Simplified investment loss calculation

OBSI's Approach to Calculating Investment Losses

People often complain to us that they lost money because their investments were not suitable for them and their advisor gave them bad advice. When we receive this type of complaint, here is what we do to see if that is true.

Finding out if the investments were suitable

We start with the person's investments and situation to find out if they got good advice. That means looking at:

• personal and financial circumstances
• what they know about investing
• how much money they were willing to lose or wanted to make
• how long before they needed the money
• what they wanted the investments to do for them

If we determine the investments were suitable for them, we will explain why. If they were not, we will work to find out if they were financially harmed as a result.

Determining financial harm

We follow three-steps to calculate financial harm:

1. We calculate how much money the person lost on the investments that were not suitable for them.
2. We calculate how much money they would have made if they had been suitably invested.
3. We then compare the two amounts. If the person would have made more money on investments that were suitable for them, then they incurred financial harm.

Our loss calculation process is complex and is done by financial experts. During our process, we consider:

• the activity in the account (e.g., when investments were bought and sold)
• any payments from the investments in the account (e.g., whether any interest or dividends got paid and re-invested)
• the transaction fees paid
• any other costs

Case example

Mr. Smith originally invested $100,000. Two years later, his account has $79,000 in it. During that time, he paid $1,000 in fees. He also lost $20,000 on his investment. The $79,000 in his account equals his starting investment minus the fees he paid and minus the money he lost.

This does not necessarily mean that Mr. Smith had $20,000 of financial harm. To find out if there was financial harm, we need to compare his losses to what would have happened if he was invested suitably. To do that, we look at how suitable investments performed during that time.

Assume Mr. Smith's $100,000 was invested suitably. Those investments increased by $10,000. During that time, he still would have paid $1,000 in fees. But his account would have $109,000 at the end of the two years.

We then compare these two outcomes. In this case, Mr. Smith's financial harm would be $30,000. That is the difference between what his money is now worth and what his money would have been worth if he had been invested suitably. You can see this example in the table below.

It is important to remember that the wrong kind of investments don't always lose money and the right kind of investments don't always make money. Investments all have some risk. Investments can lose money even when they are suitable for the person.

Also, sometimes investments that are wrong for a person make more money than investments that are right for them. When that happens, even though the person got bad investing advice, they have not had any financial harm. 

Deciding how much compensation is fair

We may determine that a person's investments were not suitable for them and that they had financial harm because of it. If so, we look at whether the advisor should pay for all the financial harm or just some of it. This depends on whether the investor has any responsibility for their own financial harm. To decide that, we will look at things like:

• the relationship between the investor, the advisor and the firm (e.g. did the advisor make all the decisions or were decisions made together?)
• how much the investor understood about the investments
• the information that the investor had at the time
• whether the investor took reasonable steps to protect themselves when they found out there was a problem

Once we have a full picture, we decide how much compensation is fair. We will communicate this to the investor and the firm. We will then work with both to resolve the complaint in a way that is fair. 

Useful links

Our website contains a lot of information about our approach, our process, and how we can help consumers and small businesses. Here you can find additional information about our investment suitability and loss assessment process.