Investors' risk and financial profiles ignored by advisor

A few years after immigrating to Canada, a middle-aged couple opened an account with a full service investment firm and deposited $80,000 from the sale of their home in the UK and the husband's severance pay.

The clients said they told their investment advisor that they planned to use this money, which represented their entire wealth, for a down payment on a house and for their daughter's upcoming wedding. At the time, the husband worked as a tradesman and the wife was employed as a receptionist, and they were living in a one-bedroom apartment with one of their children. Except for personal effects and an older car, the clients had no other assets. They also had an outstanding line of credit that was close to its $20,000 limit.

The account opening documentation showed the clients' investment knowledge as “good," although their only investment experience was with GICs and a bank money market mutual fund. The clients' risk tolerance was identified as 60-per-cent medium risk and 40-per-cent high risk, and their objectives as 60-per-cent long-term capital appreciation and 40-per-cent short-term capital appreciation and speculative trading.

When the account was opened, it was invested 100% in equity mutual funds, most of which were foreign, technology, sector or theme funds. All were purchased on a deferred sales charge (DSC) basis or back end load.

The clients' money was invested as though their investment objectives were 100% long term, and nearly all of it was in medium- to high-risk investments. The advisor denied that he was ever told of the client's intentions for the money in the account.

Five months after opening the account, the clients wanted to withdraw $13,000 to pay for the wedding, which was scheduled to take place within a few months. Since the mutual funds had declined in value and were subject to significant DSCs, the advisor recommended they not sell any of the investments, and instead helped arrange a $13,000 margin loan.

By the end of March 2004, the mutual funds had declined in value by $33,000 and the balance owing on the margin loan had increased to $16,500.

In investigating the complaint, we determined that the information recorded on the account opening documentation was not an accurate reflection of the client's risk tolerance and investment objectives. Moreover, the mutual funds the clients invested in were not even consistent with this inaccurate documentation. We concluded that the advisor had not learned essential facts needed to provide investment recommendations in keeping with the clients' financial circumstances.

The margin loan was also unsuitable – the clients didn't have enough money to service it, which meant the monthly interest was simply accumulating.

The investment firm agreed to reimburse the clients for all of their investment losses.

(2004)