Investors incur significant losses and seek compensation, believing themselves to be unsuitably invested in high-risk securities

Posted Tuesday November 10, 2020

Category: Unsuitable Investments

Key lessons:

  • Investment suitability is not determined on the basis of losses. Investment suitability is based on the risk profile of an investment at the time that advice about it was given.
  • Every investment has the possibility of gains and the risk of loss, and the amount of each is usually closely matched. The advisor’s role is to recommend suitable investments, but they cannot predict the future nor guarantee results.
  • Investors should monitor their investments and stay informed by reviewing their account statements regularly. If you are concerned about the performance of your investments, you should contact your investment advisor to discuss the matter.

Investment losses lead consumers to challenge suitability

Mr. and Mrs. E, a married couple who operated their own business, purchased securities in their Registered Retirement Savings Plans (RRSPs) and joint account. When they first met with their investment advisor, Mr. and Mrs. E agreed they had a medium to medium-high risk tolerance. While they were experienced investors, Mr. and Mrs. E still relied on their advisor to recommend suitable investments for them.

Over an eight-month period beginning January 2018, Mr. and Mrs. E’s advisor recommended that they invest in certain public company shares and carried out these purchases in their accounts. Although their monthly account statements began to show losses, Mr. and Mrs. E had incurred losses on other investments before and were optimistic that the shares would recover. When this did not happen and their loss reached $47,000, Mr. and Mrs. E concluded that their investments must have been high-risk because they had lost a significant amount of money.

Firm confirms investment met risk tolerance

Mr. and Mrs. E contacted the firm in the fall of 2019 with their concerns about being unsuitably invested. They complained that, because they were preoccupied with operating their business, they had only recently become aware of their losses on the shares. Mr. and Mrs. E believed that the shares were a high-risk investment that went beyond their risk tolerance and asked the firm to compensate them for their entire loss of $47,000.

The firm investigated their complaint and found that the shares were within Mr. and Mrs. E’s risk tolerance. Consequently, the firm refused to compensate Mr. and Mrs. E.

Dissatisfied with this outcome, Mr. and Mrs. E brought their complaint to OBSI.

Our findings

During our investigation, we spoke to Mr. and Mrs. E and their advisor and we reviewed their account opening documents, correspondence, and other documentation in the firm’s file. We also conducted a detailed analysis of the investments in their accounts. We found that:

  • The shares that they had purchased were a medium-risk investment at the time that Mr. and Mrs. E’s advisor purchased it on their behalf, making it a suitable investment for them.
  • All of Mr. and Mrs. E’s other investments were suitable, including the shares that had lost value.
  • Mr. and Mrs. E had experienced a significant loss due to market volatility, not because they were unsuitably invested.

The outcome

We had no basis to recommend compensation, and we explained our findings in detail to Mr. and Mrs. E.

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