5 Investment Scams You Must Avoid


That salesman may seem nice but take some precautions before signing away your savings (Thinkstock/Getty Images)

Bernie Madoff got our attention. We wondered: could it happen to us?

The reality is that these scams are as old as time, and are going on right now. There are also ways to avoid them. Here’s how:

“We truly, truly believed this man.”

This was a quote from a recent victim of a 38-year-old real estate entrepreneur from Oakville, Ontario. Trusting someone takes time and is an important thing. The problem is that all victims seem to say the same thing. If someone seems honest and respected in the community, they probably are. However, don’t invest your money based on that. It has cost people billions of dollars. There needs to be something much more tangible beyond personal trust.

“The rates of return are so good.”

One of my clients made a comment about the GIC rates at Stanford International Bank in Antigua. They wondered if they should put some of their safe money there because they could get 5% and 6% rates on short-term GICs. The questions that need to be answered fully are always, ‘why such a good return? What is the investment in? What is so special about how the underlying investment is to achieve this extra return?’  If you keep asking questions and get clear answers, then it might very well be a good investment. The problem is if you are not in a position to know what questions to ask, it can be difficult to discern between a real investment and a not-so-real one. The other obvious sign to run is when you ask questions about the investment or its structure and you don’t really get straight answers.

“Can I see the value of my investments?”

This is another warning sign. In most Ponzi schemes, the value shown on a statement was a made-up number. The value behind the number was not entirely clear. Anytime you invest in something that isn’t publicly traded or held at a large financial institution, you are taking greater risk.

For example, if you own 100 shares of Royal Bank according to your custodian at TD Bank Financial Group, you can be pretty certain you actually own 100 shares of Royal Bank. You can then look on the public and open stock market and see the value of those 100 shares. If you have money in Stanford Bank (even though it was very large) in Antigua, you will get a statement showing a balance of dollars. You had better be confident in the banking regulator in Antigua that they have a strong enough system to ensure those dollars are actually there.

“First I put in $20,000. It did well, so I put in $50,000. It did well, so I put in $250,000.”

Humans are greedy by nature and it’s tough to overcome. When something appears to perform well, it is natural to want to have more money invested in it. If the investment is growing on paper, how certain are you that it represents a real number? The toughest scenario is when you put money in and take it out before making further investments. It is then real cash. It instills confidence. It builds trust. This is why Ponzi schemes are so successful. Unless there is a run on the money, as long as new money is going in, most investors can get their funds out. Don’t be fooled by an initial good investment by betting the farm.

“I trusted my gut feelings that this was a good investment.”

Don’t trust your gut. Trust your brain and do your homework. Your life savings are too important to risk on “liking the guy” or “they seemed honest.”At the end of the day, investment is always a balance of risk and reward. Always understand the true risks you are taking. If the cheque is written out to a small entity or person — please do a triple check before handing the money over. The next Ponzi scheme is being set up right now.

Do you have an additional tip for avoiding a scam? Leave a comment below or message us on Twitter or Facebook!

Ted Rechtshaffen is president and CEO of TriDelta Financial, a firm that provides independent financial planning and investment advice. This article was originally published in National Post.


Meet Our Custodians


There is a common misconception about the security of an investors’ money when it is trusted to a private firm. People often ask, “what happens to my money if your investment firm goes bankrupt?”

Our answer to that is easy: meet our custodians.

Custodians are what boutique planning and investment firms like TriDelta Investment Counsel use to hold their client’s money. For example, we hold or custody our client’s money at TD Waterhouse Institutional Services, part of the TD Financial Group, and National Bank Correspondent Network, part of National Bank of Canada.  Both of which happen to be on Bloomberg’s list of the strongest banks in the world so you know your money is safe.

Our relationship with them is simple: we have total independence from them in terms of investment management, but our clients’ assets are effectively held with one of the largest financial institutions in Canada. If something happens to our firm, the clients’ money is still as safe at those institutions as if they were working directly with TD Waterhouse from the beginning. Their accounts are either transferred directly or a cheque is written out to National Bank.

Custody of Assets

It is very important to remember that if you trust someone with an investment cheque that is not written out to one of the most stable firms in the world, you are putting yourself at some risk. If that entity shuts down, likely so does your money.

This doesn’t mean investing in such things as a private company or a private mortgage fund or some other real estate deal is a bad investment. It simply means you have to work significantly harder on understanding the investment and its risks before investing, and there is a higher risk of your money disappearing.

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Ted Rechtshaffen is president and CEO of TriDelta Financial, a firm that provides independent financial planning and investment advice. This article was originally published in the Financial Post.


[VIDEO] Common Investing Mistake: Judging by Past Performance


Even investment advisors sometimes make this mistake of judging stocks by their past performance. At TriDelta, we believe that investments should be forward looking towards the future instead. Watch this 2 minute video clip to find out more:

If you liked this video, check out the TriDelta YouTube channel for more videos on financial planning and investing.

[VIDEO] Understanding & Avoiding Emotional Investing


Getting emotional about your investment is likely to hurt your returns. Watch the video below that discusses how to avoid emotions like greed or fear when it comes to your investment decisions!

If you liked this video, read our article about The Role of Emotions in Investing or visit our Youtube Channel for more financial planning videos.

A Critique of the “Sequence of Investment Returns”

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Products like the Manulife Income Plus or Sunwise Elite Plus sell their solutions based on the concept of sequence of returns. The idea is that the sequence of your investment returns in a significant determinant of whether you outlive your money in retirement.

The math here works because by drawing out your savings each year, you are declining your overall asset base. So both good and bad returns in the earlier part of your retirement have a bigger impact. While the math is all true, the solution isn’t to pay high fees for a guaranteed income product.

But there is something significantly wrong with this concept.

The investment reality misses a key principle.

What is missing is the fundamental fact that after a year or period of poor investment performance, the market will overcompensate with stronger-than-average returns to get back to its “normal” level. What this means is that as long as you stick to your investment discipline, you will get better investment performance after poor performance, and it will then carry you back on target.

A Critique of the Sequence of Investment Returns

The most recent example has been 2008, 2009 and 2010. Based on the sequence of returns research, if your first year of retirement was in 2008, then you lost out on the sequence of returns. The investment industry says instead, you should invest a lump sum amount in a guaranteed product with high fees that will get charged every year of your retirement instead.

What actually happened is that after the TSX total return index returned -34 per cent in 2008, it has averaged 25 per cent returns over 2009 and 2010. Of course, if you invested in a guaranteed withdrawal benefit product, you wouldn’t have been able to invest in anything more risky than a balanced portfolio and you would have missed much of the strong returns of the past two years.

What the real message should be is: Don’t pull your money out of the market after it falls 20 per cent. Better yet, if you have other investments, it might be time to add to your stock position once the market drops 20 per cent.

The key to investment growth is to have some long-term discipline. When it comes to the sequence of returns affecting your retirement income, remember that even after a rough winter, spring always comes.

Finding Bond Information for Canadian Investors


Finding information about the performance of your bonds and bond indices can be difficult.

For our clients’ portfolios, fixed income in the form of bonds or preferred shares will make up somewhere between 30% and 60% of assets. Multiply that by millions of investors and even for retail clients, that represents trillions of dollars invested outside of what most view as the stock market.

Yet, there does not seem to be readily available information on bonds. All investors know how the TSX is doing today, but what about the DEX bond universe? Most bond information is kept out of reach of the common investor.

Finding Information on Bond Performance can be Difficult!

To find bond index information, one of the best places to look is the PC Bond Analytics website. It is a business unit of the TMX Group, which runs the Toronto Stock Exchange.

To find preferred share information on the S&P/TSX Preferred Share Index, you can visit Standard and Poor’s here.

Another place to look is if you have your own brokerage account, their research tools may include bond quotes and preferred share information.

The question is:

Why are all of those indexes (outside of the stock market) so hard to learn about?

It isn’t an obscure investment. There are 40 bond funds in Canada that have over $1-billion invested. The TD Bond Fund has over $9-billion in assets. The RBC Balanced Fund has $8.4-billion in assets, with a third of that currently invested in bonds. Granted, the information might be more difficult to understand. In addition, because there is usually more buying and holding, the investment industry may be less interested in reporting on it (it is less profitable).

The problem with this lack of information is that many investors get too carried away with the TSX numbers and assume that if they aren’t beating the TSX then they are not doing well.  We often remind clients that the TSX has 79 per cent in financials, energy and materials. This is a concentrated index that carries higher-than-average risk. This isn’t the appropriate benchmark for most investors.

This performance information of bonds and preferred stocks however is key to many investors to get a sense of how they should be doing. These indexes and their performance numbers should be widely reported on all business media – but today, it simply is hard to find.

Visit my weekly Personal Finance column in the Globe and Mail, where this article originally appeared.

(Photo: JanKroemer)