Investors complained after accepting firm's error

A couple had been investing with their advisor for several years. The husband instructed the advisor to make a small change in one of his accounts. About a week later, both the husband and the wife received trade confirmation slips in the mail indicating that a large number of units of mutual fund A had been switched to mutual fund B in their accounts.

The husband immediately called the advisor to notify him of the errors. The advisor was on vacation, and the husband spoke to his partner, another advisor. The advisor's partner recommended that the clients keep the units of mutual fund B, and the husband agreed. After this telephone conversation, the husband relayed the partner's recommendation to his wife, who also decided to keep the mutual fund B units in her account.

At first, mutual fund B performed well. After several months, however, the tide turned for the worse. After a year, the couple's units had declined by $18,000 in value and they transferred their investments to another firm. In the same period, had they stayed with mutual fund A, the couple would have been up about $14,000. After the transfer to the other firm was complete, the clients complained to the original firm about the switch to mutual fund B.

There was no doubt that a mistake had been made. In our view, however, since the clients agreed to keep the units of mutual fund B that had been purchased in error, they ratified the transaction.

Further, the clients did not complain when the fund was doing well, but only after it declined in value and after they moved their accounts. Had they complained promptly after the switch, the switch could have been reversed with no loss to the clients and at no cost to the firm. OBSI decided that it would not be fair to recommend the firm compensate the clients.

(2005)