Sophisticated investor with a high risk tolerance claimed to be low risk
In early 2007, Ms. F was referred to a new investment advisor by a friend. At the time, she was 63 years old and retired. Between February and May, 2007, she invested a total of $470,000 in growth-oriented mutual funds.
The account application Ms. F signed in February 2007 showed her investment knowledge as “high."
Based on our interview and other evidence, we found Ms. F actively followed market developments and kept abreast of world economic news. Ms. F also completed an Investment Profile Questionnaire (IPQ) showing she had a high-growth long-term capital appreciation objective. In addition to the IPQ, Ms. F signed a handwritten statement saying her assets exceeded $1.3 million, of which three quarters were in conservative investments, and that she did not want to be restricted to investments within her IPQ score. She selected a highrisk aggressive growth profile indicating she could tolerate negative performance over a year or more in exchange for the possibility of earning higher returns. She also acknowledged that she had sufficient income to meet her needs and was not relying on the investments in this account.
In March 2009, she transferred her investments valued at about $156,000 away from the firm.
Ms. F complained that her advisor inaccurately documented her as an aggressive investor with good investment knowledge. She said she had told him that she was a single senior, her income came from her limited investments and a small pension, and she could not take risks with her money. Ms. F also said she had very limited investment knowledge and relied on her advisor to select investments for her. She said that based on her trust, she signed and initialed the forms the advisor filled out without reading them. The firm responded that Ms. F's investments were in line with her instructions and there was adequate disclosure of the investments' risks, and so did not offer compensation. Ms. F then brought her complaint to us.
Complaint not upheld
Given the IPQ and the signed statement along with Ms. F's level of investment knowledge, we concluded that Ms. F understood the documents she signed and was indeed an aggressive growth investor willing and able to hold high-risk mutual funds for the potential to earn higher returns. While an aggressive investment strategy is unusual at Ms. F's age, we found it was not unsuitable for Ms. F in her circumstances.
We analyzed her mutual fund investments and found that they were all growth-oriented equity funds. Our analysis also showed they were initially allocated about 30% to medium-risk mutual funds, 32% to medium-to-high and 38% to high-risk mutual funds. However, periodic switches were made and by June 2008, Ms. F's account was entirely invested in one high-risk natural resource mutual fund. Given Ms. F's aggressive growth objective and high risk tolerance, her investments were suitable at all times.
However, Ms. F said the advisor should have contacted her when the markets were dropping in 2008 so that she could have sold in a timely manner and avoided incurring losses. Ms. F acknowledged that she monitored her investment values online regularly. When the markets were declining in the fall of 2008 she monitored her accounts daily. Given her investment knowledge and experience and that she was aware of and following what was happening in the markets in general and with her investments specifically, we concluded she was in a good position to have sold her investments or to have taken other steps to limit losses. In fact, Ms. F gave instructions to her advisor in November 2008 to switch the entire account to a significantly lower-risk mutual fund.
While Ms. F's portfolio experienced losses, the investments were suitable for her. Ms. F also understood and accepted the risks and was well positioned to sell or change her investments at any point to limit the risk or volatility. We did not recommend the firm compensate Ms. F.
(2011)