Excerpts from “Suitability From a Retiree Perspective…

Almost from the pages of Stephen King, but not quite because these are all real stories.   Please note the following synopsises of real live cases of bad financial advice from the recent Kenmar Associates report “Suitability From a Retiree Perspective”:

  • A retiree ( widow) with little income/net worth was 100 % invested in four T -class equity mutual funds.All were rated Medium risk per Fund Facts. The mutual fund dealer rejected a claim for compensation after the portfolio tumbled 38 % arguing that all the funds were congruent with the client’s risk profile. The fact that the asset allocation was wholly unsuitable for a retiree living on fixed income , her risk tolerance was low, she was in the de-accumulation phase, FF risk ratings refer to volatility not to security risks, and that the T-class funds were harmful to her ( because when she redeemed ,the capital gain caused the OAS clawback to kick in) was not enough to sway the investigator. After several months of negotiations ,the case was settled for about eighty cents on the dollar.[One rough rule of thumb is that retirees should subtract their age from 100 to get their percentage of fixed income. ie.someone who is 70 might require 70% bonds and 30% stocks.]
  • A man in his late eighties and financially unsophisticated was sold a number of TSX listed resource stocks . The purchases were made on margin.In 2008 the market hit the portfolio hard and margins were called.The dealer would not agree to a settlement even though the elderly gentleman clearly did not understand the risks of margin buying , had no need to take on added risk to satisfy his income needs and was carrying a steady $15,000 of 18% credit card debt . The buying on margin was recommended by the Rep. The loss was unrecoverable due to his age and continuing income needs.The dealer took the position that the investor was made fully aware of the risks of buying on margin and the KYC was duly amended to cover (KYA) the material change in strategy . The elderly gentleman signed the form believing the Rep was acting in best interests.Civil litigation found the dealer rationale was wrong ( unnsuitable strategy nothwithstanding the man’s signature on a Material Change form and the Rep’s disclosure of risk) and restitution was paid in full plus interest.
  • A 73 year old man suffering from cancer lost 48 % of his RRIF portfolio due to a combination of unsuitable security selection , high fees. and DSC early redemption charges on mutual funds that had to be sold to meet the RRIF minimum annual withdrawal percentage. The investigator didn’t seem to understand that withdrawing money, rather than putting it in, changes everything, including portfolio construction and how suitability is assessed. She kept saying “Markets always bounce back!¨. She did not comprehend that when a client is employed he/she can dollar cost average and then when the market rebounds, be that much better off. But for a retiree continually withdrawing cash, if the market drops 50%, the client has to liquidate twice as many shares to cover his/her living expenses. Then when the market recovers, the portfolio never does recover completely, because some of it is gone. After 4 months of back and forth, the dealer finally agreed the portfolio design was flawed and the choice of DSC funds was unsuitable. It was only with the guiding help of an investor advocate that this gentleman ultimately received a recommendation for compensation.
  • The complaint of a 76 year old man demanding compensation was denied on the grounds the recommendations were suitable per account opening documentation.In fact ,the client held a small trading account and a much larger RRIF with the dealer. He was presented with only one account application form thinking it appled only to the trading account.The risk tolerance for the RRIF he argued was very low based on his modest net worth , annual income and low loss capacity.After the dealer received a letter from a lawyer , the dealer agreed to settle.
  • A 67 year old woman ,of limited means, lost 30 % of her life’s savings due to excessive exposure to precious metal and micro-cap stocks . The firm would not provide compensation because they say the recommendations were accepted by the client who “directed” the advisor to make the purchase and were consistent with the NAAF..A dispute resolver took on the case ( for a 35% contingency fee) pointing out that it is the dealer who must make suitable recommendations and acceptance by a client does not negate that obligation.It was also discovered that it was the Rep who filled in the NAAF after the trusting woman had been convinced to sign a blank form.After 14 months, the dealer agreed to settle but only after realizing civil litigation was the next step.
  • A widow living in a retirement home ( $5000/mo.) wanted compensation after her portfolio suffered major losses.Her only source of income other than CPP and OAS was the income from the account. She argued that her monthly expenses were well known to her advisor . After a number of business income trusts slashed distributions or blew up altogether she had to sell off parts of her nest egg to survive as she had precious little other savings. The dealer countered by saying the woman fully understood the risks of income trusts as she had been an active investor for 20 years.In fact, her prior investments were limited to GIC’s , CSB’s and mutual funds.The dealer also claimed it was the woman who demanded the income trusts be purchased.After a parallel complaint made to IIROC found the dealer behaviour improper, the firm decided to settle .
  • A dealer refused to compensate a handicapped man on disability who had undergone a heart transplant.His income came mostly from CPP and Government social benefit programs.He had no emergency fund as was very clear to his advisor.Products with long lock-up periods and high surrender fees pose a particular threat for senior investors who may need access to their savings to pay unexpected expenses associated with aging.When an emergency arose, he had to redeem some a emerging market segregated fund and a precious metal mutual fund sold to him on a deferred sales commission basis ( exposing him to penalties of about 5 %) .In addition , he incurred investment losses and lost some of the guarantee value.The man stated that he should

    never have been sold risky products that involved redemption penalties given his personal circumstances and likely need for emergency funds. The dealer denies any responsibility despite claiming he was an “advisor” thereby giving the man a feeling of trust.This case is still in dispute.

  • In the well publicized Connor Financial Corporation case http://www.obsi.ca/images/Documents/IR/refusal/connor_financial_ms_h.pdf , the mutual fund dealer refused to accept a OBSI recommendation for restitution on the grounds that the client ( a divorcee) had accepted a risk tolerance based on standard deviation and had accepted the advisor’s recommendations. CFC also pointed out that the client when she opened her LIF account in 1997 had advised CFC that she wanted the maximum income permitted from her LIF account beginning immediately. The woman did not understand standard deviation as a proxy for risk, did not understand the impact of a high withdrawal rate and placed her full trust in the advisor to meet her financial objectives .In this case, no compensation has been received as OBSI recommendations are non-binding. [ Riskier investments are described as "riskier" not just because their values float around a lot ("volatility risk"), but also because sometimes they go down and never recover at all ("default risk"). Many retirees discovered this, to their regret, when the market tech boom of the late 1990s turned into a crash, and again in 2008.For retirees in the de-accumulation phase even if the market eventually does recover, a certain amount of capital is gone forever ]

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