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Unhappy investors face legal minefield The Toronto Star A small piece of paper makes a big difference to your success as an investor. The account application form sets out your risk profile (high, medium, low) and investment objectives (safety, income, capital gains). An investment adviser is required to fill out the form and keep it on file. You need a copy as well. This little-known document comes in handy later if your relationship runs aground. It's evidence to support a claim that the adviser's recommended investments were unsuitable for you. The "know your client form," as the industry calls it, should be done in consultation with you. But that's not always the case, as one investor found out. I'll call her Ann Smith. A conservative investor, she was 41 years old and buying only guaranteed investment certificates. But in 1996, the bank encouraged her to switch to a full-service brokerage account. She agreed to do so. When she received account application forms in the mail, she filled in the areas that were highlighted. Unfortunately, the areas she had ignored because they were not highlighted — risk tolerance and investment objectives — were filled in later by the brokerage staff. Then her adviser recommended higher-risk investments (such as corporate bonds and equity funds). She bought them, trusting his advice. Her investments lost money, which made her unhappy and frightened. She decided to complain and seek compensation. "Someone at the bank without my consent filled in risk tolerance and investment objectives without my knowledge or consent," she wrote. In April 2002, she complained to the bank. The ombudsman did an investigation for six months, which resulted in an offer of reimbursement. Ann Smith would receive $30,000 to cover losses in three accounts. She said that was too low, calculating her losses at more than $100,000. The bank's ombudsman said she shared responsibility because she waited too long to complain. More than a year had passed after the last trades before she began to raise concerns. What about the account application forms filled in without her consent? "It is not normal procedure to sign these forms in blank, but it does happen," the bank said. Ann Smith decided to escalate her complaint. She went to the Ombudsman for Banking Services and Investments. The OBSI recommended compensation of $20,000, or $10,000 less than before. It's independent and doesn't have to respect the bank's offer. "Four consecutive years of high rates of return should have prompted you to question the type of investments in the account, especially if you were seeking only risk-free investments of one to three percentage points above GIC rates," said its report in August 2004. Ann Smith lacked credibility in saying she wanted only safe investments, the OBSI concluded. And, once she became aware her investments were not risk-free, she didn't try to mitigate her losses — for example, by liquidating her securities to buy GICs or moving her accounts to another adviser. Though she hadn't filled in her risk tolerance, the OBSI felt the know-your-client information on file "was reasonable in the circumstances." Finally, Ann Smith hired a lawyer and went through arbitration. This time, she was offered $15,000. Pursuing a legal challenge was expensive and difficult, she realized. The bank had deep pockets and could afford to pay a team of lawyers to defend itself. "I decided to take the $15,000 and just get on with my life," she says. "It cost me $5,000 to settle with them." Getting redress for investment complaints isn't easy. The system is complex and hard to navigate. "Unfortunately, when it comes to understanding the complaint process, the best education seems to be obtained by going through it," said the Ontario Securities Commission in a report last year. After hearing from aggrieved investors at a town hall meeting in Toronto, the OSC plans to act on what it heard. It's looking to "develop means to make sure the complaint process is comprehensible and accessible to all investors." One issue came up again and again. An Ontario law that came into force last year gives investors a window of only two years to file a lawsuit. The limitation period starts from the day you find out — or should have found out — about the loss or damage you suffered and who caused it. The law used to provide six years, a more realistic time frame when you're dealing with a possible loss of all your life savings. How can ordinary investors protect their own interests? I went to three people who work in complaint resolution. Robert Goldin acts as a consultant and mediator, charging $150 an hour. Investors should keep records of all their communication with an adviser, he says. "Advisers make notes on their conversations. But investors don't make notes. They're in a trusting relationship and they rely on their memory." John Vivash had a long career as a financial services executive. Today, he acts as an expert witness in investor lawsuits. "My advice is don't sue. It's expensive and just takes forever," he says. "The best offence is to be cautious and questioning at the beginning. Take some ownership for yourself." Vivash has another tip: Don't complain only to your adviser. Call the branch manager when you feel something is wrong. "Until you do that, the business has no way of knowing about your complaint." Hugh Lissaman is a lawyer in Toronto, charging $350 an hour. He also works with investors on a contingency basis, taking 25 to 30 per cent of the settlement amount. Get a legal opinion on whether your complaint is legitimate or not, he says. The Law Society of Canada can refer you to a lawyer who offers a free initial assessment. Lissaman advises hiring an independent expert, especially if your complaint is about suitability. "You'd be hard pressed to go to arbitration or trial without an expert. That will cost you $5,000 to $10,000," he says. Next week, we look more closely at getting redress through an ombudsman service. Ellen Roseman's column appears Wednesday, Saturday and Sunday. You can reach her by writing Business c/o Toronto Star, 1 Yonge St., Toronto M5E 1E6; by phone at 416-945-8687; by fax at 416-865-3630; or at eroseman@thestar.ca by email. Additional articles by Ellen Roseman |