April, 2009
The Second Opinion: Can You Sue Your
Advisor? (Part Two)

Can you sue your advisor? (Part Two)

Last month we discussed six common grounds for filing a claim against your advisor. This month, Ken Hawkins outlines a six step process for filing a complaint against your advisor. We have also included a link to the Ontario Securities Commission’s (OSC) website where you can find other helpful information for getting your money back. It is interesting to note that, according to the OSC, in order to use the Investment Industry Regulatory Organization Commission’s (IIROC) arbitration process, you will first have to go through your advisor’s firm’s complaint process. Going through that process is the meat of Ken’s article, which is found below.

If you have lost a substantial sum of money but (after reading Ken’s advice and speaking to a lawyer) have determined that you probably do not have grounds for a claim, then the only thing you can do is ensure that you don’t get burned by the industry again. In light of this, we have included Warren’s tip, Ask Your Advisor The Tough Questions. Asking your advisor some of the questions Warren suggests will make it less likely that your account will be neglected and more likely that you will receive better service and performance.

Another good resource this month (and every other month) comes from Second Opinion Vice President Mike Macdonald. His blog, found here, has a good article on fiduciaries and how you can tell if your advisor is one or not (he probably isn’t). Don’t forget to bookmark the page and check back often!

A final comment is that time is of the essence. According to an interview by Rob Carrick with two lawyers from Doucet McBride LLP in Ottawa, you have only two years from when you discover a loss to start a lawsuit. Since getting expert opinions and going through the firm’s complaint process takes some time, you need to start now. Click here to read the interview.

By Carlo Palazzo, CIM

Ask your advisor the tough questions

Why this is important: Your investment strategy can be compromised if you become so friendly with your financial advisor that you don’t feel comfortable asking tough questions.

Financial advisors are fortunate that most investors want to be agreeable. Being friendly and likeable, however, does not always lead to better service. In fact, the most knowledgeable and demanding clients are likely to get the best performance, the lowest fees, and the most phone calls. Of course, there are limits. Good advisors will drop clients who are unreasonable or too demanding. All clients, however, should expect good service, regular contacts, and answers to pertinent questions.

Sometimes the client is so easygoing that the financial advisor begins to assume that the client will stay as a client regardless of performance and service. You don’t want to be in this situation. There are occasions when a financial advisor needs to call every client to suggest an important change, and you want to be one of the first ones he calls, not one of the last. You want to be a client the advisor wants to impress, not one he takes for granted.

For example, assume that the difference in performance is 1% per annum between the portfolio that the advisor monitors carefully, compared with one owned by a client that he takes for granted. The lack of attention to the latter account – because the client is undemanding – could lead to greater losses. Being taken for granted, and not receiving information about a better asset mix, could result in your having to work longer before you retire or having to live on a lower income during retirement.

To ensure that you are not taken for granted, you should seek answers to the questions below. (If you have an Investment Policy Statement, most of these questions are already answered.)

  • What is the expected return on this portfolio over one, three, five, and ten years?
  • What is the worst likely performance over one, three, five, and ten years, based on a 95% confidence level?
  • What is the grand total of all the fees I will be paying on this portfolio?
  • What investment strategy or rationale is this portfolio based on?
  • What is the benchmark against which we will compare performance?
  • What is the rebalancing strategy?
  • Can we put an Investment Policy Statement in place that will set down in writing the strategies and expectations for this portfolio?

Most of the more experienced and highly qualified financial advisors want their clients to have a comprehensive IPS because this helps investors understand how portfolios may be expected to perform during the bad years. During the occasional bad year, these advisors will receive fewer calls from nervous clients.

Bottom line: Your financial advisor will treat you with more respect and work more diligently on your account when he knows that you are fair but expect a high standard of performance. When your advisor expects tough but fair questions, he will prepare for meetings and work harder to see that no opportunity is overlooked. You earn this respect when you insist on a written Investment Policy Statement and on getting complete answers to all reasonable questions.

What you can do now: If you do not already have an Investment Policy Statement, you should call your financial advisor and ask for a meeting to put one in place.

By Warren MacKenzie, CA, CFP, CIMA

Making a complaint and filing a claim against your advisor

Last month we discussed the different types of advisor misconduct that may be grounds for filing a claim to recover some of your investment losses. The most common complaint is due to unsuitable investments, and we will discuss the process to follow to ensure you have the best chance of recovery.

Step 1 - Determine If You Have A Legitimate Claim

Just because you lost a substantial sum of money and feel that you were wronged does not necessarily mean that you will be able to recover any losses. Your advisor and his or her employer are not going to willingly hand over money to you just because you feel they owe it to you. You will have to present a good case, backed with strong evidence, to ensure that you will have a chance of recovering any money.

Investment advisors have an obligation to know their client and to make only those recommendations that are suitable. This means that the recommendations must be in the client’s best interest and must be consistent with the client’s needs, investment objectives, and risk tolerance. Investments or recommendations that fail to meet these tests would be considered unsuitable.

Generally, unsuitable investments are investments that are riskier than what is appropriate for the client, and might include (among other things) strategies such as investing in small-cap stocks, taking concentrated positions, speculating with options, or borrowing for investment purposes.

You will have to demonstrate that the investment portfolio was too risky resulting in the losses over and above what would have been the case for a more appropriate portfolio.

In general, those of you who have limited investment knowledge/experience and a low tolerance for risk will have a better chance of recovering losses than an experienced investor with a high risk tolerance. For example, a 75 year old widow with very limited investment experience will have a better chance of recovering losses than a wealthy businessman in his 40’s with considerable investment experience.

Before you start filing a complaint it is important to get an expert opinion to determine if you have legitimate grounds for a claim and if the potential damages would be enough to justify it.

Step 2 - Gather All Pertinent Information

The most important documents to collect are the account opening form and the Know Your Client Form (KYC). The account application form sets out your risk profile (high, medium, low) and investment objectives (safety, income, capital gains). It will also have your investment knowledge and experience. Ensure that you gather your monthly and online statements, and any written or e-mail correspondence you have had with your advisor.

If there is any information that you feel you might be missing, ask the firm to provide all documents in your name, including the adviser's notes about your conversations. Under Section 8 of the Personal Information Protection and Electronic Documents Act (PIPEDA), they are obligated to give them to you.

Step 3 - Create a Time Line

On one page, create a time line showing all milestones and significant events, such as your initial discussion with the advisor, setting up your accounts, significant trades or discussions, date that you first complained, etc. This will provide a chronology of the main issues surrounding the complaint.

Step 4 - Get An Expert Opinion On Suitability And Estimate Of Damages

Get a written expert opinion on the suitability of the investments in the portfolio for you. The asset allocation of the portfolio will be compared to the asset allocation which would be appropriate based on your age, investment objectives and risk tolerance. Also a risk profile of your portfolio would be calculated and compared to the risk profile stated on the ‘know your client’ form. Damages can be estimated based on the losses, due to unsuitable investments over and above the market losses. This will provide the basis for your claim.

Step 5 - Write A Compliant Letter

Write a letter to the advisor with copies to the manager at his office/branch and the compliance department. It is important to be clear about what went wrong and when. Let them know the damages you are expecting to receive. A letter of two or three pages should be sufficient.

Present the letter of complaint with all relevant account documents (KYC, investment statements, etc), a timeline, the expert opinion on suitability and damages and correspondence. Present the complaint and backup data as a package, so the firm's compliance department has everything needed to do an investigation.

Step 6 - Follow Their Complaint Process

Each firm will have a complaint handling process and they have to inform the clients how to make a complaint and to whom they should address a complaint. Firms are required to provide clients with a brochure providing information on the complaint process as well as compensation options when they file a written complaint. The more thorough your letter and supporting documents are, the more seriously they will take the complaint and try to expedite it. Once you begin the complaint process, it is important to document every step you take, including telephone conversations, faxes and e-mails.

Your complaint might not be settled after the initial complaint. If you are not satisfied with the results there are many other avenues to pursue. However, making an official complaint to the offending firm is always the first step in trying to recover your investment losses.

By Ken Hawkins