Latest scam shows need for disclosure

The financial advice industry has been tarnished once again by someone from outside the business as Montreal’s “mini-Madoff” made headlines across the country.

In fairness, to call Earl Jones a financial advisor is akin to calling the accused in a stabbing case a surgeon, since he was not registered with securities regulators, not affiliated with a dealer, MGA or broker and has no professional designation.

But the case does provide some lessons to advisors, notably the importance of flaunting your accreditation.

“We’ve had a few of these cases come forth and they almost all bear the same commonalities,” says Rob McEachern, CFP, CLU, with LifePath Transitions Strategies in Barrie, Ont. “The people may not be members of professional associations, they maybe don’t have designations. To me, it seems to be an underlying theme.”

In response to these types of frauds, McEachern sat down and drew up a document for clients that explains how their investments are secured and how his practice ensures that client capital is not the target of fraud.

“There are simple things, like not issuing personal cheques to cover anything; how all deposits go into trust accounts, and the company sending confirmations,” he says. “In some of these cases, it sounds like the clients weren’t getting anything from the companies they were [supposedly] dealing with. Everything was coming from the advisor.”

The document lists his mutual fund dealership, the managing general agency he runs his insurance business through and how to get in touch with either company. He encourages clients to do their own due diligence to ensure an advisor actually has these relationships.

This information finds a natural home in the client engagement letter, but not all advisors use these, despite the endorsement of the Financial Planners Standards Council.

“There’s nothing legislated that says you have to be a member of an association,” McEachern says. “That’s where the problem comes out in the financial services industry, because I can get a licence — or not get a licence — hang out a shingle and somebody will walk by my office and think, ‘Oh, there’s a new financial advisor.’ They know nothing about me, they don’t know whether I’m registered, or whether I’m governed by any laws.”

Other professions, such as doctors and lawyers, are protected from such abuse. It would be illegal to claim to be a doctor without the proper training, licensing and membership in the provincial medical association.

McEachern suggests that recent fraud cases demonstrate the power of the referral, as many victims of these types of fraud accept the endorsement of their friends or family, and neglect to check out the so-called advisor’s credentials.

“If you get a professional referral from a friend, you automatically elevate it as something good,” he says. “If you don’t have the skills to feel out whether the person is just a slick talker, what else do you have to go by if they don’t have professional qualifications?”

(07/14/09)