Firm shoots back at

The Ombudsman for Banking Services and Investments has unfairly targeted a small firm in Toronto, according to the head of compliance at the firm. And he has no intentions of complying with its recommendation that the firm pay nearly $80,000 in client compensation.

“We decided not to go along with the recommendation of the ombudsman’s office because we don’t believe they’ve considered all the facts, and we believe they have deliberately chosen to ignore some of the most important information surrounding the decision that was made,” says Chand Misir, chair of compliance at Financial Architects Investments.

“They did not consider the fact that this woman had full knowledge — she was not a naive investor. She had been investing for probably 15 to 20 years — she’s not naive by any stretch of the imagination,” he says, pointing out that she had signed off on all of the trades that led up to the dispute.

The case began in 1999, when a 76-year-old widow invested her $142,000 RRIF in a combination of medium-risk income and equity mutual funds with the aid of her advisor. Shortly after the initial investments were made, OBSI says, the advisor shifted 40% of the client’s assets into high-risk mutual funds. The account was moved to Financial Architects in the summer of 2000, and the advisor increased the client’s exposure to higher-risk funds to 60%.

The overall portfolio allocation was virtually 100% equities, according to OBSI, with little or no distributions to fund the client’s mandatory RRIF withdrawals. Withdrawals were funded instead by redemption of fund units. Unfortunately for the client, her funds were all sold on a DSC schedule and she faced early redemption penalties to meet her RRIF withdrawal requirements.

Misir says the client’s daughter had attended the meeting at which the more aggressive strategy was put in place and that the allocation reflected an “intergenerational investment style.” The risk profile was adjusted to reflect the daughter’s investment horizon, which was longer-term, as she was in her forties.

“It was our understanding that the allocation would continue after the daughter inherited these monies,” says Misir.

When the tech-heavy investments tanked, Misir says the firm attempted repeatedly to contact the woman in an effort to mitigate her losses, but the client failed to react to the changing market conditions.

“The information that we have provided repeatedly to the ombudsman’s office indicated that we made several attempts by phone and letters, requesting that she come into the office and update her information,” Misir says. “She never responded to any [calls] for some time. She had made no attempt to mitigate her losses over the seven-year period.”

“She had to take responsibility for her investments. We did whatever we could within our powers to get her to come in here and take a look at what was going on. She never responded.”

Misir asserts that the woman did have other sources of income. The ombudsman points out that these consisted of government benefits and that the woman, now in her 80s, remains financially constrained.

Ombudsman David Agnew points out that it is not the ombudsman’s role to take sides in a dispute but to remain a neutral arbitrator. Throughout OBSI’s lengthy investigation, he says, there was no question that the woman was not a sophisticated investor.

R elated Stories

OBSI relies on bad publicity

“It was clear that this was not a sophisticated investor, in fact, [she was] an investor with very limited knowledge, and it was not evident at all of the increasing risk of the portfolio, or whether she understood the strategy behind it,” says Agnew. “This is someone who was, and continues to be, on a very limited income, who does not have anything but modest income. This is a very difficult situation for the woman, who is now past 80 [years of age] and on an even more reduced income.”

What Misir finds particularly unfair, though, is the treatment of the advisor — also his brother — who passed away in September 2006. Misir contends that just two months before his brother’s death, the case worker had said that the case would be dropped but that OBSI became even more aggressive after his passing.

“Over the seven years while he was alive, there was hardly any communication with the ombudsman’s office. If there was communication, it was once a year,” says Misir. “When we announced that he had passed away, they became very vigorous and aggressive. They started to communicate on a weekly basis with me.”

Agnew says the circumstances are unfortunate but that OBSI had been less vigorous prior to the advisor’s death because his office did not want to badger a man who was seriously ill.

“It would be only human not to pursue someone when they are that sick, but we do have a file here. The complaint is against the firm, not a specific advisor. The complaint is still attached to Financial Architects. With all due respect, we have to continue to pursue the file.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(05/18/07)

Steven Lamb