Features Contamination Water Issues
The nature of risk

Overdependence on conventional wisdom and following the crowd are only two of the myriad of risks historically facing investors.

Overdependence on conventional wisdom and following the crowd are only two of the myriad of risks historically facing investors. Nowadays there are many more risks that are not necessarily market related. Indeed, many of today’s investment dangers are difficult to detect and manage. In the business of managing wealth, investment behaviour can be driven by career risk.

At some levels of the investment business, there is a tension between protecting clients’ money and protecting one’s job.  There are monthly sales quotas that many firms expect to be met by their sales force and pressure not to be wrong on your own. To prevent being wrong all alone, many advisors watch what others are doing and flock for safety. The resulting herding action drives prices above or below fair value.  When purchasing mutual funds or “seg” funds from an advisor, you may pay him or her in one of several ways. You, the purchaser, ultimately fund all of these fees and commissions. If you don’t know what questions to ask or are not prepared to read a lengthy prospectus, you may never be aware of the money that actually changes hands as the result of your transactions. In addition, the annual embedded fee charged by the fund company can run as high as three per cent or more before any returns get into your pocket. You may never know If your advisor has been found guilty of breaking the rules as set down by the body that licenses him or her, (for example, MFDA for mutual fund salespeople, IIROC for brokers). Results of an investigation will be posted on the regulatory body’s website. However, victims of wrongdoing and other clients are not normally notified. Do your homework before agreeing to work with any advisor.  

Where do your statements originate? Are they produced on your advisor’s letterhead in his or her office? Is the information on the statement independently verified? As your first line of basic safety, you must insist that your money be held at an independent custodian from whom you can obtain clear reporting and disclosure on a timely basis.

A fiduciary duty is the highest standard of care in equity or law. A fiduciary must act at all times for the sole benefit and interest of the client. The fiduciary can make a profit, by consent, but he must not put his personal interests in front of his duty of care. It is appropriate for you as a client to ask your advisor if he or she has a legal fiduciary duty to you. If not, ask if you can have a “fiduciary pledge” signed. It is a contractual commitment that helps ensure that your advisor can’t profit at your expense.  

Darryl Cailes is executive vice-president at Enriched Investing Incorporated. He can be reached at dcailes@enrichedinvesting.com.

This document is for information only and should not be construed as an offer, or a solicitation of an offer, to buy a security or investment service. Before making an investment, prospective investors should review offering documents that summarize the objectives, fees, expenses and associated risks.