In World Today, Investment Coaching is a Must…True Stories on Advisors Preying on Customers

I am going to tell you a true story of why the investment industry makes my blood run cold.  They will tell you these advisors are the minority, but the reality is, the system is designed for people like this, and the firms love them.  Customers assets are the big rock made of gold where the advisors job is to chip off the monetary rock as much as they can without the customer understanding how their wealth is eroding….

My Journey In The Investment Industry As One of Canada’s Top Success Stories

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There is a saying ‘how can an investment advisor make an investor worth a million dollars – give them $2 million dollars to start’.  The reality is sad but true in many cases.  I saw it as a senior officer, board director and manager in the industry.  The scenarios I was privy to made me sick.  Customers and their assets were the vehicles towards others wealth, and many times greed, and incompetence led to massive losses.  Lives were devastated.

I spend 14 years in the financial industry.  I ended up being one of Canada’s top advisors; became a manager of one of the most prestigious offices in the country; was one of the most admired and respected advisors as I had many of Canada’s and world top corporate executives, professional athletes and most successful entrepreneurs. I also was a key player in helping one of Canada’s big banks build out their investment management division.  I had constant great challenges, great successes and deep knowledge.

I had this success because I loved two things:  helping people achieve the success they rightly deserved at investing; and loved the challenge of figuring out investment markets as they are a complex mechanism.  The problem came down to a point where clearly the long-term cycle was coming to an end in the late 1990’s and my belief in ‘customer #1 philosophy’ always would be the top priority.  This meant I had to move customer funds to safe havens which greatly impacted corporate profits as well as my personal income…I had no problem with it, but the firm did. 

Investment Firms One and Only Goal – Profitability To Ensure Their Own Wealth Enrichment

The investment firms did not care if it is at a good, bad or ugly part of the investment cycle – the job of an advisor is to collect as many fees as they can from their customers, ALWAYS.  That is the only way they are assessed – the fees/commissions they collect from customers.  The firms do now know or for that matter care about the returns their advisors achieve for customers.  If they do care at times, it is only because they do not want lawsuits from flagrant mismanagement as well as they know that if their advisors do terrible for their customers, they move thier assets to the competition.  But they know if advisors provide weak, or poor or for that matter very sub-par performance, customers generally do not move unless they do not like or trust their advisor. 

This is simply due to ‘the devil you know versus the devil you don’t know’.  Many times it is due to the fact that the customer does not have a clue how bad they are actually doing.  So what is the key to being a successful advisor:  give off an aura of trust and be likable.  We must remember that the best sociopaths who prey on others in the world are great at this…but I digress.  It is not about being a brilliant money manager.  Just make your customers feel good about the professional relationship, although if customers truly understood the incompetence at times, they should and would be infuriated.  I am amazed how little many advisors truly know.  It is because it is not their job to understand successful investing.  This may sound crazy – but it’s true.

Why The Industry Puts Up With Advisors That Prey On Their Customers With No Conscience…

Clearly I cannot divulge the name of any advisors that have done so many horrific things, as many are still in the system today.  Remember,  we must protect the guilty.  You would hope that big banks and investment firms would clean these people out, but reality is, they are the most profitable of all advisors in the system.  The firms will not admit it, but they love these people.  They manipulate, lie and abuse financial relationships and advisor-client trust constantly. They only care about how much money they make.  The more they make, the more their firm makes.  Very sadly, by far the majority of the time, this means the less their customers make or for that matter, the more they lose.   Advisor win, Firm wins, Customer loses.  Do not think that there are only a few of these types of advisors…they are throughout the industry.  It draws them as they can use their sociopathic skills to make huge monies and not be thrown in jail.  I will discuss the ‘perceived good advisors’ later in this article.

This is a systemic problem.  Advisors should not be allowed to manage assets on their own, at least not the majority of them.  The firms permit them, as they know that their end ‘return of assets’ will be much greater than if they managed the assets in a much more ethical way. 

Story of Some Horrible Acts That I Saw Advisors Do And Firms Still Allow them to Prey on Customers Today

So let’s get into some of the meat that I saw happen when I was in the industry.  The list could go on and on and on, but we will give you some stories that still to this day sicken me:

Pump and Dump Scheme…Enriches an Advisor But Kills Customers

I saw this scheme happen way too many times, and reality is, it still goes on today.  This is because advisors are not policed as tight as they have to be.  Here are two stories in this area:

In the precious metal boom, advisors are approached by very unscrupulous people who own and promote small capitalized companies.  They want a successful advisor to promote their company shares in turn for a piece of the action or back door benefits. I think your mind could figure out some of the benefits they could receive.  The normal route is for the advisor to be given a significant amount of shares in a company and put into a numbered company, probably with their name not attached – could be their kids, wife, associates, etc.

The advisor’s role is to push out a bunch of false stories to their customers and advisors throughout the firm.  I saw this happen a number of times.  The advisor would talk about the potential home run this stock would achieve, and that other advisors should get all their customers in it, including putting their money in.  Of course, there were no solid fundamentals behind the company, just a purely made up story.  I know a few top advisors in the system today who were famous for it and today the firms give them titles like Senior VP and lavish them with income and constant recognition.

Now, what happens is that the more money being pumped into these type stocks, the more they rise.  The more they rise, the more money gets pushed into them.  Advisors and investors love to buy a stock that is running.  They believe that a nice move will turn into a monster move.  So a stock may go from .50c to $7 as an example.  Let’s say that the company started with a small market cap of $25 million.  So, if the stock is trading at .50c, there are 50 million shares outstanding.

Let’s say the advisor who is promoting the shares is gifted $1 million shares at a book value of $500,000.   Well, if the advisor can pump enough money into this stock that is fairly illiquid, by way of their customer’s money, other advisors money, and other advisors clients money, the stock will run. So it goes from .50c to a $1 easily as there is no selling, just more buying.  Then it keeps running as the money keeps flowing in with little selling.  These promoters keep promoting, driving the stock price up, but also have the details of money flowing in and when the new money is slowing down or drying up.  This is when they walk by selling off their ownership shares, and the investment advisor promoter will do the same thing.

As an example lets say they see buying momentum slowing as the stock reaches $6.  This is when they start to sell off their monies.  Here is an example of the kind of wealth that can be made:

Primary owner of the company has 25 of the 50 million shares (original cost 25 million shares at .10c per share or $2.5 million).

The promoting advisor was gifted $1 million of shares or let’s say; they were granted the shares at a discounted price of $100,000 (their cost) or .01 c per share (10% of .10c).

Now lets say, the primary owners sell 50% of their shares at $6:

Proceeds:  ($6 X 12.5 million shares = $75 million) – (cost .10c X 12.5 million =  $1.25 million)

               Profit:  $73.75 million

What about the advisor who promoted the shares throughout their firm:

Proceeds:  ($6 X 1 million shares = $6 million) – (cost .01c X 1 million = $100,000)

               Profit:  $5.9 million

So you have a very happy principal owner of the company and promoting stock advisor.  But for every winner, there have to be losers.  What happens at this stage is that the advisor keeps promoting the heck out of the shares.  Their job now has now expanded from getting as many other people to buy the shares as now to also have those who bought, hold on and not sell. They may not walk away quite as rich as I described as both the owner of the company and promoting investment advisor sell consistently as the stock rises.  Their average sell may be lower but I think you get the message – they make a sick amount of money for playing into others naive nature and greed.

The reason that the principle and promoter must know the flow of money is that if they wait too long, their selling will drive the price down too fast.  The reality is, they sell consistently as new money enters from unsuspecting customers.  In the end, all the advisors customers, other and their advisors would lose:

Potential proceeds of sale of 13.5 million shares X .05c (price most will be forced to sell out at) = $675,000

Let’s say the average cost of shares was $4 as customers bought the shares from .50c right up to the peak of $7 with most of the buying being later in the promotion cycle…the classic human flaw of wanting to buy into a winner, not early in the cycle but late.  Therefore, the cost:

13.5 million shares X $4 = $54 million


A staggering loss.  Now the job of the promoting company and advisor is to spin the story like the opportunity was incredible, but things just did not come together like they were supposed to.  It still may in the future, so do not lose hope.  This keeps customers from suing as they still have a faint glimmer of hope in their eye.  Other sell and just chalk it up to, I took the risk on this one, and it did not pay off..but the next one may.  If they only knew that this one could never have paid off.

Even if there are a few lawsuits, most will get settled at a fraction of the loss.  The financial industry is also famous for forcing those who sue them to drain their funds, so they have to walk away.  Suing someone, especially a major corporation with unending deep pockets, is extremely expensive.  Most do not have the where with all to go through the whole process to an actual court proceeding.  They just do not have the monies to do and as well as cannot take the risk that they may not succeed, as the reality is the court system is not always a  ‘just’ system.  There are unending examples of where justice is not served.

I saw this ‘pump and dump’ scenario go on all the time. It tended to be done by very successful advisors as they had the deep client base to sell it to and connections with top advisors throughout their firm and industry.  The way I saw these players in the industry is that they were and are psychopaths.  They care nothing about others, and some of them took pleasure in their gain as others loss.  Sick, yes, but there are many in the industry like this.

This is a famous game in the precious metals and commodity spectrum as there are many of these companies that are penny stocks with unlimited potential.  Saying that, I saw this go on with many small cap companies outside the commodity spectrum. It is sick and horrible…not the advisors that do it, as this is a normal activity to socio or psychopaths.  But to firms that allow it to go on.  Evil is evil, but the firms could stop evil from preying on their customers…they chose not to for the sake of profit.

Trade, Trade, Trade:  Path To Riches or Poverty For Investors and Advisors?

A second situation I saw way too often was advisors preying on the naïve and fragile.  Many times this happened to a retired couple of widows/widowers.  Here is a situation that exemplifies many that I saw.

The Technology Boom was clearly going to end in a bust…at least any analyst with any substance new that.  I moved all my customer’s monies out in 1999 which resulted in one of the worst compensation years I had had in a decade, and clearly one the firm I worked for did not understand or accept. They demand that you generate incomes at all times: booms, busts and periods of normality.  It didn’t matter…all that mattered was their annual bonus and value of their stock options.  They had multi millions on the line.  They had no time for advisors like me who cared deeply for their customers and their future.

I left the industry in March 2000 as my values were more important that my pocket book.  I simply could not hurt others to benefit myself and the firm I worked for.  The time I left was the peak of the technology boom, and beginning of the bust.

About two years later I got a call from a previous customer.  She and her husband previously owned two pharmacies and had a very successful career.  They sold everything off and invested in the market.  When I left, her account was conservative, with a significant amount of cash and quality bonds.  They  knew that I felt a major correction was coming.  Fast forward two years and this 75-year-old couple had lost more than half their wealth.  Or should I say the advisor lost more than half their wealth.

The advisor that took it on was more interested in generating fees and commissions by trading the account like crazy in technology shares.  They preyed on the greed and ignorance of the customer.  It is easy to do in the industry if you don’t care about your customers, as human nature is to want more and more.  Unscrupulous advisors do it all the time. They will sell the dream and path to riches with no substance to their story other than the dream of greater wealth.

This is what happened to this customer.  They told me all the technology shares that the advisor had bought them, and they never stopped.  Finally, the couple lost about 60% of their wealth.  They contacted a lawyer, but the lawyer advised them that they knew about the companies being purchased; intellectually understood the risks; gave their OK on the transactions that occurred, and were high net worth customers that should have had better knowledge than the average person. They were advised that their case would probably fail.  So here is a 75-year-old couple that was conned into buying aggressive investments, preying on them due to their naïve nature.  Justice…you tell me where it is in such situations.

The advisor made a great deal in fees in a few years but, of course, ended up losing the customer.  But what about the customer.  Their whole lifestyle had to change during their twilight years. They built great wealth and a reckless advisor lost if for them with no accountability.  They struggled sleeping and their physical, and mental health became compromised.  There is no end to what advisors will do in this industry and how the actual firms don’t care as the advisors are doing what they are supposed to do – generate profits for the company.

My actions were wrong to the firm prior to my leaving the industry.  My fees were down about 70% year over year as I put customers into safe areas where monies would not be lost.  This to a firm is not acceptable – integrity over profit is never acceptable.

Churning and Burning Customers With Buying and Selling Mutual Funds

One more example today of how investment advisors chip away at a customers’ wealth for their gain.  Mutual funds were and still are a very popular way that advisors invest monies.  History now shows us that more than 85% of mutual funds do not even achieve index returns, which to be blunt stinks.  One of the main reasons is that mutual fund management fees in Canada are the highest in the world…yes, you heard right, the world.  This is structured this way so that the mutual fund company gets a very high fee for their management services BUT the advisor and firm that sells the funds, also get significant fees. 

There are also fees for purchasing mutual funds and possibly when selling and switching.  Historically many mutual funds were sold deferred sales charge, more commonly known as DSC.  When I was in the business, I would bet that 90%+ of mutual funds sold were done this way.  There were not many options except buying individuals stocks or bonds.  The DSC payment to the advisor is 5% from day 1, as the customer is locked in.  Most do not know this as many advisors present the purchase an ‘no fee.’  When I say locked in, they can sell, but if they did so in year one, they would have to pay a 7% fee.  Back then due to lack of options, DSC funds was not an awful option as long as advisors switched fees at not fees and in a stategic manner; only sold off the 10% free component that could be sold; and made sure the funds invested were for long-term investors.

Now, in today’s world, there are so many better investment alternatives like Index ETF’s whose fees are about 75% – 90% lower than most mutual funds.  That in itself has a huge impact on your wealth over time.  Yes, these fees stink, but this is not the gist of the problem.  Here is how some advisors abuse their position:

I saw many advisors buy DSC mutual funds, collecting the 5% hidden fee.  On top of this, they would be receiving a 0.5% – 1% average trailer fee on all the funds they purchased for their clients each year.  That in itself should be enough as all most advisors do is buy and ignore the accounts and funds.  Making money each year for doing nothing or very little is not bad….but here is what I have seen happen too often.  Many  advisors build up investment assets in mutual funds just so they can get the trailer fees and do nothing other than playing golf all summer.  In today’s world, a relatively small book size (amount of assets an advisor managers) would be about $100 million.  Well, if they built thier business on mutual funds that paid them a 1% trailer fee, they knew that on January 1st and for the next year, they would make $1 million in fees, and share it with their firm.  Not bad, especially for those who never even manage the assets.

An advisor will buy a DSC with that 5% fee.  Then within a year or two they would recommend selling the fund to an advisor as it had outperformed, underperformed, had negative prospects, etc.  The bottom line is they sold naïve investors into selling their fund.  The fee of 6 or 7% selling fee becomes buried in the net proceeds, so customers do not even know the fee they are paying.  An advisor with great selling skills but no conscience and a drive towards personal gain uses these techniques consistently on unsuspecting and naïve customers.

In future articles, I will highlight many other areas that customers should be aware of but the first things that all customers must understand is that ‘the house is against you and your goal of building wealth.’  The house being the investment firms are structured for the people within it to build obscene personal wealth.  Remember, you cannot create wealth from nothing.  So many times, the wealth of people in the financial industry is simply a movement of some wealth of their clients to them.

Do not be naïve and think that advisors are holistic and good money managers.  They are great salespeople, with many being very dangerous to your wealth.   So, as I said earlier in this article, it is time to discuss the good investment advisors.

My Advisor is a Great Person and Would Never Do Anything Against Me….

Well, this is fairly easy to do as one of my roles in the industry was as an investment advisor.  I managed about a quarter billion dollars, which at the time was one of the larger assets bases of any advisor in Canada.  Anyone who knew me understood that integrity and doing what was right for my customers was a rule that I would never deviate from.  I was one of those good advisors.  The problem then becomes the system and all the systemic failures.  You can be a caring advisor, but you have to do what the firms want you to do.  Do not manage assets or make market calls is one of the investment firms goals – problem number one as the firms will NEVER say that customers should sell out as the risks are huge. It is contrary to their profit model.  It is also very against their personal income.  Many advisors get about 50% of the fees/commissions they charge.  If they have $2 million dollars in customer fees, they get $1 million. 

So, you have the majority of advisors whose main role is to sell and maintain relationships, not understand the dynamic of markets, especially when sell signals occur.  If they see risks as huge, and that customers should be moving into cash investments or top quality bonds (something like we see today as well as what I saw in 1999), how can they move clients out of harm’s way into such areas and continue to collect high fees.  Their fees would collapse; their personal income would therefore dramatically fall, and most people’s lifestyles are attached to their income; firms profitably would take a hit, and the advisors job would be on the line.   They just can’t do it so they constantly will take a positive bullish approach to investments as they must.  Good advisors will have to believe the system or they will not be in the business.  This is where risks are huge to customers without them even knowing it.

Do Fees and Poor Investment Management Have That Big An Impact on Building Wealth?

This is why we have built a financial coaching platform. One of our roles is to make sure that investors have the knowledge of all the particular risks they have dealing with a system that is setup from day one for their failure.  We have many people come to us and say, look we have averaged 6% for the last five years.  Other objectives is to market time, which yes, is possible, contrary to what the industry will tell you.  Well, if investors got market returns only, they should have gotten potentially double that or, at least, a few points higher.  Here is a chart to show you how significant fee erosion or mismanagement can impact your wealth:

Impact Compound Poor Performance

The difference can be massive. If your wealth is 1/10 of this, move the decimal point over one space, and you will still see how dramatic your wealth can be impacted. Do not let a systemic failure and advisor manipulation steal your wealth.

Matt Sammut