Retail clients who lose money in the financial markets often wonder how much their claim should be. At first, it may appear simple for them to claim their capital losses. They provided X dollars to their advisor for investment. They withdrew Y dollars from the account. Their claim is at least X minus Y. However, it is also important to factor in how their money was invested in the meantime.
If investments that were suitable for the client rose by 20 per cent during the time in question, should not the client claim for the loss of opportunity to earn a 20 per cent return? The question was definitively answered in the 2013 Ontario Superior Court decision of Ridel v. Cassin and E3M.
At trial, former CIBC Head of Compliance, Wealth Management, Guenther Kleberg gave evidence regarding what was suitable for the client. The Court’s observation about the calculation of damages on account of loss of opportunity was, "While not speculative, they are not easily calculated." The Court also heard evidence of the returns earned by certain bond mutual funds and equity indices. The Court adjusted these returns to account for the appropriate asset allocations that conformed to the client's actual risk, and awarded this return as part of the damage claim.
Appropriate Allocations and Applicable Losses
The law of negligence dictates that victims should be put in the same position as if the negligence had not occurred. That must include suitable returns if the financial advisor implemented unsuitable recommendations.
Members of the financial services industry often argue that the client would have suffered some loss in a declining market. After adjusting for "suitable" allocations, this argument may be persuasive. They argue that a client’s account that had 50% in the equity markets should suffer the loss applicable to such allocation. This begs the question, “What is the appropriate asset allocation for this client?”
The lesson is that financial advisors (FA) and life agents (LA) must conduct a thorough and fully documented needs analysis and KYC process. This analysis is the only credible way to defend an asset allocation recommendation. The mere signature of a client on the form is not sufficient, as the FA/LA is responsible for KYC and allocation suitability. Even if an allocation might have been suitable, where there is no documentary analysis to support such a conclusion the FA or LA is at risk of a finding of negligence. In these cases, a calculation of damages becomes all the more important.
If your client requires timely and effective legal advice from the experienced lawyers at MBC Law Professional Corporation, we are professionals who are already on your side. Contact Harold Geller or John Hollander toll-free at 1-888-288-2033 ext. 234 or by email.