Portus fallout: Dealing with worried clients

(February 2005) With Portus stuck in regulatory limbo, advisors are offering guidance to colleagues who may have referred clients to the hedge fund firm.

Although the current controversy over Portus may not be directly comparable, it has some advisors harkening back to the grim days of the bear market when they were forced to deal regularly with anxious clients.

Portus’s assets, estimated at more than $700 million, have been temporarily frozen as the Ontario Securities Commission investigates the hedge fund firm over allegations related to sales practices and record keeping. The probe is expected to take at least several months, but at this point, there’s no evidence that client funds are at risk and Portus insists the money is safe.

Understandably, advisors who sold Portus products are not keen to go public. In fact, sources say that at least one dealer, Berkshire, has forbidden its advisors from talking to the media on the subject. But a number of advisors are willing to discuss the general topic of dealing with clients when a product or firm falls under the cloud of suspicion.

James Taylor, a Toronto-based advisor who describes himself as a financial physician and has trademarked the name “DrFinancialHealth,” says he took a close look and Portus, but in the end decided against referring his clients to the company, despite an aggressive sales and marketing campaign.

“My big problem was, outside of looking at this and trying to understand it, was that I like to provide client statements which reflect all of their investments,” Taylor says. “And to me, Portus was an ‘off-book’ transaction, that I have no way of overseeing.”

That’s because once a client is referred, Portus takes over investment suitability and due diligence. “The know-your-client forms and all those things would be handled by a third party,” Taylor notes.

“There are other competitive, comparable products out there that fit in the mutual fund structure,” he adds.

For John Hope of Allied Financial Services in London, Ontario, due diligence is his most important concern in this type of situation.

“One of the most important clues that I look at in completing my due diligence duty has to do with compensation,” Hope says. “If the product I’m being asked to consider selling comes with a higher commission as an enticement to sell it I usually decline the opportunity.”

“We work in a world where building trust is the primary goal,” adds Taylor. “So the question for advisors is to what degree should you have been able to assess the eligibility of a client to participate in this type of investment and what percentage of a client’s assets are you looking to put there?”

Other advisors are more critical of colleagues who referred clients to Portus. “Anyone who read the Portus offering memorandum as the new notes came along should have smelled trouble,” wrote one anonymous advisor in Advisor.ca’s Talvest Town Hall, who describes herself as an industry veteran with more than 15 years experience. “We can look back and blame the OSC, our dealer, the slick Portus spin team, but what it really boils down to is this: you can’t recommend a product to your client unless you know what it is.”

“I would suggest that if you don’t have time to understand each and every product you sell to clients, you may need to refocus your practice and stop selling the last thing someone promoted at a free breakfast or lunch.”

But what’s the guidance for those advisors who did refer clients to Portus, either because they believed in the product or were attracted by the firm’s attractive incentive package?

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Taylor says he would take a proactive approach and immediately contact the clients involved. “The reality is that you can’t change due process. Portus is in limbo, there’s nothing you can do about that, but you can look at the portfolio. If [your client] has lost 100% of their [Portus] investment, what would that mean?”

“Fortunately I did not have any clients in Portus,” says Marc Lamontagne, a CFP based in Ottawa. “If I did, my first reaction would be to call the clients. There is good value in calling clients in times of stress just to discuss how they feel. The mistake is to hide and hope the matter will correct itself. I would rather the client received the bad news from me than read about in the paper. At least that way they see that I am on top of the matter and providing regular updates.”

Lamontagne adds that many advisors don’t have either the time or the training to do a full analysis on all investment products. He outsources that function to an independent CFA (Paterson & Associates) for a second opinion.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(02/22/05)