New advisor did not ask about risk tolerance or investment horizon

When this couple went to a new advisor in 1995, they were earning a combined income of about $55,000, had no debt and had accumulated about $300,000 in liquid and fixed assets.

The account-opening documents recorded the investment objectives as 50-per-cent income and 50-per-cent capital gains. Unfortunately, the forms used by the firm did not record risk tolerance, or investment horizons. We found it strange that the account opened was a margin account that allowed the couple to borrow against their investments. This kind of investment strategy, known as leveraging, is not suitable for investors of average knowledge.

Over the next few years, the amount of debt rose to a peak of more than $235,000. At the same time, the profile of the account shifted to 100% equity mutual funds, some of which were high risk. The result was an aggressive portfolio with no income investments.

While the couple agreed to the leveraging strategy, our investigation didn't convince us that they had sufficient understanding of how leveraging works or the increased risk they had assumed. As well, we didn't find that the advisor had fulfilled her duty to provide the appropriate cautionary advice to her clients.

Between the margin account losses and similarly inappropriate investments in a smaller RRSP account, we recommended a total of nearly $60,000 in compensation. The couple is now retired, and managing their investments much more cautiously with a new advisor.

(2005)