Can you Trust Your Adviser?

Before you give anyone your money, there's a phone call you should make.

BY KELLY RODGERS

TORONTO POLICE ISSUED A warrant this past June for the arrest of Patrick Kinlin, a financial adviser who allegedly stole more than $12 million from his clients. What's frustrating is that Kinlin's clients could have prevented this tragedy with one phone call apiece. If they had simply contacted the Ontario Securities Commision before entrusting their money to Kinlin, they would have discovered their adviser was not what he appeared.

Kinlin was registered solely as a mutual fund dealer and as an insurance agent, which means he was entitled to sell only mutual funds and insurance products. The problem was that he persuaded clients to buy government bonds. Since he was not registered to sell these bonds, police allege he simply printed his own.

You should keep Kinlin in mind whenever you're dealing with anyone who wants to handle your money. You should ask those would-be advisers what registration they possess (anyone selling securities or managing investments must be registered) and you should verify that registration.

Don't just take an adviser's word that he or she is qualified. In my consulting practice, I advise affluent clients on who should manage their investment portfolios. I regularly come across advisers who lack the proper registration, but who are actively pitching for my clients' business.

Simply because someone has a degree in business or a financial planning designation doesn't mean they're qualified to perform all types of financial transactions or to sell you any type of security. What an individual adviser can do is determined by that person's registration with provincial securities commissions and organizations such as the Investment Dealers Association of Canada.

Your first step should be to ask an adviser to explain precisely what his or her registration means. What products or services can they sell? What can they not sell? If the answer seems vague, you should be suspicious.

As a minimum precaution, you should run your adviser's name past your provincial securities commission. Ask for the registrations department and explain that you would like to verify the registration of your adviser. As an added safeguard, you may want to contact the regional office of the Investment Dealers Association. (For local phone numbers, see "Lie detectors" below.) Again, explain that you want to check on your adviser's registration.

The answers you get may sound confusing or technical, but don't be deterred - most registration categories have to do with narrow business niches that. don't concern you. The four key registrations you should listen for are mutual fund dealer, registered representative, portfolio manager and investment counsel portfolio manager. Here's what each title means:

Mutual fund dealers can sell only mutual funds; they can't sell you individual stocks or bonds. Also, they can act only on an advisery basis - in other words, they can't make decisions for you, just recommend investments. Their compensation comes from commissions and trailer (or service) fees from the sale of mutual funds. People registered as mutual fund dealers typically work for financial planning firms and mutual fund dealers such as Regal Capital Planners, Investors Group, Berkshire Financial Planning or Manulife Financial. Beginning next year, mutual fund dealers will be supervised by the Mutual Fund Dealers Association, which is under the direction of the Investment Dealers Association.

If your adviser is registered only as a mutual fund dealer, he or she may have blinders on' Even if individual stocks or bonds may be more appropriate to your situation, these advisers are limited to selling you mutual funds - and, not surprisingly, their sales pitches are likely to be based on touting the wonders of mutual funds. If you want a wider viewpoint, you may want to consider an adviser with a broader registration.

A registered representative, or RR, is sometimes referred to as a stock broker or investment adviser. RRs are supervised by the Investment Dealers Association. They work for brokerage firms such as Nesbitt Bums, Merrill Lvnch and RBC Dominion Securities. They can assist you with the purchase of stocks and bonds, as well as mutual funds.

RRs, like mutual fund dealers, can provide only advice and recommendations; you still have to make the decisions. RRs make their money from commissions and trailer (or service) fees on the products they sell. That means if you want to follow a buy-and-hold strategy, your RR doesn't make as much money as he would if you traded more frequently. Keep that in mind when your broker is telling you about the latest wonder stock.

A very few RRs are registered as portfolio managers. This registration allows them to manage your portfolio on a discretionary basis - in other words, they can buy or sell securities for your account without clearing each transaction with you. You, of course, have to sign over this authority to them (and should do so only after making sure they fully understand your investment objectives, risk tolerance and how they are to report to you). Portfolio managers who work for brokerage firms are supervised by the Investment Dealers Association.

If you have a large portfolio, you may encounter people known as investment counsel portfolio managers. These individuals and their firms only manage portfolios on a discretionary basis and must meet stringent qualifications. They usually receive no commissions from the sale of products; instead, they charge clients based on the size of their investment portfolios. They are supervised by the securities commissions in each province.

In checking out your adviser, you may have to be persistent. I've found the provincial securities commissions in Ontario and British Columbia to be helpful and pleasant. But, until recently, the Investment Dealers Association was a different matter. The association was a lobby group for the industry, with no mandate to provide information to investors. The IDA would verify only that an adviser was registered with the association, but not which registration category the adviser was in. I've usually been successful in getting the information I want from the IDA only because I'm prepared to argue.

As a result of inquiries for this column, the IDA has changed its policy and will provide information on the category of registration an adviser has obtained. That's great news. So take advantage of the opportunity and check out your own adviser. The money you save may be your own.