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Caveat Investor

Financial gurus like Brian Costello and Jerry White say they're educating the public. Can they help it if their students fail disastrously?

00:00 EDT Friday, October 25, 2002

On a February day in 1990, Jean King and about 50 other Toronto-area teachers gathered in a high school auditorium to spend part of their professional development day planning their approaching retirement. Various sessions were scheduled, none more important to King than the one on financial planning, organized by Moynes Securities Ltd. with a keynote presentation by Brian Costello.

"I had heard Mr. Costello on the radio," King recalls in her home north of Toronto, seated next to her husband, Lindsay, a retired United Church minister. "He described the investments available through Moynes and spoke of them favourably. Later, I found out that Moynes Securities had paid Costello $2,000 for his little talk to us."

Among the investments Moynes promoted was a Limited Partnership (LP) in a Kitchener, Ont., condominium managed by Track Investments. Moments before, Costello had spoken of LPs as a method of maximizing capital for a retirement nest-egg, so when King heard the details, she was more than intrigued-she was practically presold. "The appeal was the increase in value of the units, plus tax write-offs," she explains. "We were promised between $73,000 and $86,000 in tax write-offs over five years." Since the investment would be held outside an RRSP, the tax benefits were especially appealing.

King bought two units in the development. The deal required her to put up $75,000 in cash, which she and her husband borrowed, and commit to payments of $2,400 every three months. They believed they had taken a suitable step toward a comfortable retirement.

In retrospect, their decision was disastrous. Real estate-based LPs are only appropriate for investors who have the risk tolerance of a near-sighted lion tamer. They are a means of obtaining Other People's Money as capital, sold through brokers who skim commissions as high as 10% from the investment. Management fees and expenses are deducted over the course of the investment and, in contrast to mutual funds, LP investors cannot vote with their dollars because shares are locked in for seven to 10 years.

This is not an investment that a Certified Financial Planner (CFP) would likely recommend to someone like Jean King, even if the LP were solidly based and well managed. This one was neither. In fact, Track Investments was run by Richard John Smith and a partner who were eventually convicted of 32 counts of fraud after investors reported losing almost $2 million in a deal similar to the one the Kings bought into. As for the Kings, they lost every penny they invested in the LP. Then things got worse.

"Revenue Canada changed their minds about the tax deductions they had been allowing us for several years," King sighs, "saying we had gone into the deal with no reasonable expectation of profit. They wanted all our deferred taxes back, which amounted to about $50,000. They kept applying interest, and by this year it was up to $100,000." (In mid-2002, after the Supreme Court of Canada ruled against such clawbacks, the tax department abandoned its efforts to recover the money.)

Bad investment decisions, corrupt brokers and tax reassessments can occur whether the investor is a near-retirement schoolteacher or a crusty day-trader. Lindsay King insists that the critical element in this particular disaster was the persuasive presence of Brian Costello. "Costello is good-looking and he's a good speaker," the soft-spoken reverend says. "I've heard him, Garth Turner and others, and I presume they are knowledgeable about investing and that's why they are there." Costello, he suggests, was as much a part of the sales effort as the reassuring charts and graphs used by the brokerage salespeople.

Reverend King is not alone in that perception. Each year, thousands of Canadians gather to absorb investment strategies from financial commentators who are famous for ...well, for being famous. Almost all are unregistered and unregulated. There's little evidence that they've grown wealthy from following the advice they dispense. For most, their living is earned from selling advice at seminars and from media platforms including books, radio and TV appearances, newspaper columns and web sites. Some of the commentators have regional bases; only a few, like Costello, have a national audience.

While conflicted analysts and accountants have been subject to front-page scrutiny of late-with calls for tighter scrutiny issuing from all quarters-the celebrity advisers continue down their idiosyncratic paths, proclaiming themselves the friend of small investors. Gurus are generally careful not to pitch a specific investment at a seminar; that, after all, would be illegal for anyone not registered with a provincial securities commission or as a CFP. The gurus are paid a fee by the event's sponsor-typically a mutual fund or financial adviser-that likely is content to let the speaker say their piece without guidance. Still, even though the speaker has not explicitly recommended the host's products, an implicit recommendation is in the air.

"These guys may be there to give a perfectly credible story on the merits of investing in a certain fashion, and the next person [to speak] may be someone who is hawking a particular product," comments lawyer Neil Gross, whose practice focuses on investor claims against brokerages and financial institutions. "In some people's minds, this juxtaposition amounts to an endorsement."

When the guru exits the stage, licensed salespeople appear to start closing deals. Their sales pitch may have been subject to skepticism an hour earlier, but now it enjoys a boost of credibility, perhaps even urgency. Use the equity in your home to leverage your investment? Make an immediate lump-sum mutual-fund purchase? Ratchet up your risk level rather than face retirement dining on road kill? Suddenly, it's all plausible to the audience.

"There are two ways to build your client list," one broker explains. "Cold calls and seminars. Make a hundred cold calls and you'll get 98 hang-ups and two clients. Hold a seminar for 100 people and you sell to a third of them. Seminars work."

The practice rankles CFPs like Burlington, Ont.-based William Sloper. "It's unfortunate that the people who need investment advice the most are the ones who are both attracted to the celebrity gurus and who lack the fallback resource of an independent adviser," Sloper says. His CFP credentials, granted and monitored by the Financial Planners Standards Council, require two years' experience, a demanding exam and annual proof that he meets continuing education requirements.

The unlicensed gurus are accountable to no one until they cross a legal line, Sloper notes. "They rely on their credibility, which can be high if they have lots of media exposure. Unfortunately, it takes a lot of bad advice before their credibility suffers."

Or bad publicity, something Brian Costello has dealt with over the course of his career. In January, 2002, the Ontario Securities Commission (OSC) began a proceeding against Costello, alleging that, via his seminars, newsletter and radio segments, he "acted as an 'adviser' without being registered" and "engaged in this conduct without disclosing that he held an interest in a company that would benefit financially from the sale of those specific securities." One of the OSC allegations is that between 1994 and 1997, Costello wasendorsinganotherLimited Partnership promoted by the same Richard John Smith, whose bad deals had cost the Kings and others so much of their savings back in 1990.

Costello denied the allegations, which are to be aired in hearings beginning the week of Nov. 11. It was not necessary for him to be registered, says his lawyer, Janice Wright, because he was neither an adviser nor a broker. "We think the term financial educator and commentator is appropriate," Wright suggests. "Mere reference to new types of investment models does not constitute acting as an adviser."

Costello, a Hamilton native, began his investing career in 1971 as a salesman with Richardson Securities in his hometown before establishing himself as a commentator on financial and investment matters. He parlayed this ability into newspaper columns, newsletters, books and endorsements of everything from tax-return software to beer, often employing his signature line, "Taking care of yooouuur money."

Over the years, Costello has been convicted of shoplifting and has pleaded guilty of failing to provide income-tax documents to Revenue Canada on time. This after publishing a book titled How to Beat the Taxman All Year Round. But these woes have not permanently impeded his guru career.

In February, 2001, Costello was heard on radio commercials promoting Retrocom Growth Fund Inc., a labour-sponsored investment fund. "If low volatility is what you are looking for in your RRSP this year," he said, "I recommend you look at Retrocom Growth Fund."

Retrocom may offer low volatility but, like most labour-sponsored funds, its performance is low as well. As of Aug. 31, 2002, Retrocom had a five-year average annual compound return of 0.73%. Even with the various tax credits available to labour funds within RRSPs, this is less than scintillating: Five-year GICs earned six times as much over the same period with no volatility at all. Yet many Canadians purchased Retrocom units becausewell, because Brian Costello said it was a good idea.

Costello, it's true, also advised listeners to obtain a prospectus and read it carefully. Indeed, none of the gurus' activities excuses foolish behaviour by investors who don't do their homework, especially on the downside risks of a given strategy.

A common complaint against financial seminars is that investors are encouraged to leverage themselves heavily to invest, either via a loan or the equity in their home. Duff Young, once a familiar presence at seminars-he's cut back appearances-and now a marketer of his own software programs for financial advisers, notes that seminars promoting leverage can be substantial moneymakers for sponsoring brokers or financial advisers. "If the adviser gets 100 people [to attend]," Young explains, "and just 10 of them go along with the idea, each borrowing $100,000 to invest, that's $1 million in mutual-fund sales, or $50,000 in commission for the adviser. Not bad for an evening's work."

Young questions the penchant at these leverage-oriented seminars for promoting lump-sum investments. Seminar salespeople rarely propose equal monthly investments to benefit from dollar-cost averaging, Young says, and he claims to know why.

"With a lump sum [the salespeople] make all the commissions upfront. Ask about dollar-cost averaging and they say, 'Listen, the client might chicken out if he only puts 20 grand in this month and the market drops.' But if the client has invested 20 grand, and you can't convince him to buy more now that the price is lower, I want to ask, 'What are you getting paid for, anyway?'"

Stan Buell, president of the Small Investors Protection Association, recalls one seminar he attended just before the current

bear market struck. "The core of the presentation was to use the equity in your home," Buell says, "to borrow money on it and invest in the market. A lot of the people attending this seminar were older people. I'm sure many of them would have invested that way, and many of them would have lost a substantial part of their equity."

The lead speaker at the seminar was Garth Turner.

Criticism of his work ignites a fire in Garth Turner's eyes. People don't understand what financial commentators are trying to do, he suggests.

"It's so easy to sit on the sidelines and take a shot at the guy on the stage." We are seated in a small office near Turner's Bay Street TV production studio. "And you guys [the media] do it so well. I'm not complaining for myself. I've got a thick skin. I proved that in Ottawa." (Turner served as Revenue Minister in Kim Campbell's short-lived 1993 Tory government.) "Go out and hear what people are saying," he instructs. "Determine whether we are doing a public service of education, or whether it's sales. That's a huge distinction. People who go out to motivate the public, that's great. People who go out to sell product, and they're not licensed-that's wrong."

Turner may not directly sell investment products, but he clearly associates himself with them. He speaks at seminars sponsored by banks and financial advisers, and has appeared in television "advertorials" for CIBC and AIM Funds with the tag line, "Looking out for your financial healthI'm Garth Turner."

As in his advertorials, Turner elides the distinction between advertising and information as principal owner of Millennium Media Television, which produces 250 shows annually, many of them broadcast on the Global and CTV networks. As the CBC-TV program Disclosure revealed, some of Turner's shows-company profiles-do not make clear that they are paid for by the featured companies, the aim being to enhance their investment appeal.

Duff Young recalls speaking at a seminar in October, 1997, "and the financial adviser who hired me had previously used Garth Turner. He said he'd had excellent results, which meant he earned a ton of commissions. Turner had proposed leveraged purchases of mutual funds, using home equity as security to borrow the money."

What disturbed Young was not Turner's recommendation, nor the opportunity for the broker to make a substantial gross from his own appearance, but the presence of a third party that was aggressively marketing leverage. "An hour before my presentation, I'm horrified to see a mortgage lender setting up a booth at the back, and someone placing mortgage applications on every chair in the place." Young demanded to know if the seminar operator was recommending real estate-backed leveraging for everybody. "And he says, 'No, of course not. That wouldn't be appropriate. I only recommend leveraging for homeowners!'"

A charge frequently levelled at celebrity gurus is that they promote a one-size-fits-all solution to investor needs, and the very mention ignites another firestorm in Turner's eyes. "That's bullshit," he responds. "I've never done that. How can you? Ninety-nine per cent of people making up opinions and levelling criticisms at seminars like mine have never been to one. It's the shoddiest piece of bullshit journalism I've ever seen in my life!"

Turner says he covers about 35 different investment strategies during a seminar. "The idea is to get the juices flowing, so they think, 'I'm not a victim, goddammit. I'm not going to be a victim of this economy or this stock market or my bank. I'm going to be proactive and seek solutions.'"

Turner promulgated his strategy of pulling equity out of one's home and plunging it into diversified mutual funds in his book The Strategy: A Homeowner's Guide to Wealth Creation. It includes some quite pointed advice. Turner writes: "If your real estate falls in value, to the point where the home equity loan is greater than the worth of your home, you can always take a walk. Then it's the bank's problem." But it's not just the bank's problem, as any real estate lawyer or banker will confirm. In Ontario and most other provinces, a homeowner continues to be liable for mortgage debt.

To be fair, Turner warns readers in the "Caution" at the front of his book, "If laying your paid-for home on the line will keep you awake and in a sweat at night, put this down." And when he discusses investment strategies at his seminars, home-equity leveraging may receive no more than a minute's mention, Turner says. But he's adamant about the strategy's premise. "Everybody thinks real estate is a good investment," he says. "Are you kidding? You buy an asset with 90% leverage and you think it's a safe investment? We've got to get out of this mindset."

It takes an unrepentant bull to propose Turner's style of real-estate leveraging. Which raises the question: Just how prescient has Turner been in recent years?

In a Canoe "Money" chat room back on Sept. 27, 2000, Turner assured participants that the stock market was undergoing a mini-correction, that the Dow would hit 30,000 by 2006, and that "Nortel [then trading at $96.60] is a wonderful company and, given the recent decline, I think it is a strong 'buy.'" That day, the TSE closed at 10,250.

Barely two months later his enthusiasm refused to wane, despite a TSE index of 8,945 and a price for Nortel stock of $56.35. "Will the Nasdaq again reach 5,000 and the TSE attain 11,000?" Turner asked. "Will it be warmer again in April? How about clipping this column and taping it to the fridge?"

Those who did would have noticed that, as of March 26, 2001, the TSE had slipped to 7,686 and Nortel, at $25.60, had begun its slide to penny-stock status. Turner remained confident: "By the time the flowers bloom in Saskatoon, the back of the bear market will have been broken. We will see sustained gains in Toronto and New York, and those who fled from stocks and equity funds into cash and money-market funds, taking a loss in the process, will be sorry indeed." The bull was still charging.

It's true that plopping a lump sum on Nortel in 1995 and selling the stock in the first half of 2000 would have earned a major chunk of profit. Not so later. This sort of brinksmanship is not what the average homeowner's investment strategy is made of.

Turner is not registered by the OSC or any provincial securities commission, nor does he intend to be. "I'm not in the business of selling product. I'll write a book and they'll market my book, but I don't want to be a mutual fund salesman. I don't want to stand in front of a crowd and say, 'Go and buy XYZ Income Trust.' That's not my thing. I don't want to cross the line from information to sales."

Lawyer Neil Gross's special concern about financial seminars is with the most vulnerable section of the audience. "The people I fear most for," Gross says, "are the ones who wind up in the hands of somebody who tells them, 'Our computer-generated data says this is the amount of money you're going to need to retire.' And of course the number is stratospheric. Then they say, 'The only way we can get you to that number is by leveraging you and creating some tax-effective structure that involves borrowing.' They're told, 'You can retire, but only if you take some tremendous risks in the latter stages of your life,' and that's pretty scary."

Financial planner William Sloper has seen the technique used all too often. "What happens is that the estimated amount of money the client needs for retirement is inflated far beyond the amount the client is expected to accumulate," Sloper says, "and this is used as a lever by the seminar operator. They say, 'If we can swing your financial investments our way, then we can both build your future.' "

Tell that to Georgetown, Ont., resident Brian Andrew*. In 1999, at the age of 72, having recovered from a stroke, bypass surgery and three heart attacks, and battling diabetes, Andrew attended a number of seminars, including several with Brian Costello, in hopes of maximizing the retirement income for himself and his wife.

"You get excited at the things they say," Andrew says, recalling that the seminar speaker praised the growth potential of technology stocks. "I followed [the speaker's] suggestions at a rather horrendous cost when they gave me a 9-to-1 leverage loan to buy a NASDAQ-based index fund." Andrew's wife agreed to sign their home equity over as security, and when technology stocks tanked, the bank made a series of margin calls. The Andrews' nest egg was devastated, and today they face the potential loss of their home.

Andrew recalls that one of the speakers at a 1999 seminar was very persuasive. "It was Jerry White," he says. Then he adds with some sarcasm, "Sorry, I mean Doctor Jerry White."

According to his recorded message on the UltimateWealth Hot Line, Jerry White has more than 50 books "in publication," he has written for 125 U.S. daily newspapers, and his firm J. White and Associates "educates the financial advisers." White boasts he is "one of North America's best-known, most-listened-to and most-published personal financial experts." Canadian Who's Who lists an alphabet of degrees after his name. In these biographical sketches and another on a web site bearing White's visage, more accomplishments accumulate. White purportedly was professor of entrepreneurial studies at the University of Toronto from 1988 to 1992, and was also a professor at the International Management Centre. Plus, he claims to have been a professor of management at the College for Human Services in New York City since 1992. White was president of Mother's Restaurants Ltd.; vice-president and director of publisher Macmillan of Canada; and he lists media and advisory roles sufficient to fill several careers. White also claims to conduct "well over 200 public financial, tax and estate seminars across North America," all in pursuit of "democratizing professional services around the world."

But if White has more than 50 books in print, it's news to the National Library, and likewise to megabookseller Chapters/

Indigo, whose web site lists White as having only a handful of titles in print, including Death & Taxes: Beating One of the Two Certainties in Life.

According to journalist Rod McQueen, who published a profile of White in 1996, White earned his D. Litt from the above-mentioned International Management Centre, a U.K.-based "distance-learning" school geared to on-the-job training. Those professorships? White was an adjunct, not full, professor at U of T. The university asked White to stop claiming full professorship and to give up suggesting he obtained a doctorate at that institution. As for the College of Human Services in New York City, White lectured there for one semester in 1993.

How about White's practical experience? He was indeed president of Mother's Restaurants-but not for long-just before it went under in 1988. At Macmillan of Canada, where White was indeed a VP, his stint was marred by discoveries of résumé inflation, plagiarism and the unusual practice of signing book contracts with himself. He was fired in 1978. Another publishing dustup came in 1994, when John Wiley & Sons Canada Ltd. dropped White as an author and launched a civil suit to recover almost $70,000 in bad cheques he'd signed. The suit was settled out of court.

In 1992, White declared bankruptcy. Creditors, including CIBC and Revenue Canada, were out $1.4 million. White moved to the U.S. for a time.

Despite questionable academic credentials, a shaky personal financial record and books with an apparent shelf life shorter than fresh oysters, White still commands a reported $3,000 per night, 200 nights a year. Then there's UltimateWealth.biz, the doctor's latest moneymaker. Although White is the one and only face and name present on the web site, he apparently is not its proprietor.

"Jerry is a spokesperson for us, but he doesn't work out of this office," says Robert Steen, manager of UltimateWealth.biz. Steen says UltimateWealth.biz began operations in the U.S. and Canada in mid-2002. "Our corporate goal is to best educate members on how to put their money to best use, mainstream stuff."

The web site encourages visitors to purchase a Bronze Membership ($159 annually), a Silver Membership ($499) or a Gold Membership ($1,999), all in U.S. dollars. What do you get for your money? White tells you on his Hot Line spiel: "the best new ideas, research, concepts and strategies available nowhere else on earth, totally exclusive to our subscriber base." Bronze members sample an evening seminar of White's wit and wisdom, Silver members an entire weekend's worth. And Gold members receive "a one-week international cruise-ship seminar on ultrasophisticated global taxation and investment strategies with extensive training materials" (you pay for your own travel expenses, accommodation and food).

The main attraction of UltimateWealth.biz is actually the prospect of signing up friends as members, generating cash commissions from their fees, then multiplying these profits when these members sign up still more members andsay, doesn't this sound like a pyramid scheme? And aren't pyramid schemes of interest to the authorities?

Andrew McAlpine, senior competition law officer with the federal Competition Bureau, says they are. "A pyramid scheme is a multilevel marketing program that has stepped across the bounds and is doing certain things," McAlpine says. Things like offering recruitment bonuses. "If you pay to join a plan, and you get paid for recruiting other people who also pay to join the plan, we consider that a recruitment bonus. You are not allowed to have a multilevel marketing plan that pays for recruiting people." (The UltimateWealth site shouts, "FOR EVERY NEW MEMBER THAT YOU ENROLL, YOU RECEIVE A COMMISSION.")

McAlpine is also concerned over extravagant claims about the money participants earn. "If someone makes a representation regarding the compensation, they must also disclose what a typical participant actually makes. Our view is that [the average income] should be readily available. If you have to click to go to a completely different page to get the disclaimer, that could be a problem." (From the UltimateWealth site: "CELEBRATION BONUS/ At Least $1,000,001 U.S./ In addition to your Commissions and Lifestyle Overrides!" And from a different page, number 19 of 29 Terms & Conditions, the only reference to average income for a member: "U.W. cannot guarantee that he or she may, can or will generate income or be profitable. The average Network Marketer makes approximately $1,900.00 per year.")

On a perfect late summer evening in an industrial area of North Toronto, about 40 people half-fill a banquet room that resembles a set from My Big Fat Greek Wedding-plastic ivy, plaster columns, brocade upholstery and tinted mirrors. They are here to hear Dr. Jerry White, who will speak on behalf of UltimateWealth.biz.

Two-thirds of the audience are men in suits and ties who slap each other on the back and generally look and act like extras from The Sopranos. Most of the others appear as though they've taken a break from checking their lottery tickets to attend the session.

After a welcome by various Ultimate

Wealth executives, Dr. Jerry White walks to the microphone. Before a title slide that reads "Why People Fail Financially?" he promptly adopts the persona of a fundamentalist preacher warning his audience of the horrors of hell-in this case, a retirement spent in poverty.

True salvation, White shouts, is found by being rich and living like you are poor, "which is what rich people do!" Rich people, White lectures, do not drive fancy cars, nor take expensive vacations, nor shop in exclusive stores. They drive cheap cars, shop at discount stores and build up cash reserves. Really?

We are challenged to doubt his wisdom. White boasts he has been a professor at the University of Toronto since 1970, and appears "hundreds of times a year" at seminars around North America. (White events sponsored by Dundee Securities have been held in such off-the-beaten-track venues as the Legion Hall in Wilkie, Sask.) We should all start generating income from a home business, White preaches, then describes a surprising benefit if we remain employed full-time at another job. "Working out of your house or apartment," he barks, "you can write off one-third of your household expenses, including rent. If this eats up all the income you make from your part-time work, you deduct the rest from your full-time salary." (This will be news to the taxman.)

"Twenty-eight-and-a-half million Canadians have nothing!" he bellows at one point, "except maybe a thousand dollars in savings and $2,000 in their RRSPs. Otherwise, they have nothing!"

We, his audience, must avoid that fate. We can do it by joining UltimateWealth, the "new international internet-based financial information opportunity." The information, need it be said, will be provided by Dr. Jerry White.

When he finishes an hour after he began, the men in suits rise to give a standing ovation, smiling and nodding at each other. The MC announces that Jerry White has to leave immediately, and I pursue him out the door. In the lobby, I introduce myself and explain I have been trying without success for weeks to meet with him.

"I don't do interviews," he replies.

I ask if he is really a professor at the University of Toronto.

"Not any more," he admits.

Why won't he speak to me?

"I told you I don't do interviews," he says. "I don't see the purpose of them."

The purpose, I suggest, is so I can prepare an article on him for this magazine, and include his views.

"I said I don't do interviews," he tells me again. "No interviews, get it?"

I get it. Back inside the presentation room, the MC is drawing for door prizes: two leather day-timers. I don't win there either.

Brian Andrew frequently wakes at 4 a.m. recalling the bad decision he made following a Jerry White presentation three years ago. "Last night I applied for part-time work as a car jockey," Andrew sighs. "It pays $8 an hour. I need the money." Andrew is now 75 years old.




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