TORONTO (Reuters) - While big financial institutions lost the trust of investors with LIBOR scandals and mortgage meltdowns, financial advisers have seen the trust drain away for more personal reasons with faces attached: Bernie Madoff, Earl Jones, Allen Stanford.
The hangover of mistrust caused by high-profile Ponzi schemes, together with volatile markets and distrustful investors, has created a perfect storm of sidelined cash and financial advisers worried about their future.
“I fear a little bit for our business right now,” said Dean Owen, a personal financial planner with Cherry Financial Services in Saskatoon, Saskatchewan, and chair of Advocis, the Financial Advisors Association of Canada.
Owen feels the fallout every time another unscrupulous scam artist calling himself a financial planner takes investor money, promises a fat return and spends the proceeds himself.
Clients “ask how did it happen, and why does it happen? And it always comes down to the same reason. In a situation of falling markets, people will always want to look for higher returns,” he said. It comes down to fear and greed — “more greed than fear,” he said.
“It starts right in a coffee shop. People will hear from their friends: ‘I’m dealing with Mr. Madoff. He’s gotten me 8 percent over the last three years and it’s working great.’ Word of mouth spreads.”
Canada has had its share of scams, too. The highest profile case involved Earl Jones, a Montreal investment adviser who pleaded guilty in 2010 to running a Ponzi scheme that cost his victims — mostly senior citizens — an estimated C$40 million ($40.8 million) over 20 years.
Market volatility and low returns have created the breeding ground for desperate investors looking for the promise of profits. But while scams have an obvious cost to investors, financial advisers are also hurt.
“There is an inherent skepticism” among prospective clients about independent advisers, said Sandy Cimoroni, president of TD Mutual Funds at Toronto-Dominion Bank, Canada’s second-largest lender. “Brand credibility and governance is very important to clients.”
Owen worries Canada’s big banks, who have branches from coast to coast and full brand recognition, are going to benefit from the distrust of advisers, even though independent advisers may boast better education, diversity of products and, most obviously, no loyalty to one national lender.
“But people are willing to do that for safety. So they are foregoing financial advice for security,” said Owen.
On the ground, advisers warn one another to document everything fully — both to build trust and satisfy regulators.
Lee Helkie, a certified financial planner, said paperwork has tripled or quadrupled in her 16 years in the business, to the point where she cannot understand how fraud can be perpetrated — and then go unnoticed by clients.
“We never have clients writing checks directly to us — it is always to the investment company,” said Helkie, an Advocis member in Toronto.
She advises precautions such as good note-taking and good processes for communicating account information to clients, so that investors get information not just from the adviser but from those who provide the investment products themselves.
“I can send out an individual statement showing where their money is, what it has returned. But you should also expect a statement from the company directly. When you stop seeing statement from the company, start asking questions,” he warns investors.
John Rogers, chief executive of the CFA Institute, calls it the “basics of corporate hygiene.”
“Structurally, there are things financial firms can do to reassure clients - for example, independent custody. Or if custody is taking place at the adviser’s institution, independent audits of custody holdings,” he said.
Codes of conduct, training and licensing also play a role, said Rogers, whose institute certifies Chartered Financial Analysts only after years of education and on-the-job training.
Owen pushes for regional associations for financial advisers, so that industry players can keep an eye on each other in addition to the usual licensing and regulation required by the different provinces.
But he, like other financial advisers on the ground, are worried the distrust will cause investors to either hoard their money — avoiding financial advice altogether — or take such a conservative approach that inflation will eat their savings.
Rogers said the only answer to scandal and skittishness — and the future health of the advice industry — may be time.
“It’s important that financial advisers take some comfort in the value of time, and the high probability that if they go back to the basic asset allocation approach for their clients ... time and market forces will probably work out to their advantage.” ($1 = 0.98 Canadian dollars)
Editing by Frank McGurty