Investor misunderstood investment product

In early 2002 a client sold a rental property for $175,000. He asked his accountant if there was an investment product that would guarantee his capital and provide him with a regular income. His accountant suggested income trusts. Through an advisor referred to him by his financial institution, he invested in income trusts recommended by the advisor. However, the distribution from the trusts soon reduced to a trickle. Even though the capital was guaranteed, the client was not happy and looked for an alternative.

The client then got in touch with another advisor who, after checking with an income trust specialist, recommended some income trusts that she said were guaranteed at maturity and provided a regular income. The new advisor also said the client would make up the $40,000 loss he would incur when selling his investments at the other firm since she could buy the trusts at a discount. The client happily agreed to transfer his account and she bought two income trusts for him.

The income on one of the trusts stopped within three months of purchase and sometime thereafter the advisor informed the client she was mistaken about the other income trust being guaranteed at maturity. Not only would the client not recuperate the $40,000 he lost when he transferred his account to the new advisor, but he also stood to lose approximately $30,000 on the income trust that was not principal guaranteed. He had also lost the opportunity to earn any income on the other income trust as it was locked in for several years.

OBSI concluded the advisor did not properly describe the investments to the client and that they were not appropriate for this conservative investor. We recommended the client sell the trusts and be compensated for $98,000.

(2007)