Investor accepts low settlement offer by firm despite significant losses from unsuitable investments
Mr. G, a conservative investor with a modest income and limited investment knowledge, wanted to see growth on his retirement savings. His investments were initially held at Bank ABC where Mr. G thought the fees were too high and the returns were too low. When Mr. G met Mr. U socially, Mr. U said he was an advisor at Firm XYZ, and convinced Mr. G to switch to his firm by promising lower fees and the potential for better returns. Mr. G trusted Mr. U because he was an advisor at a credible firm. In the summer of 2016, Mr. G opened two accounts at Firm XYZ. He transferred $44,000 into a LIRA (locked-in retirement account) and $121,000 into an RRSP (registered retirement savings plan).
In the spring of 2017, Mr. U recommended Mr. G invest in one of Firm XYZ’s proprietary funds (the Fund). The Fund was not a mutual fund, not issued by prospectus and the risk rating was determined by the firm. By the end of 2017, 65% of Mr. G’s portfolio was invested in the Fund. In 2018, the value of the Fund increased and Firm XYZ sent investors an email to indicate that the risk of the Fund had changed from low-medium to medium-high. Mr. U did not discuss the change with Mr. G or recommend any changes to his investments.
In 2019, the Fund’s value dropped by 15%. In late 2019, Mr. G expressed concerns to Mr. U about his financial losses. Mr. U said the fund would recover and Mr. G believed him. At no time did Mr. U offer to move Mr. G’s money to avoid further losses.
By early 2020, the Fund’s decline had caused Mr. G’s portfolio to lose 40% of its initial value. In the spring of 2020, Firm XYZ emailed investors to state that the risk of the Fund had changed from medium-high to high. Mr. G did not think this change affected him because he was not a high-risk investor and he expected he would have been told by Mr. U of any changes needed in his account. In the fall of 2020, Firm XYZ closed the Fund, leaving Mr. G with a 71% loss in his portfolio’s value.
When Mr. G contacted Mr. U, he was advised to complain to Firm XYZ and to contact OBSI. Although Mr. G knew investing carried risks, he believed he had been in low to medium risk investments and requested Firm XYZ to restore him to his financial position as of January 2020 due to Mr. U’s negligence. After reviewing Mr. G’s file, the firm said it had met its obligations and explained to Mr. G that compensation for losses was not standard practice. As a goodwill gesture, Firm XYZ offered Mr. G $4,100.
Mr. G brought his complaint to OBSI.
Complaint upheld
The OBSI investigator interviewed Mr. G to determine the circumstances surrounding his financial loss. During the investigation, the investigator reviewed Mr. G’s file at the firm, which confirmed that Mr. G had been exposed to greater risk than was documented for him and that he had agreed to.
In addition, OBSI’s financial analysis team found that Firm XYZ’s risk assessment of the Fund was inconsistent with securities legislation, and that the Fund’s associated risk factors should have increased its risk rating. Furthermore, the regular changes in the risk rating of the Fund by the firm without corresponding changes to the strategy supported their conclusion that the original rating was inaccurate.
The investigation also revealed that in a separate communication to Mr. G and his wife, Mr. U took responsibility for their financial losses but also indicated the firm should not have allowed or encouraged the approach taken. The OBSI investigator concluded that Mr. G had been unsuitably invested while his portfolio was invested in the Fund.
OBSI’s analyst team calculated the financial position that Mr. G would have been in if he had been suitably invested, and we recommended that Firm XYZ compensate Mr. G $124,000 for the financial harm he suffered. We informed both the firm and Mr. G of our findings. The firm disagreed with our risk rating of the Fund, and increased their settlement offer to $43,000. Mr. G accepted their offer to offset his losses despite this being only a fraction of the total financial harm he experienced.