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When 'expert advice' isn't

The greatest number of complaints received by the Investment Industry Regulatory Organization of Canada (IIROC) comes from people saying they were put into unsuitable investments by the financial advisors they trusted.

The greatest number of complaints received by the Investment Industry Regulatory Organization of Canada (IIROC) comes from people saying they were put into unsuitable investments by the financial advisors they trusted. The investments were often risky, especially for those approaching or in retirement, and were often made because of high fees the investor must pay to the advisor and his or her company.

“The trend of unsuitable investments reinforces exactly why IIROC needs and is committed to seeking more effective enforcement powers under provincial securities legislation so all investors, particularly seniors and vulnerable investors, are better protected,” said Andrew Kriegler, IIROC President and Chief Executive Officer.

The group recently reported that 222 of 838 complaints it received in the two years ending March 31, 2016 concerned unsuitable investments, followed by complaints about service issues, disputed fees, firm policies and unauthorized trading. The numbers confirmed a 2015 IIROC report that almost 50 per cent of its prosecutions of advisors involved violations of suitability requirements of investments, mostly inflicted on seniors and vulnerable uneducated investors. Among people who disclosed their age, those older than 60 accounted for 63 per cent of complaints and for 59 per cent of inquiries about suspicious investment firm practices. Alberta had the fourth greatest number of complaints and inquires among provinces and territories.

Larry Elford, a former Lethbridge financial advisor turned investor advocate, reports that the Small Investor Protection Association has detailed how the majority of people using the “financial advisor” designation are not licensed to protect the best interest of investors, and are actually salespeople with low standards. Writes the Association: “How many of you would patronize a restaurant whose written obligation to the public is that ‘our food is edible,' our steak is ‘chewable,' ‘suitable for consumption,' or ‘our wine is drinkable?' ”

IIROC reports many investments deemed unsuitable incurred much higher fees than other products that offered potentially similar returns. The next biggest problem was that seniors needing retirement income they can count on – particularly those without defined benefit pensions – were put into highly risky investments that were greatly volatile and often lost money. People with less than a 10-year time horizon frequently see their investments unable to recover from stock market corrections or an outright crash. The portfolios of some seniors still haven't returned to what they were at before the 2008 global recession, in most cases because advisors had clients in equities while holding little or no fixed income.

The eyes of many advisors light up when a new client with little investment knowledge or experience enters their office with wads of cash saved up during decades of work, or the profits from the sale of house as they downsize in retirement.

Before people invest they should learn about the basics of investment risk.

Guaranteed Investment Certificates and even bonds have had small returns in recent years, but are relatively secure and will be there to provide regular income.

High yield bonds offer potentially greater returns but higher risk than regular bonds or real return bonds.

Value stocks like Canadian banks and utilities don't usually increase much in market price, but do offer dividends that “pay you to wait.”

Growth stocks are riskier, offering great market price increases or losses, and should not be a large part of many seniors' portfolios. There is a graveyard of small technology companies that seemed promising but tanked early this century, taking investors down with them.

A few years ago hedge funds enjoyed success, and advisors started putting seniors into them. While the hedge fund category implies some security, some funds “short” companies held by the fund, betting they will fall in value, and some hedge funds are leveraged so the investor may lose much more than their initial investment. During the first nine months of this year, investors withdrew $60 billion from hedge funds, which suffered their worst losses since the 2008 financial crisis.

Investors wondering whether particular products are practical, given their individual financial situation, age and risk tolerance, may inquire with IROOC at 1-877-442-4322. And they may register a complaint if they question their advisor's tactics in putting them into a product.

Ray Turchansky is an income tax preparer.