Q: My father lost a large sum of money when the company holding his investments in his home country defrauded its clients. As a result, I worry whether it is safe to keep all our investments in one institution. What would happen to investors if these companies became insolvent? Should we diversify across fund providers and financial institutions the way we diversify our investments? — M.T.
Canadians have many legitimate gripes about their financial institutions, but compared with most other countries we’re pretty fortunate. Fund companies and brokerages may charge too much or provide lousy service, but they aren’t likely to defraud their clients. And in the extremely rare cases when they become insolvent, there are safeguards that should prevent investors from significant losses.
It may not be necessary to diversify your holdings across multiple fund providers or financial institutions. But every Canadian should understand how investor protection programs work and be aware of their limits.
Your online brokerage
Every major online brokerage is a member of the Canadian Investment Protection Fund (CIPF), which was established by agreement with the Investment Industry Regulatory Association of Canada. (IIROC is the self-regulatory organization that oversees investment dealers in Canada.)
The CIPF maintains a pool of money that can be used to compensate investors in the event of a member’s insolvency.