Elderly investor solely relied on advisor for investment advice

In 2002, Mrs. E, then 71-years-old, began investing at Firm ABC with the help of an investment advisor. As her financial knowledge was limited, she let her advisor manage her registered account. The Know-Your-Client (KYC) form she signed indicated she was a conservative investor seeking to preserve her capital. Her initial portfolio was worth $71,000 and contained a mix of conservative investments such as corporate bonds as well as income and money market mutual funds.

Over the years Mrs. E was satisfied with how her account was being managed. In 2007 when her advisor moved to Firm XYZ, Mrs. E transferred her account with him. By this time, her account had increased in value to over $91,000.

At her new firm, a completed KYC form was mailed to Mrs. E but she was not asked to sign it and her advisor did not go over it with her. This document portrayed Mrs. E differently from the one signed at the previous firm, increasing her risk tolerance and modifying her investment objectives to favour growth-oriented securities. These changes were not highlighted for Mrs. E nor were any explanations given. Mrs. E's comprehension of the KYC form was limited by her minimal financial knowledge.

Shortly after the account was transferred, a number of conservative investments were sold and replaced with riskier, growth-oriented equity securities. Mrs. E's portfolio increased briefly before sharply declining in value. By the end of 2008, her portfolio was worth only $43,000.

Mrs. E complained to Firm XYZ that her advisor had mismanaged her account and asked to be compensated for her losses. She had expected it to be managed similarly to how it had been at Firm ABC, and was not knowledgeable enough to understand the new KYC form she had been given. Firm XYZ declined to compensate Mrs. E, stating she had been well informed of all purchases made on her behalf and that her portfolio accurately reflected her financial needs. Mrs. E then escalated her complaint to OBSI.

Complaint upheld

Our investigation confirmed that Mrs. E had very limited financial knowledge and relied heavily on her advisor for explanations and advice before making decisions. We found it peculiar that the advisor changed Mrs. E's risk tolerance and investment objectives when transferring her account. The advisor had not kept any notes of his discussions with Mrs. E, and we found no evidence that she was consulted on these changes. Under these circumstances, we accepted that Mrs. E was not in a position to independently assess the risks and characteristics of the investments recommended to her.

To determine what losses, if any, Mrs. E experienced with her investments, OBSI compared her actual portfolio against a notional portfolio. A notional portfolio uses historical financial data and simulates how a portfolio would have performed had it been suitably invested. In Mrs. E's case, the notional portfolio was created using historical financial data from April 2007 – the month Firm XYZ became responsible for her portfolio – to May, 2009, four months after she formally complained and was in a position to take the necessary steps to limit further losses. The notional portfolio was built to be consistent with Firm XYZ's guidelines for an individual such as Mrs. E with limited tolerance for risk and who is primarily seeking conservative income-oriented securities: a mix of 35% laddered benchmark bonds and 65% S&P/TSX Composite Index.

After we calculated Mrs. E's losses using a notional portfolio, Firm XYZ agreed to compensate her.

(2010)