Investment Advisor Sales Tricks and Tactics – Caution Required

October 2005

As a financial planner, I have seen many individuals who have been “sold” on an investment approach by a financial advisor that really made no sense in the particular situation. If your financial advisor promotes the following bits of wisdom, you should probe with more questions or get yourself a second opinion. These are but a few of the tricks I have seen. However, these scenarios could be right for you, but could also be very wrong. Remember how hard you worked for your money, and think about how you will replace it if you lose it. See an hourly based fee only financial planner – with a professional designation – for a second opinion. Please see my other articles on topics such as foreign investing, investing to beat inflation, bonds are not guaranteed, questions to ask your financial advisor, questions to ask before buying a mutual fund and borrowing to invest for more information.

“We have calculated your retirement income needs, and in order to retire when you wish, you need to take more risk to make higher returns in your portfolio.”

While buying higher risk investments may earn you more money, the definition of higher risk means that you may actually make much less money and put you further away from your retirement date. You should never need to take more risk. The probable answer to your retirement problem is to reduce your expenses, modify your expectations and invest within your own risk comfort level.
“You should start drawing out your RRSP / RRIF savings now, before retirement. You can save taxes by deducting interest on a new investment loan.”

This is a combination of recommendations blended into one package to hide the individual risks. Look at each piece separately. Will you have more money in retirement by giving up tax-deferred growth in your RRSP? Are you willing to increase your debt level to invest? Can you afford, financially or mentally, to repay the loan if the stock market crashes? If you are comfortable with taking on more debt and more risk, this does not mean that you need to cash out your RRSP.
“Your portfolio has not performed well but remember that you have a long-term view and it will turn around soon.”

This is generally a true statement, but ensure that you understand “long-term.” Ask your advisor to compare your performance to a comparable benchmark annually. For example, the performance of your Canadian equities should match or exceed the S&P/TSX Composite Index. Each piece of your portfolio can be benchmarked.
“Although the portfolio has performed well, you should not sell now because of the capital gains tax or deferred sales charges that will be deducted.”

If the time is right to sell, then losing a few percentage points to taxes or commissions should not stop you. The tax costs will not go away unless your growth does. If it is time to sell, losing a few dollars to taxes and commissions is better than having a capital loss. I have a client who avoided taxes by not selling his Nortel shares in the early 2000’s – he saved taxes on 3 million dollars because the shares are now worthless.
“You will be able to make 12 to 15% in the future.”

The bottom line here is that your advisor is not permitted by regulatory authorities to make such statements because he/she really does not know (and few people achieve such returns). Leading out with “Although I am not technically allowed to promise this,” does not excuse the statement. And showing you a “what if” scenario based on past history is meaningless, because it varies based on the time frame chosen.
“You should invest in bond funds and/or income trusts because they are safe investments.”

Bond funds can lose value when interest rates rise, and income trusts are equity investments, not the safe fixed income securities. Be sure your advisor explains the risks. See my article on Bonds are not Guaranteed – Understand the Difference between Bonds and GICs.
“When you transfer your investment account to me, we will need to sell your investments and buy new ones.”

This only makes sense if they were bad investments or if your new advisor has limits on what he/she is allowed to hold. If it is the latter reason, maybe the new broker is limited in his or her product line and will be limited in getting you the best investments. Selling your securities when making such a transfer is not normally a requirement. And, after the transfer, make sure your original costs are reported accurately in your new account, because the computer system may have changed them to current market prices – resulting in misreporting of future gains and losses.
“Don’t worry about designations behind a person’s name – experience is more important.”

Knowledge is required in this complex world, and is changing every day. Experience without knowledge is likely out of date. If they have the knowledge, why do they not have the credentials? Maybe they are just salespersons taking advantage of the lack of rules around using the title, “financial planner.” See my article on Finding the Right Investment Broker.
“Trust me – you don’t need to understand these investments because that is my job.”

That’s satisfactory if you plan to live with your advisor in retirement (i.e. in his or her house!) – however, only you can be responsible for your own future. A basic understanding of your investments and the related risks is essential. It is very important that you understand whether you are a conservative or an aggressive investor, and that your portfolio is properly designed to reflect this personality. Always ask, “What is the worst case scenario?”
“There are more opportunities outside of Canada in the equity markets; therefore, the majority of your investing should be in global and international funds.”

Diversification is great, but balance it with increased risks of exchange fluctuations, government interventions, war and recessions in countries you know nothing about. See my article on Foreign Investing – Is it for you?
“Balanced funds will protect you from losses.”

Again, diversification is great, but a balanced fund holds cash, bonds and equities. A decline in equities will impact the whole fund, and so a balanced fund is not appropriate for money from which you regularly withdraw money. If you withdraw money when equity markets have pulled down your value, you will be selling at a loss with no opportunity for recovery in the future. Consider balancing your portfolio by separating bonds from equities; then, if the market declines, you can draw money from the bond portfolio and wait for the equity market to improve. Also look at the management fees you are paying in a balanced fund versus holding them separately; you may save money holding them separately. Furthermore, if you are drawing money regularly from mutual funds, remember that bond funds fluctuate in value as well. Consider a laddered portfolio of GICs to meet your regular needs. See my related articles on laddering and on the risks of bonds.
“My services are free to you – I am paid by the company”

Not likely! If you are buying mutual funds, for example, an annual management fee is deducted from the fund before you receive any of your money. From these fees, an annual “trailer fee” averaging from 0.5% for a bond fund to 1% for a balanced or equity fund is paid to your advisor with many firms, unless special low fee funds are used (which is normally the case when you are paying them directly). However, payment of your advisor will vary depending on their employer, and the type of investments they sell you. My article, Finding the Right Investment Broker, may assist you.

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Investment Advisor Sales Tricks and Tactics – Caution Required

“We have calculated your retirement income needs, and in order to retire when you wish, you need to take more risk to make higher returns in your portfolio.”

“You should start drawing out your RRSP / RRIF savings now, before retirement. You can save taxes by deducting interest on a new investment loan.”

“Your portfolio has not performed well but remember that you have a long-term view and it will turn around soon.”

“Although the portfolio has performed well, you should not sell now because of the capital gains tax or deferred sales charges that will be deducted.”

“You will be able to make 12 to 15% in the future.”

“You should invest in bond funds and/or income trusts because they are safe investments.”

“When you transfer your investment account to me, we will need to sell your investments and buy new ones.”

“Don’t worry about designations behind a person’s name – experience is more important.”

“Trust me – you don’t need to understand these investments because that is my job.”

“There are more opportunities outside of Canada in the equity markets; therefore, the majority of your investing should be in global and international funds.”

“Balanced funds will protect you from losses.”

“My services are free to you – I am paid by the company”