High-risk exempt market securities unsuitable for older investor with limited assets

February 26, 2020

Key learnings:

High-risk, illiquid investments are not suitable for low-to-medium risk, semi-retired or retired consumers with limited financial assets who rely on their investments to supplement their retirement income.

Consumer makes risky investing decisions

In December 2010, Ms. R was 60 years old, had been retired since 2008, and had been divorced for several years. Between 2008 and 2010, her annual income averaged $17,500. She owned her home that was valued at $352,000 and had $100,000 in investable savings. Her investment objective was to generate income from her investment portfolio to supplement her income.

Ms. R’s friend was a referral agent for ABC Firm. He introduced Ms. R to Mr. Y, a dealing representative at ABC Firm who had become registered in November 2010. Over the next month, Mr. Y recommended that Ms. R invest a total of $40,000 in high-risk, illiquid exempt market securities. Ms. R invested $15,000 in January 2011 and $25,000 in March 2011.

In early 2011, Ms. R started working as a part-time cashier to supplement her pension and investment income, increasing her annual income to approximately $33,000. Ms. R asked for a new advisor and ABC Firm assigned her Ms. Z, a new dealing representative who had also been registered since November 2010.

In May 2011, Ms. Z recommended that Ms. R invest an additional $51,200 in high-risk, illiquid exempt market securities. Ms. R invested $25,000 in June 2011 and $26,200 in July 2011. By the summer of 2011, Ms. R’s investments in exempt market securities at ABC Firm represented about 90% of her savings.

Investments declined

Ms. R’s investments declined significantly in value. Ms. R complained to ABC Firm that the investments Mr. Y and Ms. Z had set up for her were too risky because she was semi-retired and dependent on investment income to meet her living expenses. She asked ABC Firm to compensate her for investment losses. When ABC Firm did not agree to do so, Ms. R came to OBSI for assistance.

What did OBSI do?

We found that, based on her personal information and circumstances, Ms. R was a low-to-medium risk investor. She required income from her investments to supplement her pension income throughout her retirement. Significant losses would jeopardize her financial situation, and her limited income meant that she would be unable to replenish her savings. While Ms. R’s investment knowledge was fair, she had limited investing experience, and relied on the expertise and recommendations of ABC Firm’s dealing representatives. Given Ms. R’s circumstances, we concluded that the high-risk, illiquid exempt market securities that were recommended to her were unsuitable for her.

We calculated what the value of Ms. R’s investments would have been if she had been suitably invested and compared the actual performance of her unsuitable investments to determine the total amount of financial harm caused by the unsuitable advice she received at ABC Firm.

Our recommendation

We recommended that ABC Firm compensate Ms. R $85,804 for the losses she incurred investing in the unsuitable exempt market securities. In exchange, we recommended that Ms. R transfer all rights and interests in the exempt market securities she continued to hold back to ABC Firm. We made these recommendations for the following reasons:

Mr. Y and Ms. Z had recommended investments that were unsuitable for Ms. R.
By purchasing the exempt market securities recommended to her, Ms. R was in a worse financial position than if she had been suitably invested.
ABC Firm is responsible for Mr. Y and Ms. Z’s recommendations to Ms. R. to purchase the exempt market products.

ABC Firm and Ms. R agreed with our recommendation and the dispute was resolved.