Advisor did not take action despite repeated investor concerns

In January 2007 Ms. P was 52 years old. Her ex-husband had recently passed away leaving her about $300,000 in an RRSP at a large bankowned investment firm. She contacted the advisors on the RRSP account to discuss estate transfer matters.

Ms. P opened a new RRSP account with the advisors and rolled over her ex-husband's RRSP. She also transferred about $45,000 in GICs and about $6,000 in mutual funds from her RRSPs at another firm to consolidate her registered investments.

In January 2007, Ms. P's new account application form showed she had a long-term growth objective and a medium risk tolerance.

In February 2007, $500,000 in life insurance proceeds was deposited into Ms. P's new nonregistered account. In addition, she opened a $29,000 “in trust" account for her son. She met with the advisors who completed a financial inventory and discussed her financial needs further. Before her ex-husband's death, Ms. P had been receiving $2,000 in monthly support payments and earned about $30,000 a year as a bookkeeper. After his death, Ms. P resigned from her job to attend to family and estate matters, with the expectation that she would find other work in the future.

On February 22, 2007 Ms. P completed a questionnaire clearly showing she was investing for income, needed $3,000 per month and could accept low short-term fluctuations, but could not accept any losses.

The advisors recommended a selection of investments including principal-protected notes and bond and equity mutual funds ranging from low-medium risk to high-risk. In July 2007, coincidental with a higher-risk mutual fund purchase, the advisors updated Ms. P's risk tolerance from 100% medium to 75% medium and 25% high.

Between November 2007 and July 2008, Ms. P sent at least seven emails to the advisors desperately asserting that she was a very low-risk investor, did not understand how the market works or what makes a good investment, that she had told them she wanted safe investments that would provide her with interest, that she could not afford losses, and that she was distraught and physically ill because of the decline in her investment values. In spring 2008, she specifically asked that her investments be changed so there would be no risk and no more losses. The advisors responded saying she need not be concerned about capital losses, she should not make irrational decisions, it would be irresponsible and a mistake to make changes, and that she should remain invested as is until the account values recover.

Ultimately, Ms. P transferred her accounts away from the firm in late 2008. She complained to the firm about her investments and requested compensation for her non-registered account losses in particular. She excluded her RRSP account losses from her claim because she had decided to keep her ex-husband's RRSP investments for sentimental reasons. When the firm did not offer Ms. P any compensation, she escalated her complaint to OBSI.

Complaint upheld

During our investigation, the advisors acknowledged there was limited discussion about Ms. P's investment objectives and risk tolerance in January 2007. Despite the investment objective and risk tolerance parameters on the account application and update forms, the questionnaire Ms. P completed in February 2007 clearly showed she was a low-risk investor, seeking income with capital preservation. While the advisors agreed these were Ms. P's objectives and risk tolerance, many of the investments they recommended exceeded her low-risk tolerance and were not suited to her capital preservation objective. The advisors told us they always gave Ms. P the option to sell, but that she followed their advice to avoid crystallizing a loss.

Ms. P told us there was no discussion about fluctuations or risk until her investment values began to decline and she raised concerns. The advisors said that Ms. P had over 15-years experience investing in mutual funds and therefore, she had a good appreciation of market fluctuations and risk. Based on our interviews with Ms. P and the advisors, and on the emails exchanged between Ms. P. and the advisors in 2007 and 2008, we found Ms. P had limited investment knowledge. We also could not conclude on file notes or other available evidence that the advisors sufficiently disclosed the risks and expected volatility of the investments they recommended.

Although Ms. P did not understand that her investments were unsuitable, we found she immediately raised her concerns about her declining portfolio value and did everything we believed she could do to try to limit her losses. However, the advisors would not help her take action and instead repeatedly assured her the market values would recover, convincing her that she should leave the portfolio as is.

In the circumstances, we found it reasonable that Ms. P. followed the advisor's advice to remain invested to recover the losses she had never expected in the first place and we concluded that the advisors were entirely responsible for Ms. P's loss.

We calculated that Ms. P. lost about $34,000 on the non-registered and “in trust" accounts and would have earned a modest amount of income had she been suitably invested in low-risk interest-bearing investments given the low interest rate environment at the time. The firm agreed with our conclusions and settled with Ms. P.

(2011)