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Most investors need help with choosing and buying investments. You may trust someone to help you and believe their advice is good for you. But it can be hard to tell whether someone is trying to help you or just trying to help themselves. If they are just trying to help themselves, their advice is likely to hurt you.
Sometimes people pretend to offer you investments, but are really trying to steal your money. In other cases, advisor/registrants selling real investments take advantage of you.
Being aware of both of these risks is important for protecting yourself and your money. Knowing what to do if you have one of these problems is also important.
The risk of investment fraud and the risk that an advisor/registrant will take advantage of you are different. The signs of trouble, or “red flags,” are different; how you protect yourself is different; and what you do if it happens is different. You will learn about both concerns. We will start with investment fraud and then look at the other concerns.
Sometimes you give someone your money to invest, but the investment does not exist. The person simply takes your money and you never get it back. Usually, the people selling these fake investments are not allowed to sell real investments. This is illegal and is known as “investment fraud.” The people who do this are known as “fraudsters.”
This video from the British Columbia Securities Commission (BCSC) is a good summary of investment fraud. It also tells you about a real investment fraud case.
Fraudster Investment Schemes
These videos from the Nova Scotia Securities Commission (NSSC) tell you about some common schemes, or ways fraudsters may try to trick you. Since fraudsters are always coming up with new schemes, the videos also tell you some general things to watch for. Recognizing these red flags can help you avoid new schemes, not just the ones talked about in the videos.
You can watch as many of the videos below as you are interested in. The same red flags are mentioned are in each video so you may want to watch all of one video and just parts of the others.
Affinity fraud involves a fraudster using the relationships between members of a group to gain their trust. When people you trust recommend someone they trust, you tend to be less skeptical and become more likely to be taken advantage of.
In a Ponzi Scheme, a fraudster uses the investors’ own money invested to pay out fake returns. By using the money from new investors to pay out earlier investors who want to withdraw their funds, the fraudster can keep the scheme going for a long time.
In a Boiler Room scheme, fraudsters use fake information to promote a fake company that is supposedly about to list their shares on a stock exchange. They say the price will quickly skyrocket to put pressure on people to invest quickly. They often choose an industry with a lot of media attention to make their more believable.
In a Pump & Dump scheme, a fraudster artificially inflates or “pumps” the price of a stock that he owns a lot of. He does this by falsely promoting it and selling it to his victims. Once the price is high, he sells or “dumps” his large holding, making a profit. The price falls after the “dump,” leaving his victim investors with a loss.
A FOREX scam is a fake investment that promises a quick high return with little or no risk by investing in the Foreign Exchange market.
Fraudsters look for opportunities. When situations make people more vulnerable, they try to take advantage of that. NSSC made this video about schemes being used during the 2020 Covid-19 pandemic.
Recognizing a “For Sure” Fraudster
In the Investor Rights section of this guide, we said the investment industry is regulated. The industry registers the people who can sell you investments and has rules for how these people have to treat you. The rules help protect you from investment fraud.
Most people who try to sell you fake investments are not allowed to sell investments because they are not registered. For this reason, checking the registration of anyone offering you investments for sale is the first step in avoiding investment fraud. If someone is not registered to sell investments in Nova Scotia, then you do not need to look further at what they are offering: You should simply avoid becoming involved.
You can quickly check if someone is registered using your computer or cell phone. You simply type the person’s name into this online search tool provided by the Canadian Securities Administrators (CSA).
Staying Safe from Fraudsters
Using this flowchart, checklist and booklet can help you guard against fraud when looking at a new investment.
When the NSSC learns about a person or company that investors should watch out for, they use social media and their website to let investors know about it. This video talks about NSSC “investor alerts” and gives an example of how one investor was saved from being scammed.
Advisor/Registrant Investment Fraud
The first step in avoiding investment fraud is checking if the person offering to sell you an investment is registered. But sometimes advisor/registrants commit investment fraud. An advisor/registrant who sold you legal investments in the past might later try to sell you a fraudulent investment. Since you already know and trust this person, it may be easy for them to trick you. These videos and this blog post explain how advisor/registrant fraud can happen and give you tips for avoiding it.
What Investment Fraud Victims Should Do
If you know or think you have been a victim of investment fraud, knowing what to do is important. This video tells you what steps to take.
Investment fraud is a serious issue and it hurts investors. Other things which can hurt investors may not be fraud, but they are still not okay. You hear less about these things, but they happen to more investors than investment fraud does. This means these things are more likely to happen to you as an investor. By learning about them, you can protect yourself.
It is possible for an advisor/registrant to take advantage of you with an investment which is legal. They might explain it in a misleading way. Or they could convince you to borrow money to buy it. These videos show examples of advisor/registrant wrongdoing. Watching these and can help you avoid being taken advantage of this way.
Advisor/registrants might buy and sell investments in your account more than is needed. This can make them money and cost you money. This is called “churning” and is explained in this video.
Churning is more likely to happen if you are not paying close attention to your account or if your advisor/registrant has been given “discretionary authority.” This means they are allowed to buy and sell investments without getting your permission each time. You should think carefully about whether you want your advisor/registrant to be able to do this.
Advisor/registrants sometimes mishandle your money by selling you investments which are legal but not suitable for you. “Not suitable” often means that the risk level of the investment does not match your goals. This video from the Investor Protection Clinic (IPC) in Ontario explains this type of advisor/registrant wrongdoing. It reviews investment risk and the duties that your advisor/registrant owes to you. Understanding this will help you know whether your investments have been mismanaged.
Finding Advisor Wrongdoing
You hope your advisor/registrant will not mishandle your investments. But if they have done something wrong, you need to know.
You must pay close attention to your investment account so you will have a better chance of knowing. You should open and read all statements, letters and emails from your advisor/registrant’s investment firm as soon as you receive them.
If you don’t, you might miss the chance to find out and do something about a mismanagement problem.
You will get investment account statements at least every three months. You may get other notices or letters too.
A letter asking you to review your account is a red flag, and you should take it seriously. It probably means that the firm or the NSSC has found some wrongdoing or is suspicious. If the letter asks you to review your transactions and report any problems, it is important that you do. You also need to do it in the time that they allow. Not doing this could be used against you later if you make a complaint.
This article from the Canadian Fund Watch explains this in more detail.
What to Do If You Think Your Advisor/Registrant Has Mishandled Your Investments
You should talk to your advisor/registrant or the head office of their firm if you think they have done something wrong. They may be able fix the problem for you. If you are not happy with what they do, or think they have broken a rule, you should contact the NSSC. They can look into it for you. They can discipline your advisor/registrant (or their firm) if they find that rules have been broken. This discipline will show up on their registration record when you or other investors search their names. This can help other investors as well as you.
The NSSC can also help you contact other organizations that can help you. This video explains what you should do and what might happen.
This NSSC Guide for Complainants will help you learn more about their complaints process.
Unfortunately, the NSSC cannot get you your money back, even if the advisor/registrant broke the rules. This CSA booklet and website tell you how to get this kind of help.
Fees and Investment Returns
Most investments have fees that you have to pay. You invest to make money. Fees cost you money so you want to keep them as low as you can. If fees were simple to calculate and you paid them out of your pocket, it would be easier for you to keep them low. But many fees are hidden in the investments that you buy.
Fees Compound Too
Many investors don’t know how much they are paying in fees. They don’t realize that they could be making a lot more money if the fees were lower. Remember how interest income and reinvested dividends compound over time to make your investment grow more? Investment fees also compound, and cut into your return on investment. Fees are one of the few things about investing that you can control. So, understanding them and keeping them as low as possible is important.
To see what fees do to your investments, try this calculator from the Ontario Securities Commission (OSC).
Remember, you cannot control your investment return (unless you have a fixed income investment which earns a stated rate of interest). But you can control the amount of fees you pay.
Most new investors buy mutual funds. They are readily available from your bank and are what most advisor/registrants recommend. But mutual funds can have very high fees. These fees can be hidden and hard to understand. To refresh your memory about what mutual funds are and why they are popular, watch this video. It is from the Investment Basics section of this guide.
You can also watch the video about exchange-traded funds (ETFs). We will be talking about these in the next section about fees.
John Robertson is a scientist, author and teacher. He teaches people how to invest in a way that is easy to understand. In his Simple Investing presentation, he explains why mutual funds are popular and how costly they can be. He also explains how lower-cost versions of these and ETFs can be a better choice. Watch his video here.
Fees that get taken out of your investment returns instead of you paying them directly are called embedded fees. The management expense ratio (MER) fee of a mutual fund is an embedded fee. This fee pays for the people to manage the fund and pays the advisor/registrant who sold you the fund. The part that gets paid to your advisor/registrant and their firm is called a “trailing commission.” These commissions can be a big part of how an advisor/registrant who sells these makes money.
This is an example of the conflict of interest we talked about in the Investor Rights section of this guide. You are better off when MER fees are low because you get to keep more of your money. Your advisor/registrant is better off when MER fees are high because they make more money. So, don’t expect an advisor/registrant to recommend lower-cost options, such as passive indexed mutual funds or exchange-traded funds. There are other professionals who are more likely to recommend that you consider buying these. They are called fee-for-service/advice-only financial planners. We will talk more about this in the Investing and Financial Planning section of this guide.
More about Fees
John Robertson explains investment fees in more detail in his book, The Value of Simple. He let us use this part of his book to help you as an investor.
This brochure from BCSC explains investment fees. It can also help you know what to ask an advisor/registrant about fees.