Low risk investor held high risk debentures

The client was a low-risk investor looking for safe, income-producing investments. He wanted to avoid the volatility of the stock market, although he would tolerate a small share of his portfolio in equities as an inflation hedge.

The client's investment advisor recommended an investment in Air Canada debentures, suggesting they were “not very risky." He failed, however, to share the prospectus for the debenture which contained rating agency descriptions ranging from “lower quality" to “speculative and non-investment grade." More than $43,000 of the client's money was invested in the debentures.

By March 31, 2003, the debenture had dropped to less than $17,000 in value and the next day Air Canada announced it was seeking creditor protection. The client phoned his advisor and was advised to hold on to his investment. In the meantime, the client searched the Internet, found the prospectus never sent to him and discovered the high-risk rating.

The client complained immediately to the firm, but instead of selling the debentures held on for a few more months by which time he had lost another $8,000. In our view, the client should have moved more swiftly to sell once the true character of the investment was apparent, and we fixed June 30 as the date at which the client became responsible for any further decline in value.

On that day, the debenture was worth about $17,000, representing a capital loss of more than $28,000. However, the client benefited over the three years from a higher interest rate to the tune of $3,200 more than if he had held GICs, even though they were more suitable to his risk tolerance.

In the end, we recommended compensation of $26,000, which was the loss on the debenture, minus the high-risk premium which benefited the client, plus interest for the time it took for the complaint to be settled.

(2005)