March 30, 2015
Hindsight is 20/20. Lawyers can’t always predict the outcome of a legal claim. But when a dispute between an investment client and her financial advisor actually reaches a court or a regulatory hearing, the client usually wins and the financial advisor usually loses – unless there’s a good paper trail of what the advisor said or did. Based on these odds, it’s in a financial advisor’s best interests to avoid a legal claim or a complaint altogether, or to deal with it quickly if one comes up.
There are some clients who, when meeting their financial advisor, do their best to come across as investment savvy. But if things go sideways, almost every client portrays herself as an unsophisticated investor who relied completely on the advisor – and claims the advisor breached one of the legal duties she owed her client: to follow the client’s instructions; to ensure she has the client’s authority to trade; to ensure her recommendations are suitable for that client; and to be loyal, act in good faith and disclose any conflicts of interest.
The most common complaints clients make against their advisors are:
Here are three steps to help financial advisors meet their legal obligations – and avoid successful client claims and complaints.
Hindsight illustrates the importance of documentation: the first thing, the advisor and her manager usually do after a client makes a claim or a complaint is look back at the documentation that the advisor produced during her relationship with the client – basically all written evidence of the advisor’s knowledge of the client’s affairs, financial circumstances, objectives and risk tolerances, advice she gave the client, and instructions the client gave her. They’re essentially looking for evidence to confirm: the trades were suitable for the client and consistent with the advisor’s advice to the client and consistent with the (hopefully) up-to-date KYC; the advisor followed the client’s instructions; and the advisor made the required disclosures, discussed the risks and fees, and provided the required documents to the client.
If the manager and the advisor find full and proper documentation in the advisor’s files, it’s very possible the potential or actual claim or complaint will just go away. But if not – either there’s no documentation, or it’s outdated or incomplete – bad things will probably happen. The claim or the complaint will become a “the client said v. the advisor said” situation. And when that happens, if it’s a lawsuit the lawyers might forge ahead with the legal claim; if it’s a complaint, the Investment Industry Regulatory Organization of Canada (IIROC) or the Mutual Fund Dealers Association of Canada might decide to proceed with the complaint, and let their discipline committee hear the evidence and decide who’s telling the truth.
And remember: if it gets to that point the client usually wins and the advisor usually loses – unless there’s proper documentation.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Banking & Financial Services Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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