Blood Money: beware those with stable income and a “long time horizon” who could be described as “knowledgeable“.

I was passed along a link to web page that provided an advertisement to “advisors” to consider the use of leverage, which actually led to a number of other links that provided more insight and documentation on the leverage implementation process in Canada.   The communication I am talking about said the following:

Studies show that for the right investor borrowing to invest can be a sound strategy. It certainly isn’t for everyone, but for knowledgeable investors in good financial health with long time horizons, taking on investment debt may be advantageous for a number of reasons. Recognizing this, and to make borrowing as convenient as possible, xxxxxx now offers investment and RRSP loans for xxxxx funds at preferred rates from xxxx Bank.

The other documents discussed making leverage a “cornerstone” of an “advisor’s” investment practise.  Note: not a niche component, but a cornerstone no less!

But let us get back to the above.   What the above states, and this is more or less endorsed by the regulators, is that investors who fit the relevant profile are fair game for high risk leveraged strategies. 

Leverage used along side high cost investment products is a way of making “advisors” and institutions money, and if the investor fits the profile, then they can be considered viable targets.  

Unfortunately, even those who have the “time frame” and “income level”, which I expect to be the bare minimum to pass muster, are going to be heavily impacted by adverse investment conditions.  Even stable low growth scenarios, given the costs of the exercise are likely to leave investors in a net debt position.  Leverage requires a fairly high certainty of fairly high returns to compensate for the risk and overcome the costs of the exercise. 

Yet all we have from the regulators effectively, is if the consumer can roll with the punches and absorb the losses without turning them out onto the streets and the soup kitchens, they are fair game.

And how do I know this, well, I was also forwarded an OBSI (Canadian financial services ombudsman) case study

The clients, a retired couple in their early 70s, were approached by an advisor who had been referred to them by a friend. The advisor recommended that they take out a $90,000 home equity line of credit and use the money to invest in various equity mutual funds. The couple had $15,000 in retirement savings and had only fair investment knowledge. Their income came from government and company pensions. Since they did not have adequate income to cover monthly interest payments on the loan, the advisor set up a regular withdrawal to be taken from the investment account.

The couple’s investment declined rapidly, but their advisor continuously reassured them that it was a market correction and that they would soon recover their losses. After four years the advisor moved to another firm. The investments were worth about $40,000 and the couple still owed $90,000 on the line of credit. Over the next three years their account was transferred to three different advisors who were concerned about the advice the first advisor had provided, but did not advise them on what to do about the investment loan. The couple complained to the firm and eventually brought the complaint to OBSI.

Overall we found that the strategy of borrowing to invest was far too risky for retired clients with only limited to fair investment knowledge and almost no savings. The strategy did not meet any of the guidelines established by the firm for leveraged investing and it was not clear why the advisor recommended it. A senior advisor with the firm agreed that the strategy was inappropriate.

We calculated that the couple had lost a total of $60,000…Given this information, the firm felt it was fair to compensate the couple for their losses and agreed to pay $60,000 to resolve the complaint.

Now, the very fact that the case had gone to OBSI meant that the firm had declined responsibility in the first place.   If you have lost a lot of money, but are not in your seventies and have a bit more than little or no income and minimal savings, be very afraid because you are fair game and if you lose there is likely to be no recourse.

Regulators support the current state of affairs, but I do not.  This is shameless exploitation supported by the regulators and the government, because of course, big business has the influence and the interest to protect this kind of money blood diamond/sex/drugs trade.   

No one who believes in human rights and in treating their customers fairly and with responsibility should in any way be supporting the status quo.   Say no to current regulation, say no to limited advisor responsibility for leveraged strategies, and let the investor know just how much the cards are stacked against them in Canada’s retail financial services industry.

And by the way, I always use the word “advisor” in quotation marks, because, unless you are in a discretionary relationship advised by individuals who have a professional duty to put your interests first (for example a CFA: there is no securities designation in Canada which requires you to put the client’s interest first, always), you are being “advised” sold securities and products by those who are regulated as sales people only.  

As always, there are those who do a good job, who are forced to operate within the dysfunctional confines of an absurd regulatory system, but these individuals will most likely not be selling you leverage.   If someone tries to sell you loans and margin, remember, most of the time they are doing it for themselves.  It is not because they consider it a strategy that is in your own best interests

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