Over the last year as equity markets have become more volatile, primarily on the heels of the sovereign debt crisis in Europe, a number of new investment opportunities have been crossing my desk and I wanted to address the risks associated with these, sometimes opaque, products. 

Typically, but not always, they are based on an alternative or ‘hot’ investment like gold or real estate and promise great returns, that are not subject to market volatility and have limited downside as they trade outside the market.  Most of these investment products are sold through “exempt market dealers” that operate under reduced compliance oversight.

Given that these investment opportunities are being sold through the exempt market, they require an extra level of due diligence, not only by the individual selling (hopefully a licensed advisor) but also by the individual looking to invest.  As the title suggests, especially when the exempt market deal is being sold outside a licensed advisor, investors are subject to the old adage “Caveat Emptor” (buyer beware).  This is not to say that all exempt market deals are bad investments or destined to lose money, but they require far more due diligence on the investor’s part than more regulated investments (like mutual funds) as it is often difficult to gain a clear picture of the true nature of the investment vis-à-vis their requirement to pay the returns they state and the timelines they promise to pay them. 

As our clients know, we are licensed through FundEX  Investments Inc. (a wholly owned subsidiary of Industrial Alliance, the fourth largest insurance company in Canada), a member firm of the self-regulatory organization, the Mutual Fund Dealers Association of Canada (MFDA).  What this means for our clients is that we are regulated by strict oversight on two levels (FundEX and the MFDA) and all investment products (excluding GICs) must be approved by FundEX prior to offering them to our clients. 

If we recommend an investment that does happen to fall under the exempt market category, you can be assured of the following:

1. The investment has been reviewed extensively by a qualified and registered individual at Foundation to determine its merits before any recommendation
2. The investment product has been reviewed by the Industrial Alliance/FundEX investment review committee
3. Any investment that we have on our books is covered by our Errors & Omissions Insurance

Below is a link to an article published in Advisor Magazine, written by Stephanie A. McManus LL. B., that discusses the merits and risks of exempt market investments.  We hope that this will enhance your understanding of an investment space that has been gaining momentum given the market criteria, but could be riskier than the marketing material would lead you to believe. 

Avoid exempt market risks