Investor delayed complaint on discretionary trades

The client was a sophisticated investor, and recently started dealing with a new advisor and a new firm. Her investment objectives were 100% capital gain and she had a medium to high tolerance for risk. She also had a high level of investment knowledge and experience.

Her advisor recommended a number of investments to meet her goals, which she approved. However, within a month of transferring her investments to him, the client received a confirmation for a transaction that the advisor had not discussed with her. She called him and complained about the unauthorized trade. The advisor apologized, but persuaded her of the merits of the investment. While she was skeptical, she decided to go along with his recommendation to see if his predictions for the investment would be accurate.

Over the course of the next year and a half, the advisor completed many transactions for his client, but made more than a dozen trades that he did not discuss with her prior to completion. The client received trade confirmations for each transaction. She raised some of these, but ultimately followed his advice and did not ask him to reverse the transactions.

When her advisor eventually left the firm, the client complained about the unauthorized trading to her new advisor. He immediately referred the complaint to a manager.

The firm said it believed that some trades had not been authorized before they were executed, but said that the client should have complained earlier. It noted that she had received trade confirmations that told clients to promptly notify the firm of any errors or omissions.

We interviewed the client and confirmed that she was aware of the unauthorized trades. While she had questioned the advisor about the unauthorized trades, on each occasion she accepted his advice to keep the investments and did not complain to anyone else at the firm.

In coming to our conclusions, we took into account the fact that the client was an experienced and sophisticated investor. She reviewed her trade confirmations and account statements regularly. While she spoke to her advisor, in the end she agreed to the transaction and waited to see how the investments fared.

Had the client complained promptly, we would have expected the firm to reverse the trade at no cost to her. We decided that in the circumstances the client couldn't have it both ways – waiting to see how her advisor's unauthorized recommendations would do, but then making a complaint if they didn't go well.We didn't recommend compensation.

However, the case does illustrate the difference between OBSI, which focuses on compensation, and the regulators, who set and enforce the rules for the investment industry. Unauthorized trading is a breach of regulations, and the firm is responsible for reporting such complaints to its regulator.

(2008)