Unsuitable investments lead to $152K loss for investor

Ms. Y opened a managed investment account with an advisor at an investment firm and transferred her entire life savings of $253,000. At the time, she was middle-aged, a single parent of four dependent children, and the owner of a small business with a net worth of $600,000. Her documentation showed she had a medium-risk tolerance, a willingness to accept losses of 10 to 15%, and limited investment knowledge and investment experience. She relied entirely on her advisor for investment advice, and he exercised full discretionary authority over her accounts.

When her investment declined in value by over $152,000, Ms. Y complained to the firm that her investments were unsuitable. The firm stated that she was aware of the risks and it was not responsible for her losses.

Complaint upheld

We investigated her complaint and found that the firm had invested Ms. Y in a high-risk proprietary exempt-market fund that her advisor managed. The fund she was invested in used high-risk strategies including short selling, market timing, and options trading, with no geographic, industry sector or market capitalization restrictions. The fund investments exceeded her documented risk tolerance and caused a substantial financial loss. We also found the firm misrepresented the fund’s risk rating as medium.

We concluded that had the firm invested her accounts suitably, she would have lost only $8,697. We recommended compensation of $143,504. The firm did not agree and offered Ms. Y $120,000, which she accepted.

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