Advisor’s recommendations exceed client’s risk tolerance

The clients, a married couple in their early 50s, received a $650,000 settlement from a car accident which permanently disabled the husband. They consulted with an investment advisor about how to invest the money.

The advisor prepared an investment proposal that described their objectives as regular guaranteed income, with some growth. The proposal said that preservation of capital was imperative. The clients signed a Know Your Client (KYC) document that provided for 40% low and 60% medium risk investments.

Their money was invested in a combination of bonds and mutual funds. Over the next six years the clients withdrew about $250,000 ($1,000 a month and a lump sum withdrawal to buy a house).

After six years the clients had experienced a net loss of approximately $37,000. The advisor recommended the clients move their investments to a new asset management service. He then resigned as their advisor.

The clients believed they had lost $100,000 and were upset that their advisor was no longer willing to assist them. They complained to the firm, but it said the investments were appropriate and did not offer compensation. The clients appealed to OBSI.

When OBSI investigated the complaint, we found that the KYC allocation of 40% low risk and 60% medium risk had been agreed to by the clients and was not inappropriate, but the investments recommended by the advisor exceeded 60% medium risk. The advisor explained that he did a correlation analysis to ensure that the portfolio as a whole remained within the client's risk tolerance. However, he was not able to provide a copy of the analysis or any evidence that he discussed this concept with the clients. OBSI found that the clients were not in a position to assess on their own the risk of their portfolio, and had relied on the advisor.

Conclusion

To establish the compensation owed to the clients, OBSI compared their losses to what would have happened if they had appropriate investments. The clients lost $43,797, but we calculated their loss would have been just $1,124 had they been appropriately invested. We recommended that the firm pay the clients $42,673 in compensation, and the firm agreed.