. It attracted more than 200 online comments, many hostile.
It’s natural that people question the value of advice when they lose money. But what’s troubling some clients is the size of their losses. They feel their advisers didn’t build a portfolio that was diversified enough to withstand a bear market.
My Sunday series on investment advisers has a few more weeks to run and I’m also getting lots of online comments, plus some heartfelt letters from readers. I’ve posted some below.
Here’s a question. What do you think can be done to improve the quality of investment advice given to Canadians? What can be done to make salespeople more trustworthy?
MK
Feb 26 2009
My mom is 83 and her investment advisor recently (June ’08 )put her into a segregated fund for her RRIF account.
While the guaranteed amount is now higher than her actual balance because of the market decline, the balance will continue to decline each year because of the redemption requirement. Also, the MER’s are very high.
Given that my mom needs the income from this fund to live on, is it wise that she is invested in this type of instrument?
It is my understanding that you only receive back the capital MINUS withdrawals. Given that this is held in a RRIF account, at the end of the day, the capital will definitely shrink.
With my mom’s age, her annual withdrawal is just under 10% and I don’t foresee the market growing by 10% on an annual basis any time soon (which would still only maintain her current capital). So, most likely we’ll never receive the “guaranteed value”.
Are there any options for people in this situation? The exit fees are enormous and we feel “stuck”.
In these grim times, seniors really need to be warned about this investment vehicle and, if they’re in it, what the options, if any, are.
In our case, I am quite incensed that an advisor would recommend such an inappropriate investment for an 83 year old. I would like to lodge a formal complaint.
KS
Feb 26 2009
I had some savings in my RRSP account for purchasing my first house: I was just waiting for the prices to go down.
In September 2008 I started to worry that I could lose some of my savings, as the market didn’t look good.
My financial adviser from Investors Group told me there was nothing to worry about, even though the smarter financiers in the USA were telling people to take out the portion that they needed to use in the near future.
As of today, I lost more than 25% of my savings. I don’t want to stay with Investors Group (I now realize that management fees are quite high) or with my financial adviser, who didn’t even call to apologize for misleading me (or when the market crashed). When I mentioned this, he just replied that he lost even more!
KT
Feb 26 2009
I am looking for some help for my mom who lives in Toronto (I live in BC.)
After spending the weekend going through her investments. I have mapped out a maze of multiple PPNs (principal protected notes), 46 mutual funds and some funds I can’t easily identify.
Before her “financial advisor” invested her cash, she had a large portfolio. She was employed as a nurse for decades, and is now on disability and close to retirement age.
I have concerns for her financial future. She has spent her life living frugally and saving.
I am disheartened to see her pay over 15K a year in MER fees and loads for shoddy and confusing investments.
Further, at no time did her “financial advisor” create a risk tolerance plan or make sense of the mutual fund maze built over years of other financial advisors taking their cut.
This “financial advisor” appeared to be churning and burning her account.
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My mom met with a partner from Second Opinion today. My analysis of her portfolio wasn’t far from the truth - she’s paying 20K in mutual fund fees per year, along with several PPNs, for the betterment of her former “financial advisor.”
The realization for my mom was harsh, but this is the situation for many Canadians who purchase mutual funds from “financial advisors” who are really sales agents.
I’ve tried for years to warn my friends and family about mutual fund fees and loads, only to get blank stares. It seems the lack of transparency in how fees are charged leads many investors to believe they don’t pay a cent. Most would be shocked to see the reality of how dearly they pay.
The good news is the worst is behind us. My mom is moving ahead with a plan from Second Opinion. She will most likely need a part-time job in her retirement to help recover what has been lost to high MERs, poor financial advice and the market slump.
Thank you for being an incredible voice and resource for Canadians. I very much enjoy reading your blog and articles here in BC.
brad
Feb 26 2009
I think much of it boils down to the challenge of financial advisors getting an accurate idea of their clients’ tolerance for risk and their understanding of how long-term investments work. People might say they can tolerate risk in the abstract, but it often takes a downturn in the market to reveal exactly how risk-tolerant they really are.
If someone is looking for steady growth, as opposed to the dynamic growth that occurs in the stock market, then I think financial advisors have to build them a balanced portfolio that can achieve that. And they have to explain that in accepting a more conservative portfolio they run risks in the other direction: that inflation may outpace growth in their portfolio’s value over the long term.
AMW
Feb 26 2009
I sent a letter of complaint to Dundee Wealth Management last April and I received three letters advising me that my complaint was under review.
On Nov. 27, I received a final letter from Dundee stating that, “While we acknowledge that you feel your interests have not been served by your adviser and Dundee, and that you should have received advice that would have put you in a better financial position, we again note that you have enjoyed market gains of nearly $128,000 during the course of your investing relationship with Dundee.
“We do not believe such a market gain is representative of your interests not being served, or having been invested inappropriately to meet your needs, and we regret that you feel this way.”
My husband and I have been investing with this adviser for over 25 years, even though he changed companies several times. He turned us over to another adviser a few years back.
My concern arose when I recognized losses in early 2008 and approached the new adviser with my concerns.
Even though we have had good returns in the past, our investments were for our retirement — and when we need them most, they are not serving us well.
I’m fully aware of the financial crises the global economy is experiencing and I don’t expect miracles. But I do feel we experienced more losses than we should have. I feel we should have been directed to a more conservative portfolio.
I’m thankful that I acted as quickly as I did. Had we stuck to the investment course we were on, we would have been in much worse financial shape.
The losses we’ve experienced have certainly put me in a very tight position and I’m very concerned for our future, since we have very little retirement money and my husband’s care will be more and more expensive as his Alzheimer Disease progresses.
DF
Feb 26 2009
Your articles hit home, as this is almost exactly what my 78 year old mother is now going through with her advisor. I am in the process of complaining on her behalf.
She was advised to keep 100% of her savings in small cap equities, despite her age and the risk. She did okay when the market was good, but she lost big when the market turned.
The advisor seemed to feel that because she had done well before, she should not be complaining. The fact is, he should have always been advising safety.
It’s easy to do well in a bull market, but the idea is that you should also protect in the event of a downturn. Well, I don’t think I need to tell you.
On top of that, last year my mother suggested she cash in, as the portfolio had done okay. He told her not to and advised she keep fully invested. He even advised her to borrow in order to invest further.
She then watched her savings nosedive, as many holdings collapsed by 80 to 90 per cent. This matter is currently with the firm’s compliance department and we await the results.
I also have a complaint in on behalf of myself, since I was advised exactly the same way, except I am not 78. In my case, I specified that I wanted to avoid risk as much as possible.
Obviously, within the context of equity investments, there is risk, but I feel that with all the investments in small cap companies, the risk was far too great given my instruction to avoid risk.
I have no banks, no utilities, no large cap companies at all. My portfolio is currently down by about 70%, as is my mother’s.
The big question is whether this is simply bad advice or improper advice. I feel that we put trust in professional advisors, who should be taking into account the investor’s stated risk tolerance, age and circumstances.
In my case, it isn’t about my age, but about my request to preserve capital and achieve growth to stay ahead of inflation and to avoid riskier investments.
People like me are just trying to do a little better than low bank interest and to achieve that, we understand there is some risk, but we want to avoid undue risk.
I believe that the holdings did not properly reflect that. The advisor should have pointed out that the investments could do very well, but are riskier. If so, I would not have invested.
It seems so obvious, now that I have done research about the specific advice, but I did trust him as he is the professional.
One question I have: What is an investor supposed to do when realizing that the investments are not suitable?
I chose not to sell, because I felt that crystallising the loss would mean losing real money. I could only hope they could recover.
The advisor never suggested that the investments should be sold. He only said that if I wasn’t happy, I should sell them.
He also suggested that because I was complaining about the degree of the losses, it was I that was not suited to equity investments of any kind. I felt that this was a major copout.
ER
Feb 26 2009
My husband retired 4 years ago and we were looking for a secure place to put his retirement fund.
We spoke to our insurance man of many years and he sat down at our table numerous times and discussed the matter.
We put the investment in his hands and, after many discussions, we were convinced that our original investment was guaranteed and that we could never lose it.
He also talked us into taking out several investments we had with CIBC and investing with him.
My husband impressed on him that he has always invested in GICs and would not invest unless our investment amount was guaranteed. We were assured it was.
We also had an annuity from him, which was to be paid to us monthly. We trusted this would be invested in a secure fund. It has gone from $260 down to $170. This prompted us to call London Life and we were informed the markets were down.
We then asked about our main investments and were told that they were not guaranteed and had fallen far below our original capital. We were also informed that they could not be touched until maturity at March 2011, a fact that was not disclosed to us.
We have had to make the difficult decision to take our losses or leave the money in there and perhaps watch our life savings dwindle to nothing. We have decided to transfer funds to our bank.
Why would this company invest a person’s life savings and retirement fund in something that was not secure?
I called the agent last year to find out the actual amounts of our original investments and to verify once again that they were guaranteed.
Yes, he assured us, they were guaranteed, but failed to disclose the fact that they were only guaranteed upon death (a fact we just found out from his assistant). I find this lack of disclosure highly unethical and totally dishonest, something I never would have thought of this man.
Both my husband and I are very intelligent people and did not misunderstand. We were deliberately not told this fact. Is there any thing we can do?
JB
Feb 26 2009
My wife and I have enjoyed your column over the past year or so. But despite its good advice, we find ourselves in a state of paralysis due to the overwhelming scope of options and responsibilities within the investment world.
Neither of us have many personal/family contacts to draw upon for good financial advice. It seems to be a taboo topic, in which for every opinion there is a counter opinion.
We are in our mid-30s. We are expecting our first child any day now. We have a variable mortgage on our downtown condo. We make car payments. We have no other debt. We have a modest savings. We have life and disability insurance.
We put our faith in an Investors Group representative last fall. It has not been a pleasant experience. We narrowly avoided having her sinking $50,000 of our home equity into the market just before it tanked, thanks to (1) YOUR column!! – “be wary of advisors looking for big commissions…..” and (2) a personal gut feeling tipped off by chatter about an impending recession.
We feel that we have been paying her to lose our money. We are suspect of her motivations to sell us her funds. We feel our options with her are limited, loaded with hidden costs and failing to adapt to market conditions.
In the meantime, we have been “hiding” some of our income from her and stashing it away in a savings account – which “performs” better!
What is frustrating is the fact that we decided to become proactive with our personal finance after the boom times, just before all of this unprecedented market volatility. We feel burned and misguided. The old rules don’t seem to apply any more.
We have since asked her to keep all contributions liquid, despite her counter recommendations.
We are aware that as this recession tapers off there will be fantastic opportunities for people in our position (relatively liquid with only limited exposure in the current market).
Perhaps we are too jaded and suspicious now. Will we always feel unsatisfied with the way in which our money is handled? Is it therefore up to us alone to get over our paralysis and learn to navigate this vast landscape?
PB
Feb 26 2009
Here’s a great comment from a Globe and Mail reader who posted on the forum associated with that article above. It speaks volumes!
somewhereinthe middle from Canada writes:
As an MBA, CMA, CFP and CFA, and as someone who has provided financial advice for almost 20 years, I can say unequivocally that there are almost no financial advisors out there who have enough knowledge to give out appropriate financial advice.
With few exceptions, financial advisors provide grossly biased advice based on commission and what their respective company is telling them what to do.
In almost no circumstance have they put in the effort to understand the investments they promote or to determine what is actually in the best interest of their clients.
While the advice given out is willfully ignorant in many cases, most of the time it is simply a case of unconscious incompetence - they simply don’t know what they don’t know.
Posted 23/02/09 at 10:23 AM EST
JC
Feb 26 2009
You talked about how, when trying to register a complaint, the first step is to talk to your advisor. If no satisfaction, then speak with his Manager/Supervisor. The next step is to try to contact the Compliance Officer.
Have you any idea of how difficult it is to obtain a name and address for a Compliance Officer?
The people who answer the phone will tell you that there is no Compliance Officer. Then you ask for the company’s Ombudsman. Again….does not exist.
You and I know that every Financial Institution does indeed have a Compliance Officer (or Ombudsman). But the people who answer the phones do not know this.
When you ask to speak with a Manager/Supervisor, they will offer to “assist” you themselves. It is difficult to even get through to a Manager/Supervisor.
After a lot of arguing and demanding you might get through to a Manager/Supervisor….or his voice mail. (But don’t expect a call back.)
I have just learned that in order to send a letter to the Compliance Officer, you have to send it to the Manager, who will forward it to the Compliance Officer.
And this is Customer Service?
Most of my problems involve having the work done correctly and in a timely manner, and in trying to get errors corrected.
I have dealt with 5 different financial institutions over the past 20 years and each one is as bad as the other. None can meet this criteria.
Because I am Financially Literate, I am aware of what needs to be done. I pity those who “trust” that their advisors will do what is requested and what is necessary…….and ensure that the work is correct.
Unfortunately, too many people do not read their statements and have no idea of what is going on in their accounts. Or perhaps they don’t know how to read a statement.
And most people have no idea of the costs involved in holding Mutual Funds.
It makes me angry to see advisors/planners taking advantage of people who do not know what questions to ask.
Buy iShares and cut costs and eliminate the complexities of Mutual Funds (or Stocks). The problem here is to buy iShares, you have to be able to do the buy/sell yourself. And if you have Registered Accounts, it gets even more complicated.
I’m just blowing off steam.
Ellen Roseman
Feb 26 2009
Hi JC. I appreciate your frustration.
Did you know that you can find contact information for participating firms at the OBSI website,
http://www.obsi.ca/UI/ParticipatingFirms/ParticipatingFirms.aspx?csid1=a
Please take a look and let me know if this is helpful.
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Response from JC:
Wow. Great site. RBC Dominion Securities is trying to keep this information a deep dark secret. Of course…. they don’t want complaints going there.
Charles in Vancouver
Feb 26 2009
MK: Wow, putting an 83-year-old into a seg fund for their RRIF? That’s a pretty egregious example of an unsuitable product. If she passes away it might trigger the principal guarantee but, of course, you don’t want to bank on this possibility!
Regarding the guaranteed amount and the RRIF redemption requirement: What she could do is withdraw the seg fund units from her RRIF in-kind rather than redeem them for cash, to meet the minimum withdrawal requirement. This would require her to pay the withholding taxes from an external source. But the advantage would be that she doesn’t have to liquidate units that carry a principal guarantee. Even with the MER eating into the return, getting to cash out the principal guarantee down the road is likely to get way more money back than liquidating now.
Ernie
Feb 26 2009
I think there are two main problems here. One is that ‘financial advisors’ who sell their own company’s products are completely untrustworthy. I would only ever get help from a flat-fee advisor.
But the bigger problem, and I realize this sounds harsh, is that people are simply ignorant about finances and investing. Someone who would haggle for hours over a five dollar shirt in Mexico doesn’t have the basic knowledge to understand transactions in the thousands of dollars. I find this appalling.
CN
Feb 27 2009
My adviser is an Investors Group guy who is a CFP but basically just sold mutual funds.
His financial plan consisted of showing me a computer program that projected an 8% average annual return on my portfolio (he said he was being conservative!) and telling me how long my money would last.
He also wanted to sell me insurance products like extra medical, critical care and long term care.
You can probably guess what he did next – he sold me on borrowing money to “kick start” my investments. Everything is invested in equities.
My portfolio lost half its value in 1 ½ years and I still have the loan to pay back.
Lior
Feb 27 2009
I think that people need to educate themselves when it comes to investments. Don’t just hand over your money or portion of it blindly to a financial adviser without having a concise understanding of your goals, risk tolerance, and the type of investments it takes to get you there.
Even more so, people have to understand that investing in the markets is a risk. There’s always a potential for loss, sometimes a heavy loss, when the markets tank. Calling your adviser and yelling at them is not going to rectify anything. We’re in a recession where virtually every sector of the economy is affected one way or another.
There are people out there, whether it’s your next door neighbour, your adviser, and even the media, who like to rave about how to invest in sectors that have been unscathed only to have a few weeks pass by and then we hear about losses in that sector as well. To some extent, all the media sensationalism surrounding the current economic situation has been a good source of information for investors, but I think is causing a great deal of confusion for those who are less experienced. As long as you are properly diversified, as long as your portfolio is optimized for your risk tolerance, and as long as you do your homework and understand what sectors are more prone to losses than others at the moment, stay the course and you will fare well in the long term.
People who are currently about to retire or are in retirement, I can only hope you’ve invested wisely and that your portfolio assets are allocated properly. As long as this was done years before you started living off your retirement income, you should be ok. On the other hand, if you did not allocate your portfolio in accordance to your retirement and your financial needs to fund your retirement, there’s really nothing you can do now that will make up for it and provide an instant fix.
Canadian Tax Blogger
Feb 28 2009
Investment advisors are commission sales people: They are paid to sell you an investment. This causes a fundamental conflict between the advisor and the client and can lead advisors to make recommendations when they are not appropriate.
In my opinion, the conflict is what it is. The IIROC conducts audits on the compliance with regulations and while not perfect, the system works fairly well.
The real problem is with supervision. Often the supervisor’s or branch manager’s compensation is tied to the profit of the branch and there’s an incentive to “overlook” questionable activities.
Firms need to have a separation of supervision and branch management. The branch manager compliance function needs to be kept apart from the sales function.
Anon
Mar 1 2009
Ellen, your question about how to improve the quality of advice being provided to Canadians is a challenging one. Unfortunately, there is some split responsibility here.
First, the industry has to do a better job of separating advice and sales. Virtually every other advice-giving profession in Canada separates advice from implementation. Think of your doctor - he/she gives you a prescription, but you can have it filled at any pharmacy you want. Unfortunately, Canadians don’t want to pay for advice, so advisors make commissions on sales to pay for their time and effort. If your doctor made a commission on writing prescriptions, wouldn’t you be skeptical of their advice?
Which brings us to the other point: Why are Canadians not more skeptical of their advisors? To a lesser but certain degree, Canadians have to also point the finger at themselves. You can get great unbiased advice from a well-educated, experience planner, but it will cost you more than you are probably willing to pay.
PB has quoted somebody from the Globe and Mail comment forum who hits it bang-on: “As an MBA, CMA, CFP and CFA, and as someone who has provided financial advice for almost 20 years, I can say unequivocally that there are almost no financial advisors out there who have enough knowledge to give out appropriate financial advice.”
By blurring the lines between advice and sales, Canadian suffer.
West Coast FP
Mar 1 2009
One thing that might go a long way to help regulate the Investment Industry is full disclosure of fees.
There are many different ways to be charged for purchasing investments. For investors who buy mutual funds it is imperative to stay away from DSC or “deferred sales charge” funds.
A DSC is a commission paid to the advisor to sell a product. Generally it is about 5% to 7% with a .50% yearly kickback to keep you in the product. Because the fund company has paid a large upfront commission to the advisor it needs to lock you into the fund in order to recoup its expenses. They do this by charging “you” not the advisor if you need to redeem funds or change fund companies. This redemption fee is on a declining scale usually about 7% in year one, declining to 0% over 7 years. If your circumstances change, the fund performs poorly, you need to move and want to change advisors etc… you will have to cough up the dough to escape, not the advisor.
Advisors who sell on a DSCs basis usually do so with trickery. Phrases like, “if you remain invested for the long term there are no fees, or “this mutual fund has no fee” are common ways to semi-disclose DSC fees while ensuring you do not understand what you are paying for. Would any reasonable person pay their advisor 5% or 7% upfront to lock them into a product when the same product with no upfront fee is available?
Why do advisors and companies do this? Most advisors are struggling to fund their lifestyle and the large upfront commission help to keep them in cufflinks. The companies like the revenue stream and the locking in of customers. Plus, an advisor who locks in a customer has more time to prospect for new clients. Who cares if the customer calls? The advisor already got paid.
The worst companies for DSC funds are Investors Group and Edward Jones. I believe it is a company policy for them to charge DSCs.
The most insidious sales practice is “DSC churning.” Here an advisor switches you into a new fund without waiting for your redemption charges to expire. In this way he can charge you a full 7% commission every few years. Meanwhile you are paying a redemption fee, which might be 5% after two years. This can deplete your funds fast!
The big banks generally do not have DSC fees. They have “no load” or no upfront commission funds. The fund will pay a higher 1% trailer or kickback to the advisor for continued advice, though. This method of sales is much preferred as you can make changes at any time. But, make sure you are in communication with your advisor as you are paying him for advice and support.
My advice to the industry is that we include a full disclosure clause for DSC products. For example, “you have chosen to pay me a 7% upfront fee to lock you into this product. If your circumstances change and you want to get out you will have to pay onerous redemption charges. There is absolutely no reason, other than helping me to pay by BMW lease, why you would choose this option when there is a no upfront fee option available.”
I’m out like insidious sales practices….
West Coast FP
Anon
Mar 2 2009
West Coast FP is a perfect example of why there is so much confusion about the financial advisory community and financial products in general.
A little bit of knowledge is a dangerous thing. Get your facts straight so you can add valuable insight, instead of perpetuating the half-truths that surround the industry.
Lior
Mar 3 2009
Anon: you don’t have to invest in such funds. You can start a simple portfolio with low-cost index funds. That way you stay invested in the entire market and you keep fees to a minimum.
It has been proven over and over that the majority of mutual funds out there don’t have any kind of “magic” when it comes to generating more lucrative returns than low-cost index funds.
Many mutual funds in Canada are way more expensive than in the US and the companies that run the funds rely heavily on business from financial advisers, to whom they pay lovely commissions and trailers. The fund company makes money, the adviser makes money, but when it’s all said and done, do YOU make money?
After all the fees are paid and inflation is taken into account, just how big is your return?
Adrian Kidd
Mar 7 2009
Would anyone be interested in buying a guide to be your own financial adviser? I met this guy who is anti-advisers and the charge for the guide is £47 and you can save £30,000 or more by doing things yourself.
Carol-Ann
Feb 6 2010
I’ve lost a lot of money also…got out recently with enough to sustain myself until OAP kicks in. Not a pretty picture.
If I had to do it again, I would educate myself to invest it myself. I would not depend on a “so called” adviser. It’s a crock.
If you want to retire, do it yourself. Educate yourself…take responsibility back. LEARNED THE HARD WAY.
B Nash
Feb 13 2010
I’ve been reading through some of the comments on this site and it truly saddens me to see so many cases of advisors and financial reps not being proactive and aggressive in caring for their clients.
Unfortunately, the financial industry is like any other in that there are some really great advisors out there and some not so great. (Just like plumbers, carpenters, etc.)
Here is a suggestion from a financial representative on finding yourself a good advisor/representative.
Referrals from people you know is the BEST way. This way there is a track record for you to base your decision on. If your friend/relative is happy with their rep and feel he/she is attentive and on the ball…it’s a good bet they’ll work hard for you too.
Ask an advisor how long they’ve been in the industry, what training did they do/get (the minimum or is their company proactive about ongoing training?)
How often does the advisor call to keep up with financial events in your life? They should be in touch with you a minimum of twice a year and even better…every quarter, just to touch base and maintain your relationship.
How quickly does your rep return your phone calls? Common courtesy and good business practice is by the end of day or at latest by end of then next day. Even if it’s a quick call to acknowledge you and explain a full schedule but will set a time as soon as possible.
Does your advisor take the time to teach you how a mutual fund works, what is dollar cost averaging, how does a down market affect you and the basics of investing. If your advisor simply wants to throw you in a fund without teaching you anything…not a good sign.
You do not need to be in 15-45 different funds!! Diversity is good but this is unnecessary and just confusing. 2-3 well thought out and researched funds are sufficient to do the job! Depending on your situation timeline and goals the rep should make this an easy thing for you to monitor and understand. KISS principle, people.
If your rep will not ensure you understand what it is you are investing in and why. Look for another advisor.
These are some suggestions for people who are looking for an advisor or want to change their present one. I hope this helps a bit and would like to say that although I know there are reps out there that are more interested in their own commission than their clients portfolio but there are some of us that do this job because we really care and want to help people with such important decisions. Customer service has to the highest priority because if you do that…you will succeed in meeting your clients needs every time.