January 31, 2010

Ellen Roseman

So, you moved heavily into stocks and mutual funds before the market crashed
in 2008.

Now your savings have been shred and you're looking for someone to blame.

What about that financial adviser, who pushed you into a higher equity
exposure because the higher-risk products paid more in commissions?

Can you sue your adviser for negligence?

Well, it depends on the kind of relationship you had with the financial
adviser.

You have a greater chance of success if you gave directions to your adviser
to make all the buying and selling decisions in your account without
consulting you. This is called a discretionary relationship.

In such a case, the court may decide that the adviser had a duty of care to
you because of your dependency and vulnerability. (It's known in legal terms
as a fiduciary duty.)

But most clients don't hand over authority to advisers. They are involved to
some degree, even if it's just to say yes every time they're called with a
trading request.

If you're sharing the control of your investments, you'll have a harder time
making a case in court for compensation.

Take the case of William and Helen Newman, who argued that TD was to blame
when they lost money on their Nortel stock after the tech boom collapsed.

Justice Robert Smith, of the Ontario Superior Court, decided that the
Newmans (a retired electrical engineer and a medical doctor) were
sophisticated clients and not dependent on their TD adviser.

While the adviser "was more than an order taker, the relationship was closer
to that of an order taker than that of a fiduciary," Smith said in Newman v.
TD Securities in 2007.

Newman was adequately warned about the risk of holding large numbers of
Nortel shares, the judge noted. (He had realized an 80 per cent gain on
holdings that reached $1.2 million at one point.)

The judge did fault TD for failing to ensure that 20 per cent of the
portfolio was in income-generating investments, such as bonds and preferred
shares, according to the clients' stated objectives.

Joseph Groia is a securities lawyer in Toronto, who acts for investors who
sue brokers. He's a former director of enforcement at the Ontario Securities
Commission.

"Increasingly, I'm seeing courts shying away from imposing fiduciary
duties," he says.

Product sellers licensed by securities commissions have a different
standard. They're required to know their clients and to recommend
investments suitable for a client's age and stage of life, objectives,
knowledge and experience.

Groia says existing rules offer ammunition on which to rest a case.

"The most common lawsuit we bring against brokers is for unsuitability," he
says. He represented an elderly woman, who invested all her $2 million
savings in tax shelters on a broker's advice. She had no income after the
first year - an undesirable outcome for someone who needed money to live on.

A fiduciary duty to clients does exist, however, among the 17,500 Canadians
who have a certified financial planner (CFP) licence.

"Beyond passing the examinations, they agree to a code of ethics and
practice standards that put clients' interests first," says Stephen
Rotstein, vice-president of policy and enforcement for the Financial
Planning Standards Council. The council took enforcement action against 14
people in the past four years, Rotstein says - and, for some, the remedy was
permanently revoking their CFP licence.

(Disclosure: I was elected to the FPSC board as a public director in 2008.)

eroseman@thestar.ca