The investment firm should tell the client how to stop management fees when requested

Key Learnings

• Firms should fully explain their management fees. This includes explaining how investors can avoid further charges if they no longer agree to pay them.
• Advisors have an obligation to ensure an investor’s account is invested in accordance with their objectives and risk tolerance. Advisors are not obligated to recommend any specific trading strategies unless they are specified in the Investment Management Agreement.

Mr. P opened a managed account with his investment firm in 2012. He agreed to pay monthly fees. His advisor, Mr. A, carried out various option strategies in his account on his behalf. Options trading is a sophisticated, higher risk investing strategy. An investor offers to either buy or sell a financial asset (usually shares) at a set price during a certain period or on a specific date. Options trading is a higher risk investment. Investors can lose all the money they have invested (or more) in a short period of time. Option investments can also grow significantly in a short period of time.

The investor’s accounts were to be transferred to a new advisor

In early 2017, the investment firm informed the advisor, Mr. A, that he would be terminated. Mr. A was given a couple of months to wind down his clients’ option positions. At this time, the firm informed Mr. P that he would be assigned a new advisor. However, Mr. P was pleased with Mr. A’s performance. He made it clear that he would follow Mr. A to his new firm.

It took Mr. A about five months to find a new firm. In the meantime, Mr. P. was assigned a new advisor by the investment firm. The new advisor contacted Mr. P but did not manage his accounts or make any investment recommendations.

Mr. P complained that he had lost the opportunity to make money on options strategies after Mr. A left the firm. The new advisor assigned to Mr. P did not recommend any option strategies to him. The option trading strategies that he had originally agreed to were abandoned by the new advisor.

The firm continued to collect fees

During this time, Mr. P continued to be charged management fees by the firm. He asked the investment firm to stop collecting fees as he was receiving no services. The firm told him that the fees were based on an automated process that could not be stopped. Despite asking various people at the firm, Mr. P was unable to get any guidance on how to stop the automated fees.

Mr. P requested a full reimbursement related to his lost opportunity and fees.

The firm offers partial reimbursement

The firm agreed that the transition of Mr. P’s accounts could have been conducted more smoothly. However, the firm argued that Mr. P’s accounts continued to be invested in accordance with his objectives and risk tolerance. The firm paid Mr. P $1,000 as compensation for two months of fees. The firm said that Mr. P should have known that he could have stopped the fees if he had cancelled his Investment Management Agreement.

What did OBSI do?

Mr. P was unhappy with the firm’s partial reimbursement. He turned to OBSI. We found that the firm was responsible for informing Mr. P on how to stop being charged fees when he first complained. Doing so was the responsibility of the new advisor. It was unreasonable for the firm to expect Mr. P to discover the process for putting an end to the fees on his own.

We found that while Mr. P was invested with the new advisor his investments were invested in accordance with his objectives and risk tolerance . The new advisor did not have an obligation to recommend option strategies to Mr. P. The options strategies were a unique offering of his original advisor. They were not part of the Investment Management Agreement. Therefore, we did not recommend compensation for lost opportunity.

OBSI’s recommendation

We recommended that the firm compensate Mr. P the full amount of fees paid from the time Mr. A left to the time Mr. P’s accounts were transferred to the new firm. The firm agreed with our recommendation. They offered Mr. P $2,500 in addition to the $1,000 partial reimbursement already paid. Mr. P accepted the firm’s offer.