High-risk investments suitable for this senior investor, but DSCs unsuitable

Key learnings

• Seniors are not always low-risk investors – high risk investments can be suitable for some seniors, depending on their circumstances.
• Deferred sales charge (DSC) funds are generally not appropriate for senior investors due to their shorter investment timeframes.
• Investors should always confirm the accuracy of their Know-Your-Client (KYC) and read their disclosure documents carefully and ask questions to be sure they understand them.

Mr. H moved his investment portfolio to a new advisor in 2008. At the time, he was 71 and was still working full-time as a physician. He was an experienced investor with an investment portfolio of approximately $1.4 million. He accepted his advisor’s recommendations to buy gold and precious metals mutual funds with DSCs.

In 2016, a year after Mr. H had retired, he suffered a stroke. His son, who was a financial advisor in the United States, offered to help his father with his investments. When Mr. H’s son became involved, he was surprised and concerned about his father’s investments.

Allegations of unsuitable investments and lost opportunity

When Mr. H’s son reviewed his father’s portfolio, he calculated that his father had lost close to $40,000 because of what he felt were unsuitable investments, unsuitable DSC fees and lost opportunity. He brought these concerns to the advisor’s investment firm.

After discussing the DSC funds with Mr. H’s son, the firm acknowledged that, while Mr. H’s investments themselves were suitable, the DSC fee option was not suitable for him because the time horizon of the  redemption  schedule was too long given his age. The firm offered to reimburse the DSC fees Mr. H incurred when his investments were sold in 2017.

Mr. H’s son did not agree with the firm that the investments were suitable. He felt they did not match his father’s risk tolerance. He brought the complaint to OBSI.

What did OBSI do?

We first investigated Mr. H’s financial circumstances and risk tolerance. From 2008 to 2010, Mr. H signed numerous Know-Your-Client (KYC) forms as well as an acknowledgement letter that showed he accepted the risks and volatility of his investments.

Upon review, we found that the firm’s KYC information about Mr. H was accurate. We saw that Mr. H’s advisor had made changes to the KYC documents over time to match the investments Mr. H was making, which can indicate a problem. However, we concluded that Mr. H was an experienced investor who could afford to withstand any potential losses. He also had the knowledge and capacity to understand or question the KYC documents that he signed.

Aggressive growth strategy and higher risk accepted by senior investor

Although he was in his seventies, a time when most investors are concerned about preserving their assets and maintaining their investment income, Mr. H wanted to grow his investments. He accepted his advisor’s recommendation to buy gold and precious metals funds with DSCs. He was comfortable with having a lack of diversity in his portfolio. He spoke to his advisor each month and regularly communicated this. As an experienced investor, Mr. H also knew about the volatility of his investment portfolio.

Some investments not suitable

Next, we investigated the complaint regarding the suitability of the investments. Based on Mr. H’s KYC information, we performed an annual suitability analysis of his accounts from 2008 to 2016. We compared the risk level of his investments in each time period with his KYC parameters at the time. We found that even though some high-risk investments were suitable for Mr. H, during certain periods the risk composition of his accounts exceeded his documented KYC parameters and was therefore unsuitable.

To determine if Mr. H experienced any financial harm as a result, we compared the actual performance of the unsuitable portfolio to how a suitable portfolio would have performed during the times in question. Based on our calculations, we found that he incurred total financial harm of $3,000 because of the unsuitable investments.

Our recommendation

We recommended that the firm increase its previous offer of $9,000 to $12,000 to account for the losses on the unsuitable investments, as well as the unsuitable DSC fees. Mr. H and the firm accepted our recommendation.