Unsuitable investments lead to $62K loss for investor
Mr. Y was a novice investor with financial assets of nearly $400,000, a net worth of $1.7 million and an annual income of $124,000 from his healthcare sector job.
In mid-2019, Mr. Y opened a managed account with a branch of a major investment firm. The branch assigned Mr. A to manage Mr. Y’s accounts. Mr. A recommended a plan consisting of 40% high-risk securities and 60% medium-risk securities in a mix of stocks and mutual funds and Mr. Y agreed. In September 2019, Mr. Y transferred his RRSP, TFSA, and RESP to the firm. By January 2020, his registered and non-registered accounts held a combined balance of over $300,000.
In July 2020, early in the pandemic, Mr. Y noticed a rapid decline in his portfolio's value and expressed his concerns to Mr. A, who reassured him that the value of his investments would recover, even as they continued to drop. Trusting Mr. A's judgment, Mr. Y transferred another $60,000 into his RRSP in November 2020.
By January 2022, the value of Mr. Y’s portfolio had declined further, and he had lost approximately $200,000. Mr. A reassured Mr. Y during an annual review of Mr. Y’s portfolio that the decline in the value of his investments was temporary. Dissatisfied with Mr. A’s advice, Mr. Y requested reimbursement for the commissions he paid in the previous year and believed that Mr. A committed to a full refund of that amount.
In March 2022, Mr. Y requested a meeting with Mr. A and the principal of the branch to discuss the magnitude of his financial losses, believing that his investment portfolio held higher risk investments than he had agreed to accept. Neither the advisor nor the principal suggested that Mr. Y sell any of his holdings if he felt uneasy about the risk or to avoid further losses.
In April 2022, after sending correspondence to Mr. A to ask about the timing of the commission refund, Mr. Y learned that the firm had terminated both Mr. A and the principal of the branch. Mr. Y requested a suitability review of his investments from the firm, complaining that Mr. A’s mismanagement of his portfolio had caused his losses. He requested reimbursement for the commission charges and to be returned to his original financial position.
In July 2022, the firm completed its suitability review, concluding that Mr. Y was invested within the stated risk tolerance of his plan and that neither Mr. A nor the principal of the branch had been aware of any discussions to return commission costs. The firm also noted that, in 2021, Mr. Y was charged fees on a per trade basis well below the firm's normal minimum fee per trade. Based on these findings, the firm refused to compensate Mr. Y.
Mr. Y did not believe the firm had fully addressed his concerns. Frustrated by its response, he turned to OBSI for assistance.
Complaint partially upheld
During the investigation, we reviewed Mr. Y’s case file and account statements from the firm and interviewed Mr. Y and firm representatives. Our investigation found that the firm’s compliance department had requested the branch to complete a suitability review of Mr. Y’s accounts in 2020 and 2021. The documentation further demonstrated that the branch had not addressed this request and the firm’s compliance department had placed a restriction on Mr. Y’s accounts in 2021 to indicate that his investments did not align with the recorded risk tolerance in his KYC documents, contradicting the firm’s earlier response to Mr. Y.
We reviewed Mr. Y’s documented risk tolerance and investment parameters and found them to be reasonable given his personal circumstances. However, when we reviewed Mr. Y’s portfolio, we found that he held more high-risk investments than his documented risk profile. Mr. Y’s unsuitable investments had lost $90,000. We compared this performance with the performance of suitable investments over the same period and found that had he been suitably invested he would have lost $28,000. As a result, we found that Mr. Y’s financial loss was $62,000 – the difference between $90,000 and $28,000.
Mr. Y also sought reimbursement for fees, however, we found no evidence supporting Mr. Y’s claim that there had been an agreement for reimbursement made by the firm’s representatives, which gave us no basis to recommend compensation for this part of Mr. Y’s complaint.
We concluded that the firm was responsible for Mr. Y’s financial harm due to the unsuitable investments and its failure to follow its internal procedures and suitability reviews identified by its compliance team. The firm agreed to our recommendation to compensate Mr. Y $62,000, but Mr. Y did not accept the offer because he believed that the firm should restore his accounts fully to their opening balances.