OBSI relies on bad publicity

In the hierarchy of regulators and industry overseers, the Ombudsman for Banking Services and Investments may, at first glance, not appear to be very powerful. While provincial regulators or the SROs can end a career, OBSI can only make non-binding recommendations for investor compensation.

But the ombudsman does have a powerful weapon in his arsenal: negative publicity. OBSI has never had to use this club, because most advisors and dealers have complied with its recommendations. Until now.

“For the first time in more than 10 years, a firm in our alternative dispute resolution service will not follow a recommendation made by our office after our thorough investigation of a complaint,” said ombudsman David Agnew.

Financial Architects Investments is a small Toronto-based mutual fund dealer which was the subject of an OBSI investigation, at the end of which the ombudsman recommended compensation of $79,797 for a former client. Financial Architects countered with an offer of $429.36.

The roots of the dispute reach back to 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. At this point, the advisor was not with Financial Architects.

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%.

At this point, the asset allocation was virtually 100% equities, 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 just to meet her RRIF withdrawal requirements.

At the same time, the value of her funds was in decline, as the technology bubble burst and drove global markets lower. The client took her complaint to the ombudsman for redress.

“This client was badly served by Financial Architects Inc.,” says Agnew. “She deserves compensation for unsuitable investments and a risky strategy that failed to provide her with needed income in her retirement.”

During the course of the investigation, Financial Architects Inc. was unable to provide any evidence that the client had ever been consulted about, let alone understood the investments she was buying. There was no evidence that a know-your-client questionnaire had ever been filled out.

“If the advisor had taken notes, it may have helped their case, but since there was no KYC, and the client was rather elderly, to have 60% of her funds in high-risk funds is not necessarily the best thing,” says Diane Bélanger, public affairs manager for OBSI. “This account was opened in 1999, and compliance was not a highlight of those days. Certainly things have gotten better [in the industry].”

OBSI recommended that the firm compensate the client for her investment losses, but Financial Architects insisted that it should only be held responsible for her DSC fees, totalling $180.86, and $248.50 for the tax penalties she incurred for exceeding foreign content limits.

Officials from Financial Architects were not available for comment.

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