Retired investors purchased investments using a loan

The clients, a retired couple in their early 70s, were approached by an advisor who had been referred to them by a friend. The advisor recommended that they take out a $90,000 home equity line of credit and use the money to invest in various equity mutual funds. The couple had $15,000 in retirement savings and had only fair investment knowledge. Their income came from government and company pensions. Since they did not have adequate income to cover monthly interest payments on the loan, the advisor set up a regular withdrawal to be taken from the investment account.

The couple's investment declined rapidly, but their advisor continuously reassured them that it was a market correction and that they would soon recover their losses. After four years the advisor moved to another firm. The investments were worth about $40,000 and the couple still owed $90,000 on the line of credit. Over the next three years their account was transferred to three different advisors who were concerned about the advice the first advisor had provided, but did not advise them on what to do about the investment loan. The couple complained to the firm and eventually brought the complaint to OBSI.

We interviewed the clients, reviewed various file documents provided by the firm and interviewed employees who had dealt with the couple. Overall we found that the strategy of borrowing to invest was far too risky for retired clients with only limited to fair investment knowledge and almost no savings. The strategy did not meet any of the guidelines established by the firm for leveraged investing and it was not clear why the advisor recommended it. A senior advisor with the firm agreed that the strategy was inappropriate.

The couple was eager to resolve the complaint because they wanted to sell their home and purchase a condominium, but did not have enough money to pay off the home equity line of credit. We calculated that the couple had lost a total of $60,000 – including losses on the investment plus interest on the investment loan – and provided the firm with a summary analysis. Given this information, the firm felt it was fair to compensate the couple for their losses and agreed to pay $60,000 to resolve the complaint. By accepting the facilitated settlement, the firm significantly reduced the investigation time and the couple got their money promptly.

(2007)