Investor dismisses firm's fair offer for unsuitable investments

Unsuitable investment recommendations were made for a client, for which her investment firm offered to compensate her $30,000. The client turned down the firm’s offer and appealed to OBSI. On closer scrutiny, however, OBSI concluded that the client should be compensated only $20,000.

A client claimed that all of the mutual funds purchased over a six-year period were unsuitable for her because she should have been invested in low risk and guaranteed securities. She requested compensation of $100,000, which included her losses on all of the funds, as well as the “opportunity cost” to her of not having her money in alternative investments.

While the investment firm agreed that some of the mutual funds were unsuitable, it maintained that this should have been apparent to the client sooner. The firm offered the client $30,000, representing 75% of the losses from her investments in high-risk mutual funds. The client was not offered compensation for 100% of her losses in the high-risk mutual funds because she significantly delayed raising her concerns while the funds continued to decline in value.

Our findings

Once a client turns down a firm’s offer, that offer is no longer available to the client. OBSI, through its investigation, establishes its own views on what is fair compensation, if any, for the client. Clients are not compensated for “opportunity costs”. In this case, OBSI recommended compensation of $20,000, a significantly lower amount than the firm’s original offer.

Investment advisors are obliged to recommend securities that are suitable for a client, but when a client becomes aware of errors or misconduct by an investment adviser that is causing a financial loss, he or she must take steps to mitigate that loss.

OBSI concluded that the client should be compensated for all of her losses in the unsuitable securities, up to three months after she recognized that the securities were unsuitable. During the three-month period after the client identified the problem, she could have reasonably mitigated her losses. To consider losses beyond this period would allow the client to unfairly speculate at the investment firm’s expense.