Investor incurs significant losses from unsuitable advice and excessive trading and accepts low settlement offer

Posted Monday May 11, 2020

Category: Low settlement

Key Lesson

OBSI is committed to conducting impartial investigations and recommending fair outcomes for both firms and consumers. When consumers escalate their complaints to OBSI, firms are obligated to participate in our process in good faith. Most firms do so and treat their customers fairly by complying with OBSI recommendations. However, sometimes firms choose not to comply and when that happens, consumers who have incurred losses have limited options and may accept unfair low settlement offers.

Tragedy leaves consumer and her children with uncertain future and small nest egg

In August 2005, Ms. F was 37 years old with two young children and had recently been widowed after her husband died unexpectedly. Ms. F earned $25,000 per year from her retail sales job and cared for an infirm elderly parent as well as her two young children. Ms. F’s home was worth $180,000 and she had a $90,000 mortgage.

Ms. F received $327,000 from her husband’s life insurance policies and investment accounts. She also received $10,000 from her church community to put toward her children’s education. In September 2005, Ms. F deposited these funds at her bank and opened investment accounts with Firm A based on the bank’s referral. On the advice of Firm A, she invested in primarily conservative low-medium and medium risk income-oriented investments.

Ms. F struggled to provide for herself and her family on her modest income. She occasionally withdrew from her investments to pay monthly bills and other expenses.

In June 2006, Ms. F contacted Mr. Q from Firm B on the advice of a friend. She sold her investments from Firm A, used some of the proceeds to pay off her mortgage, and transferred approximately $230,000 to Mr. Q at Firm B to invest.

Ms. F remarried and sold her home in July 2007. She and her new husband’s total income was $80,000 and they had a blended family of young children. Ms. F added $200,000 from the sale of her home to her investments with Firm B.

Unsuitable investments, unauthorized trades and excessive trading impact consumer’s portfolio

Ms. F had very limited investment knowledge. Before her husband had passed away, he handled all their finances. Ms. F followed the advice of Mr. Q without question and depended on Mr. Q’s expertise and judgment about which investments were appropriate for her.

In the spring of 2013, Ms. F noticed a sharp decline in her investments and asked Mr. Q about it. On Mr. Q’s advice, she kept her investments and believed his reassurances that they would recover.

In February 2016, Ms. F expressed concern to Mr. Q that he was making trades without her authorization, that the volume of trades in her accounts were high and that he was not making her aware of the commissions she was paying.

Dissatisfied with Mr. Q’s response, Ms. F asked Firm B to review her accounts. She requested to be compensated for the losses she incurred on investments that were higher than the risk she had agreed to and reimbursement of the commission she paid on trades where Mr. Q did not disclose the cost of commission to her. When Firm B refused and closed the case, Ms. F brought her complaint to OBSI.

Our findings

During our investigation, we found that:

  • Mr. Q recommended a greater allocation to high-risk investments than was suitable for Ms. F and that her investment accounts were unsuitably concentrated.
  • Mr. Q traded excessively in Ms. F’s account.
  • Ms. F incurred losses as a result of the unsuitable investments and paid excess commissions due to excessive trading.
  • Firm B was responsible for Ms. F’s losses.

OBSI’s financial analysis team determined that Ms. F incurred a loss of $133,070 in her investments at Firm B, and if she had been suitably invested, she would have gained $49,306. In addition, we found that Ms. F was charged $42,849 in excess commissions due to the excessive trading that Mr. Q had undertaken in her accounts.

We recommended that Firm B compensate Ms. F $226,497 for the financial harm she incurred, including interest, and we informed both Firm B and Ms. F of our findings.

A settlement is reached far below the fair recommendation amount

Firm B did not accept our recommendation. They said that Ms. F understood and accepted the risk in her investment portfolio and that they should not be liable for her losses. They offered compensation of $25,000. Ms. F declined this offer because it was so much lower than what OBSI recommended as fair and she hoped that the firm would extend a better offer. OBSI worked to facilitate a resolution of the case, but no higher offer was made by the firm.

Because Firm B refused to make a fair offer to resolve the dispute, we were required under our Terms of Reference to publish the results of our investigation, naming Firm B. We followed our normal process of contacting the firm’s CEO directly to attempt a last-minute resolution, informing the firm’s regulators of the imminent publication, and preparing our anonymized publication report and press release.

Hours before our publication of the case, Firm B extended a new offer of $40,000 to compensate Ms. F for her losses. After months of waiting for a better offer and although this was a small fraction of our total recommendation of $226,497, Ms. F reluctantly accepted the $40,000 due to her financial situation and her belief that she had no realistic alternative to recoup a higher proportion of her losses. Because Firm B and Ms. F had agreed to settle the case, we did not publish our report.

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