People looking to commit investor fraud are using the personalities of their potential victims against them.
Advocacy groups say surveys meant to measure a client’s level of risk can become a roadmap of just how far they can be defrauded.
“In terms of personality types, it almost serves as a checklist for fraudsters to utilize,” said Neil Gross of FAIR Canada.
The B.C. Securities Commission (BCSC) has developed another personality test to protect investors.
“We’re encouraging people to take the quiz , find out which personality type they are which will tell them what strengths and perhaps weaknesses they have,” said Pamela McDonald of the BCSC.
The survey groups participants into five personality groups: confident, diligent, impulsive, reserved and tumultuous.
All personality types show certain weaknesses when it came to investor behaviour with their financial advisors.
For example, confident investors were most likely to conduct a background check on their advisors, but less likely to ask them about how they are being compensated.
A similar struggle with diligent personality types, who had no problem reading their financial statements all the way through.
“You would think that someone who approaches their financial investments in a diligent way would also think about asking their financial advisor about how they’re compensated,” said McDonald.
The BCSC is hoping to use the findings of the survey to push investors to ask the right questions of their financial advisors, worried that many blindly trust they will be served fairly and responsibly.
“Most investors feel that they are dealing with someone, like a lawyer or doctor, someone they can repose trust in and rely on them for professional services,” said Gross.
The difference between a financial advisor and these other professions is in Canada they are not considered fiduciaries or professionals with a legal obligation to put their client’s best interests first. The United States placed a fiduciary responsibility on the financial sector after the collapse in 2008. Other nations like Australia have also taken similar action.
Some investment professionals in Canada do have a fiduciary responsibility. Portfolio managers are held to a higher standard but are in ultimate control of your investments. Investors must ask for regular updates to ensure transactions being made are in line with their comfort level. Also, a different free structure is in place for portfolio managers.
When it comes to financial advisors, the BCSC says in most cases trust is already earned and warranted, but insist consumers must still do their due diligence.
In B.C., only a quarter of people surveyed admitted to never asking their financial advisors how they are being compensated; 38 per cent do not read their financial statements on a regular basis.
Critics argue that changing someone’s behaviour is a tough task and some of these questions are not being asked because investors simply aren’t comfortable doing so.
“What we’re doing now is trying to make it easier for them and policy changes are coming,” said McDonald.
In July, new rules being implemented across Canada will require all financial investment statements to include the advisor’s fees as well as a better description of portfolio performance.
McDonald hopes the combination of policy changes and investors challenging themselves will help protect them from potential pitfalls.
“It’s their hard-earned money, it’s their retirement income, and you have to take responsibility for that,” he says.
A list of resources to protect yourself from investor fraud:
- National Registration Search – the first step to take before investing. If you discover the person or company you are dealing with is not registered, or is offering you something they don’t seem permitted to, contact your local securities regulator.
- List of “disciplined persons” – the page lists persons that the BCSC has disciplined since 1987, including persons whose sanctions have now expired.
- Investment Caution List – this list provides investors with the names of:
- Unregistered foreign brokerage firms that have solicited B.C. investors to open trading accounts
- Businesses from other jurisdictions that have solicited B.C. residents to buy unqualified investments
- Businesses connected, or purporting to be connected, to B.C. that have solicited investors in other jurisdictions to purchase unqualified investments
- BCSC’s Enforcement Report – contains an overview of its efforts to deter misconduct, protect investors and ensure that B.C.’s capital markets function fairly and efficiently.
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