OUR BLOG ON:
The Fraud Factor
To create a working relationship with a client, a financial advisor must earn and maintain the client’s confidence and trust.
In a healthy relationship, confidence is deserved and trust is honoured. However, in some cases, financial advisors take advantage of the relationship to gain direct access to their clients’ funds or to make investment recommendations for their own benefit. In other words, there is a potential fraud factor in the investment game.
There are many tactics a dishonest financial advisor can employ to take advantage of a gullible client:
- The advisor can steal money made accessible by the client.
- The advisor can divert money into bogus security products directly or in collusion with associates.
- The advisor can convince the client to purchase mutual funds that appear not to involve fees, but in fact generate substantial fees that are not disclosed. These funds can then be re-sold, generating more fees for the advisor, but with no realistic prospect of financial gain for the client. This process is called, “churning,” and can also apply to trades in individual securities.
- The advisor can convince the client to borrow large amounts of money by mortgaging a home, farm or business, or based on other investments, and then use the money, called a leveraged loan, to purchase mutual funds or securities that generate fees, but does not protect the investor from huge potential losses.
When a client trustingly signs cheques, forms and other documents at the advisor’s request, the advisor may attempt to use those signatures for protection from accountability, should the client raise any concerns later.
Foiling the Fraudster
There are number of ways you can foil a potential fraudster:
- Never sign a blank or incomplete document, and sign completed documents only when you understand the reasons for all transactions. If the advisor asks that you initial some portion of the document, read it carefully and make sure you understand it, and why it is so important that you have to initial it.
- Never write a cheque to your financial advisor or to an associate. Write all cheques and transfers directly to the firm holding your investments. The advisor may represent that firm, but the firm itself guarantees the existence and preservation of your money, mutual funds and securities, and cannot do so if it does not receive them in the first place.
- Monitor your investments. Delegating this task can help a fraudulent advisor to avoid detection.
- Check your account statements for unauthorized payments, withdrawals or transfers.
- Ask questions and demand answers. The firms that generate statements depend on clients reading them and questioning issues that arise. If your financial advisor suggests that you not bother to read statements, find another advisor!
- Don’t let your advisor blame the market when the projected gains turn into losses. If your advisor promised you 10% and that promise is not realized, connect the promise to the performance and ask questions. If your advisor doesn’t answer to your satisfaction, go "up the line" until you get the answers.
- Don’t hesitate to get a second opinion from a financial advisor in a different firm. Provide copies of financial plans, updates, statements and other communications. If the market really is to blame, an informed second opinion can support this position. If it is not to blame, the second opinion will reflect this fact. Regardless, this advisor will consider whether the promises you were given and the investments that were made on your behalf were appropriate, and can help you see things from a fresh and objective perspective.
- Compare your investment statements to your bank statements. For all transfers, there should be matching transfer-in and transfer-out records in both accounts. Report any discrepancy to your bank, as well as to your advisor's firm. Don’t hesitate to ask, “Where did the money go?”
- Keep copies of investment plans, statements and all communications with your advisor. A paper trail will help support a claim, whether it’s in front of a regulator or in a court of law. Make notes of your meetings and telephone calls. Store your e-mails. Keep an investment diary.
Following the Fraud Trail
If you suspect fraud, take your suspicions to your advisor’s supervisor. Investment firms have compliance departments that, by law, are required to investigate, report and deal with all forms of professional misconduct that harm a client's account.
You can also take complaints about a financial advisor’s actions to a regulatory body. In addition to the securities regulators in each province and territory, Canada has three national regulators, one each to deal with securities, mutual funds, and insurance. These organizations have enforcement departments that deal with misconduct on the part of advisors, and websites that provide details of how complaints can be filed.
In pursuing legal compensation from a financial advisor, you should work with a lawyer who understands the rules, regulations and standards that govern the financial industry. While only a few lawyers may have the necessary experience and knowledge, most will be able to refer you to one who can provide specialized advice and direction.
Fighting for Your Rights
John Hollander & Harold Geller
We specialize in investigating cases of losses caused by financial advisors and fighting for investors’ rights. We represent clients in civil claims for compensation. If you think you have been a victim of your financial advisor’s dishonesty, contact us for a no-obligation consultation.
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