Inaccurate risk tolerance on Know-Your-Client form

The retired client's only asset was a $500,000 one-year Guaranteed Investment Certificate (GIC). She rented an apartment with her sister and had no debts or liabilities. For income, she received Canada Pension Plan (CPP) payments and monthly interest from her GIC.

The client had recently begun spending winters in Florida with some friends and wanted to do more travelling as well as start contributing to her grandchildren's education savings. She was also considering purchasing a house with her sister.

In autumn, after discussions with her bank representative, the client decided to renew her GIC. On the day her GIC was to mature, the client received a call from the bank recommending that she meet that night with an advisor in the investment arm of the bank. A couple of weeks later, the client returned and spoke with an advisor who recommended the client not renew her GIC. Instead, the advisor said she should use her money to purchase other investments that would provide her with better returns. The client told the investment advisor that she did not want to lose any money. The advisor responded that it was important for the client's investments to grow in value, especially if she wanted to be able to spend winters in Florida, help out her grandchildren and possibly purchase a home. The advisor told the client that the investments she was recommending might fluctuate in value but over time the client would be better off than if she had invested in GICs.

At the end of the meeting, the client agreed with her advisor's recommendations to invest her $500,000 as follows:

• $150,000 in a one-year GIC
• $100,000 in a variety of medium-risk preferred shares
• $250,000 in a medium-risk balanced mutual fund

A couple of days after the meeting, the client left for Florida. When she returned home five months later, she discovered that her investments had declined in value and called her investment advisor to express her concern. The client's advisor reminded her that the investments could fluctuate over the short-term and recommended that she should hold on to her investments.

After receiving her next month's account statement, the client again called her firm and was directed to the advisor's manager. During the call she explained that she knew nothing about investing and that she had felt pressured to accept the advisor's recommendations during their initial meeting. She said that she did not want to lose any money and asked the manager to sell her investments.

Despite the advice given by the manager, the client liquidated all assets with the bank, suffering a loss of approximately $50,000. The client then took her complaint to the firm's ombudsman, requesting to be compensated for the losses incurred. The firm's ombudsman found the investment portfolio to be suitable for the client, saying that the client was looking to obtain a certain level of regular income that would not have been achievable in a GIC at the rates available at the time. The client then brought her complaint to OBSI.

In investigating the file, we found that the client's Know Your Client (KYC) form did not accurately reflect the client's income objectives and low risk tolerance. The KYC indicated the client had a 60% income and 40% long term capital gain investment objective. Based on our analysis, the client's KYC should have indicated 100% income investment objective with a low risk tolerance. We also found that all of the recommended investments exceeded the client's low risk tolerance and did not address her capital preservation requirement.

Given the client's poor investment knowledge and very limited investment experience, we did not believe the client could have assessed or understood the risks associated with the investments. Similarly, we did not believe she could have properly assessed the risk or asset allocation of her account in order to have questioned it.

We recommended that the firm compensate the client for losses, and the firm agreed.

(2009)