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A Thriving Export to Canada: Broker Misconduct

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Most Americans have a high regard for our Canadian neighbors to the north. We respect their honesty, their integrity and, especially, their civility.

The statistics on crime in the U.S. and Canada show that Canadians live in a more lawful, peaceful society. Violent crime in the U.S. is appallingly higher per 100,000 inhabitants than in Canada. Murder with firearms is 65 times higher in the U.S. Our overall murder rate is more than double, and our total crimes are five times higher.

There is one area where the conduct of Canadians seems to be on par with their American counterparts: the securities industry. It appears that financial advisers at some top Canadian banks and independent financial firms mimic similar conduct prevalent in the U.S.

The Canadian Broadcasting Corporation is the country's oldest broadcasting network. The CBC's Marketplace division, which deals with financial issues, sent a person wearing a hidden camera into five big banks and five "popular investment firms" in Ontario. The purpose of the investigation was to determine the quality of advice dispensed by these financial professionals. An overview of the results are reported in this article. They aren't pretty.

Some advisers gave incorrect information about how fees are calculated. Others failed to evaluate risk tolerance. Some didn't discuss the benefit of paying down debt. In one case, an adviser stated that a $50,000 investment should increase by 20 percent or more in one year.

The similarities don't end with poor advice. Following the precedent established by American banks and brokerage firms, one Canadian firm suspended the employee involved and reported the behavior to Canada's regulatory authorities. Others "vowed to investigate and take appropriate measures." Others characterized this conduct as an "isolated incident." Does this lack of accountability sound familiar?

The article noted that a similar investigation in the United Kingdom also produced troubling results. The Financial Services Authority conducted 231 "mystery shopping tests" at six major firms and found that more than 25 percent gave advice that was of "poor quality."

The best way to avoid becoming a victim of poor advice is to select an advisor who focuses on your asset allocation and recommends a globally diversified portfolio of low-management-fee index funds, passively managed funds or exchange-traded funds. There are many of these advisors in the U.S. and in Canada. The problem for consumers is these firms tend to be smaller, with limited marketing budgets. They rely primarily on referrals and can't compete with the huge advertising onslaught of major firms.

A good place to start for residents of Canada is the website of Dimensional Fund Advisors Canada. It has a "find an advisor" page, which provides a list of independent financial advisers from whom Dimensional currently accepts client investments into its funds.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.