Welcome to my first book review!

To get this series started, I thought I would begin by reviewing a book that would motivate users to take charge of their own financial futures. “The Naked Investor – Why Almost Everybody But You Gets Rich on Your RRSP” (ISBN 0-14-301623-7) written by John Lawrence Reynolds.

The purpose for writing this book? The author states

“Too many trusting RRSP investors stand naked in the market while their advisors convince them they are wearing a superbly fitted and highly fashionable suit of clothes. Canadians need to be educated about methods employed by the financial and investment industry to enrich itself in an atmosphere with minimal transparency and accountability.”

This book was very interesting. It went into great detail to explain the conflict of interests that abound within the financial and investment industry.

At the beginning of each chapter, the author tells a true story of how an average investor relied on an investment advisor to handle their investments. Inevitably, in each case, the investor suffered huge losses while the investment advisor walked away unscathed and richer.

The book goes into great detail explaining the various fees structures employed by the mutual fund industry: management expense ratios, (MER), deferred sales charges (DSC), front-end loads, wrap accounts, trailer fees, etc… Many people believe that they are not paying their advisors. Why is that? The reason many Canadians feel this way is because they do not receive bills or invoices. In fact, the investor rarely sees anything. These forms of compensation for the advisor are not visible or transparent. The investor never knows how much the advisor earns from managing their accounts.

Not only are these fees not transparent, but they create a conflict of interest. Financial advisors are not paid by how well your investments perform. On the contrary, they are paid irrespective of how your investments perform. Also, how well an investment will perform within your portfolio is irrelevant. The driving force for choosing “winning” investments are the investments that pay the highest commissions to the advisor! This creates a huge conflict of interest.

The author also goes into great detail about how the industry regulates itself. The author discusses the roles of the main regulatory bodies: Ontario Securities Commission (OSC), Investment Dealers Association (IDA) and the Ombudsman for Banking Services and Investment (OBSI). Needless to say, the author paints these bodies as puppets of the investment industry. Many examples of how these regulatory bodies have handled various incidents leaves all investors with little confidence in their powers to control the investment industry.

“No one knows the extent of abuse suffered by Canadian investors at the hands of brokers and advisors or by the system as a whole, thanks in part to the veil of secrecy created by confidentiality clauses inserted into settlements and supported by the investment industry.”

With this book, the author hopes to expose many of the problems with the current system and to give the average Canadian investor a fighting chance. The author is painting a gloomy picture for the investing public in Canada. Of course, not all financial advisors behave this way. In fact, there is one example of a financial advisor who performed extremely well for his clients (but unfortunately, these same clients were lured away by a dishonest advisor). The author is merely stating that one should be careful about who handles their financial affairs.

My own experiences dealing with my financial advisor at my CIBC branch are very similar to some of the experiences. Although I did not lose everything as was the case for many investors in this book, my RRSP performed very poorly. I was lucky if I even received a call from my advisor at all throughout the year.

This book is a must-read. It is a real eye-opener for investors of all ages. If anything, it will motivate you to look a little more closely at your brokerage statements to ensure that everything is proceeding exactly as it should. If there is something that you don’t understand, call your broker. After all, you are paying them handsomely for their “expert” advice and opinions.

Table of Contents

1. You are David, They are Goliath, and You Don’t Have a Slingshot
2. Of Foxes and Hedgehogs: Learning To Do One Thing Well
3. Brokers and Advisors: Whose Money is it Anyway?
4. Mutual Funds: You Win, They Win; You Lose, They Still Win
5. It Shouldn’t be Complete – It Should be Open
6. Investment Pornography and Red Suits
7. A Guide to Investment Divorce
8. Celebrity Bingo
9. SRO or SLO? The Failure of Self-Regulated Organizations to Protect Investors
10. The Banks: Gathering Us Beneath Their Umbrella
11. Vultures, Jackals, Ghouls and Everyday Thieves
12. Looking Out for Yourself and Your Money

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