Paul and Diane Laflamme: Ten ways you can avoid being fleeced

Thursday, March 15, 2012

Ten ways you can avoid being fleeced

Avoid scams by asking right questions

By MARTIN PELLETIER, Financial Post March 14, 2012

A couple of years ago upon the birth of our second child, my wife convinced me that it was finally time to sell my two-door sports car and buy a minivan. After a couple of sleepless nights thinking about it on the couch, I agreed and placed an ad in the newspaper.
I received an offer over the phone from someone out of province who was going to fly in, potentially buy the car and drive it home. He liked the car and after the test drive he asked if I would like to go to the bank with him to conclude the sale. The teller prepared the draft and I handed him the keys and the bill of sale to conclude the transaction.
After immediately depositing the draft (we had accounts at the same bank), the teller said that I must have done my homework because a common fraud is when an out-of-towner buys a car with a fake bank draft and drives off with the car before the seller makes it to the bank.
It was quite fortunate I decided to go to the bank with the purchaser, because I had no idea about this type of scam - not surprising given my infrequency of selling cars. Many Canadians have not been so fortunate.
During our many years in the investment business, we've read and heard about a number of scams that investors, with the right questions and precautions, could have avoided. With that in mind, we've put together a Top 10 list of the basic rules for assessing new investment opportunities.
1) Ask if the investment is registered with a provincial securities commission or Investment Industry Regulatory Organization of Canada (IIROC). IIROC and many regulators have a check-first search engine on their websites where you can find out if the firm and the individual selling an investment are registered. If they're registered, check for past warnings or disciplinary actions. If they're not, stay away.
2) Beware of "Friends and Family" or "Hot Deal" taglines. If the investment is that good, you'll never see it because the seller would likely take it to an institutional investment manager who has much deeper pockets than you.
3) Be cautious when approached with a "great investment opportunity" from someone in your church, professional association or community group. Con man is short for confidence man and the quickest way to gain someone's confidence is to move in the same social circles and purport to share their values and ethics.
4) Unrealistic rate of return. Remember that if it sounds too good to be true, it most likely is. Most scams reel in investors with a pitch of "guaranteed" or "low risk returns" of 30% or more. Risk and investment return go hand in hand: The higher the return potential, the greater the risk.
5) Show me the money. Ask about the disclosure requirements and access to information, meaning access to regular financial statements audited by a well-known independent third-party accounting firm.
6) Never write a cheque payable to the person offering the investment. Just ask those who wrote cheques to Earl Jones or Bernie Madoff. In particular, look for a third party custodian who will hold your investment independent of the person managing the investment.

7) Always ask for specifics about the timing and process of getting your money out.
8) Stay away from any investments being offered by sales seminars, telephone pitches and unsolicited investment emails.
9) Always ask how the investment seller is getting paid and remember there is no such thing as a free lunch.
10) Finally, and most importantly, don't be afraid to show any investment to your accountant, lawyer and investment counsellor. Fraudsters will do everything they can to prevent you from doing this.
A little due diligence can go a long way toward minimizing the chance of falling victim to investment fraud. If, despite all these precautions, you still get victimized, make sure to immediately report it to the RCMP and your local provincial securities regulator. The vast majority of investment fraud and scams go unreported and continue to operate for long periods of time, drawing in even more unsuspecting people. Victims often feel embarrassed, or are afraid to report to authorities a member of their church or community. But the only way to stop investment fraud is to take action and report it immediately.
- Martin Pelletier, CFA, is a portfolio manager at Tri-Vest Wealth Counsel Ltd., a Calgary-based private client and institutional investment management firm specializing in discretionary risk managed balanced portfolios as well as specialty offerings including an oil and gas hedge fund.