Investor partially responsible for losses

When Mrs. K, a 51-year-old life insurance advisor, opened an investment account at Firm ABC, she signed a Know-Your-Client (KYC) form indicating 100% medium risk tolerance and an objective of 100% long-term capital gains. Soon after this, her investment advisor began to purchase higher-risk securities. While Mrs. K was privately concerned, she chose not to complain.

One year later, Mrs. K's advisor moved to a new investment company, Firm XYZ. Mrs. K transferred her portfolio to Firm XYZ and stayed with her advisor. A couple of years after that, the advisor moved back to Firm ABC and Mrs. K once again transferred her portfolio with him.

Six years after first opening her account, Mrs. K complained to Firm ABC that she had been unsuitably invested given her stated risk tolerance and asked for compensation for her losses. The firm responded that Mrs. K had had ample opportunity to raise concerns about her portfolio or switch advisors. The firm's records also showed that Mrs. K discussed her portfolio at least twice a month with her advisor and was knowledgeable about her investments. Unsatisfied with this response, Mrs. K brought her complaint to OBSI.

Complaint upheld in part

Our investigation first looked at whether Mrs. K's investments were suitable for her. We found they were not. Her portfolio carried more high-risk investments than her KYC form indicated were reasonable.

We then looked at what time period was reasonable for calculating losses. By the time Mrs. K transferred away from Firm ABC to Firm XYZ, she was already concerned about her investments. In our view, Mrs. K, a long-time life insurance advisor, was capable of asking questions and consulting other resources if she had concerns about her investments. We therefore determined that the relevant period for calculating losses should only be the first year after her account was opened, before the advisor and Mrs. K switched from Firm ABC to Firm XYZ.

Finally, we looked at whether Mrs. K bore any responsibility for her losses during this one-year period. Clients must take reasonable steps to limit their losses when they realize there is a problem. Because she did not, despite her concerns about her portfolio and her ability to ask questions or consult other resources, we felt Mrs. K bore some responsibility for her losses in the first year.

In the end, OBSI recommended that the losses incurred during the initial one-year period of the account be apportioned 25% to Mrs. K and 75% to Firm ABC, and that the firm compensate Mrs. K for that 75%. Both Mrs. K and Firm ABC agreed.

(2010)