Fund dealer’s advice led to $83,000 loss: Roseman
Equity Associates refused to compensate a couple who lost money needed for a house purchase, says an ombudsman that went public with details.
A retired couple sold their home in 2008, planning to use the sale proceeds for a new house that was still under construction.
They gave the $268,000 received from the sale to their financial adviser. And when the new house was ready in April 2009, they asked for the money to complete the purchase of their new home.
The adviser said the markets weren’t doing well and wanted them to delay. He had invested their money in medium- to high-risk mutual funds that had declined in value by $75,427 in the 10 months they owned them.
The Ombudsman for Banking Services and Investments (OBSI) said the mutual fund dealer should compensate the couple for their losses. The dealer refused to do so.
OBSI, an industry-funded dispute resolution service, can’t force members to compensate clients. Its only power is to name and shame companies that refuse to honour its recommendations.
This is the 13th complaint made public in the past 18 months, says OBSI spokesman Tyler Fleming. There are just over $1.5 million in losses not paid in compensation to investors.
Will more investment firms be named and shamed for not obeying OBSI’s advice for settling disputes?
“Yes,” Fleming says. “We’ve entered a new normal with more of these cases in the future.”
The firm named in the recent complaint is Equity Associates, founded in 2003 in Markham, Ont., and its adviser, referred to as Mr. F. in a news release last week.
According to OBSI, the couple told Mr. F. they had zero tolerance for loss, since this was the only money available for the house purchase. The adviser guaranteed there would be no loss.
The couple needed safe, risk-free investments in which to park their money. Instead, Mr. F. bought only equity and balanced funds, none of which were risk-free or intended for investors with a short time horizon.
With short-term investments, such as cashable GICs, the couple would have earned $4,573 in interest. Equity Associates owed them $80,797 plus interest — a total of $83,386 — for its unsuitable advice, OBSI said.
Equity Associates did not provide any comments when asked about the case. Its advisers control their businesses and receive 100 per cent of commissions in exchange for a fixed monthly payout, according to the website.
This seems to conflict with OBSI’s statement that investment firms are vicariously liable for the actions of their investment advisers.
Equity Associates allowed Mr. F. to open new joint accounts for the couple without filling in forms on their objectives and risk tolerance, as required by securities law. It relied on previous documents done for their RRSPs.
If the firm had refused to open the accounts until the paperwork was done, “it is very likely that the unsuitable investments would not have been made and any losses would have been prevented,” OBSI said.
None of the 13 complaints made public have been about large companies. The biggest name was Macquarie Private Wealth, an Australian company that was acquired by Richardson GMP last year.
Most investment complaints are about advisers’ duty to know their clients and find suitable investments to match their objectives and risk tolerance, says OBSI head Doug Melville. Many also involve borrowing to invest.
“Leverage is a rather easy way for advisers to increase their sales,” he says. “It creates a suitability issue if applied too broadly to clients for whom it’s not appropriate.”
A significant number of complaints are about outside business activities by investment advisers —– activities for which their employers don’t want to be held responsible.
OBSI resolves most of the investment complaints it handles, Melville says. It’s important to put the number of “stuck cases” into perspective.
Ken Kivenko, an outspoken blogger and investor advocate, is upset about OBSI’s failure to resolve some complaints. He wants to see public discussions on reforms to the complaint handling system.
“What happens when a dealer rejects an OBSI request for compensation? From what we’ve seen, not much,” Kivenko says in a Feb. 15 paper on the redress system.
“Fix complaint handling and many other investor protection issues will get fixed too. In the meantime, it’s caveat emptor.”
OBSI’s series of name and shame releases shows that smaller firms can ignore its recommendations with impunity. This can only hurt confidence in Canada’s investment supervisory system.