Best practices for investors and advisors.
Every day, advisors work hard to help clients achieve a more financially secure future – but so much can be undone if clients become victims of fraud. Nevertheless, every year, Canadians lose significant amounts of money to fraud. According to the Canadian Anti-Fraud Centre, nearly 40,000 Canadians reported that they were victims of fraud in 2020 (twice as many as in 2019) and, collectively, they lost $104.2 million.
That’s why advisors who want to protect the plans they build with their clients must teach clients to recognize suspicious signs and safeguard themselves against fraud. They must also ensure that the way they conduct business gives clients confidence that they won’t encounter fraud within the walls of their advisor’s practice.
Educating clients about fraud
There are many different types of investment fraud, but some basic best practices can help your clients steer clear of many of them:
- Red flag “too good to be true” offers – for example, an investment that promises low risk, high returns and maybe even a guarantee; a scheme that suggests it’s possible to make a tax-free withdrawal from an RRSP or RRIF outside a government-sanctioned strategy such as the HBP or LLP; or an insider tip that’s “for their eyes only”
- Remember scams can come from trusted sources – remind clients that a fraudulent offer doesn’t always come in the form of a phone call, email or letter from a stranger; it may also be “affinity” fraud, presented by a family member, friend or acquaintance, or through a trusted religious group, ethnic community or social club
- Don’t rush into an investment decision – warn clients that pressure to invest in a hurry can be a warning sign of fraud, and that they should always feel free to do their own research into an investment at www.sedar.com or by checking for investor alerts at www.securities-administrators.ca
- Make sure the paperwork is accurate – it’s easy to get careless about reading fine print, but emphasize to clients that it’s vital to carefully review a financial or legal document before signing it; it’s also essential for clients to tell the truth on forms – for example, about their income to protect them from investments such as exempt securities that may be inappropriate
- Keep tabs on investments – encourage clients to examine account statements from every institution they invest with – focusing in particular on the overall balance, asset allocation, individual assets and transactions – and to contact the investment firm’s compliance department if they have any concerns
Building a safer practice
When a financial advisor is implicated in fraud, it has a damaging effect on the whole profession. But by implementing some best practices of their own, advisors can help protect themselves against even a whiff of suspicion:
- Review all important features of a potential investment with your clients – yes, clients work with you because they trust your judgement, but it’s also critical that they have a good understanding of the investments that hold their money; make sure they have a basic grasp of how an investment works and all of its pros and cons
- Give clients time to think about an investment – even when you may feel that a quick decision will enable clients to make the most out of an opportunity, don’t rush them; if they need time to reflect for a few days, it’s important to give them space so they don’t feel pressured into acting before they’re ready
- Walk clients through their statements – no matter how many times you tell clients to read their statements carefully, some of them will file them away without a first (let alone second) glance; by taking a few minutes to review key areas of a statement, and to ask if they see any transactions they don’t recognize, you can demonstrate your commitment to protecting them from errors, as well as fraud
- Make it a team effort – advisors who have committed fraud have been known to ask clients to write a cheque to them personally, rather than the investment firm, and to discourage clients from communicating with their associates and assistants; make it clear to your clients that you operate as a team, with your firm and with your staff, and encourage transparency in all dealings with clients
More than ever, clients need their advisors to help them navigate the increasingly complex world of investments and avoid potential pitfalls such as fraud. By encouraging your clients to adopt investor best practices and implementing advisor best practices in your own business, you can reduce the risk that fraud will derail the plans you and your clients have crafted together to realize their long-term goals.
Share these helpful resources with your clients
Websites that can help clients recognize and avoid fraud include:
www.obsi.ca (search for “fraud”)