Unsuitable investments did not financially harm investor

Mrs. P deferred to her husband for investment decisions and gave him trading authority over her individual accounts. When her advisor, Mr. H, recommended stocks or investment strategies, Mrs. P would often ask her husband for his opinion before making a decision.

Over time, Mrs. P began to doubt her advisor's judgment. Eventually, she complained to her firm that she lost $20,000 as a result of her advisor's inappropriate investment advice. Mrs. P's risk tolerance, as outlined in her know-your-client (KYC) documentation, was being ignored. There were also multiple instances of leveraged exchange-traded funds (ETFs) being held for months instead of being sold the same day as they were purchased, as is typical for this type of security.

The investment firm declined compensation. It explained that Mrs. P had been given suitable advice, consistent with the KYC document. The firm netted the gains and losses between the various leveraged ETFs and concluded Mrs. P did not suffer an overall loss. In fact, the firm found she gained $22,000. Finally, the firm said that by consulting her knowledgeable husband and then consenting to the investments, Mrs. P was agreeing to the recommendations and was thus responsible for any gains or losses that resulted. Unsatisfied with this response, Mrs. P came to OBSI.

Complaint not upheld

Our investigation focused on whether Mrs. P's investments were suitable as well as whether the leveraged ETF strategy was appropriate. Our analysis indicated that the KYC documentation reasonably reflected both Mrs. P's and the couple's investment knowledge and objectives. We also found that Mrs. P was willing to accept some high-risk exposure and, with the help of her husband, understood the relationship between risk and returns.

Nevertheless, we agreed with Mrs. P that there was a misalignment between the KYC documentation and the leveraged ETF strategy. Her allocation of high-risk securities was much higher than considered appropriate based on her risk tolerance parameters. In addition, after interviewing the couple, we found that although Mr. P had good investment knowledge he likely did not have a sufficient level of understanding of how leveraged ETFs differed from other ETFs. He was therefore not in a position to evaluate their level of risk.

In determining what financial harm Mrs. P suffered, if any, we compared the performance of the unsuitable leveraged ETFs against a notional portfolio of suitable securities (S&P/TSX Composite Total Return Index). Our calculations also considered the timing of purchases, sells, deposits, withdrawals, fees, and other applicable transaction costs. We concluded that, although the leveraged ETFs were unsuitable, Mrs. P did not suffer financial harm: the unsuitable investments resulted in a net gain of $60,000. As a result, OBSI did not recommend the firm compensate Mrs. P.

(2013)