By: Arash Rouhi
Turn on the evening news or browse your favourite news site and it’s hard to miss the barrage of headlines about the stock market. Whether it is the rise of companies like Tesla and Google, the army of Reddit users driving up stock prices, or whatever cryptocurrency Elon Musk is pushing at the moment; it’s hard not to get nervous about the health of your investment portfolio or about missing out on money-making asset classes. Some people may be prepared to take the bull market by the horn, but for others lucky enough to have some money set aside, the best investment strategy for their personal finances is to get financial advice from financial advisors. Choosing a financial advisor is an important first step to protecting your savings. These financial professionals can help you reach your financial goals by giving you advice how to invest your money based on your long-term plans. One important aspect of choosing a financial planner is ensuring they are registered to operate in your province. This can be done through a regulatory agency or industry organizations. But what happens if you hire a registered investment professional, and you lose your investment because of a bad investment decision or investing mistakes? Can you recover your losses? These are some of the questions we hope this blog post can answer for you as you seek investment advice to set up your investment plan.
Can I sue an investment professional if they lose my money?
The short answer is yes, but there are specific circumstances where this applies. There are cases where action or inaction by your investment professional may result in unwarranted losses in your investment portfolio. This could be because of a conflict of interest or advice that was not suitable to your financial needs. A conflict of interest occurs when the concerns and goals of the investor and investment professional are incompatible. An example of this would be if a financial adviser tells a risk-averse client to buy a risky stock that benefits the adviser in some way, such as a third-party commission. Suitability is a little more nuanced. Suitability refers to the obligation of a financial adviser to determine if a particular investment is appropriate for a client. Investment professionals are obligated to know their clients, what is known as the “Know Your Client” or “KYC” information, and give them sound advice based on that knowledge. KYC requires your investment professional to ask specific information about your annual income, net worth, investment objectives, time horizon, investment knowledge, and risk tolerance. Whether it’s diversification, real estate, individual stocks, or index funds it is your investment advisor’s job to ensure that you are investing in assets that are suitable for your financial situation. For example, it would not be suitable for a couple near retirement, with a modest amount of savings, to invest all their money in the highly volatile cryptocurrency like Bitcoin. This is because Bitcoin’s volatility can shrink their savings in the short-term, postponing their retirement plans or worse yet, demolishing their savings. So, the question then is what can investors do if they incur losses due to problems such as investment suitability or conflict of interest?
What are your options?
If you are an investor who believes you have been a victim of an investment professional’s poor decisions, you should immediately put your complaint in writing and send it to their office. From that point, the adviser or firm has 90 days to respond to your complaint. If they respond, you can either choose to accept their response or escalate the complaint. Escalation of the complaint can take three main forms. First, you can file a complaint with the Ombudsman for Banking Services and Investments (OBSI). Second, you can lodge a complaint with the appropriate regulatory body in charge of the adviser. Finally, you can choose to take the adviser or the firm to court.
Ombudsman of Banking Services
OBSI is an independent and free dispute resolution body that is recognized by Canada’s securities regulators. The Canadian Securities Administrations (CSA) requires that all firms registered with the CSA allow clients to resolve disputes through the OBSI. You have 180 days from the date of your adviser’s response to your initial complaint (or 90 after you lodged your complaint if you receive no response) to file a complaint with the OBSI. The OBSI will review your complaint and if warranted will make recommendations for compensation for up to $350,000. The recommendations of the OBSI are not like a court ruling in that the adviser or firm do not have to abide by them. If that is the case, you still have the option of taking them to court.[1]
Industry Organizations
Aside from the OBSI which as an independent organization, investment and mutual fund dealers are required to register with SROs or self-regulation organizations in their respective industries. The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) are the two SROs operating in Canada. Both organizations have avenues to address disputes. IIROC, which self-regulates investment fund managers, requires members to allow investors to take their claims to arbitration. Arbitration is less formal than a court but its rulings, like a court, are binding. Arbitration under IIROC can result in higher compensation than the OBSI process (up to $500,000), however, arbitration is not free and can get expensive. The MFDA, which regulates mutual fund dealers, allows investors to file complaints against their members. These complaints are then investigated to determine if regulatory action is required. MFDA can impose fines as large as $5,00,000, but the fines are not used to reimburse investors. They are used by the MFDA to cover operational costs, public interest projects, and the Investor Protection Fund which protects mutual fund investors in case a registered member of MFDA becomes insolvent. [3]
It is worth noting here that in Quebec investors also have the option of taking their complaint to the Autorité des Marchés Financiers (AMF) which is the securities regulatory authority in Quebec. The AMF has a voluntary dispute resolution process. Since it is voluntary, either party may choose to not participate in the proceedings. [4]
The Courts
If none of the steps above work, then you can take your complaint to the courts by bringing a civil lawsuit against the firm or individual in question. A lawyer can help you determine if you have a case for civil action. However, taking a dispute to court is very expensive and time consuming. For some investors, the losses will be too great, and the potential rewards may come too late to help them reclaim their lives. This is where Artificial Intelligence (AI) can be an invaluable tool. AI programs can be used to help assess and evaluate investor claims for suitability, conflict of interest, or any other violation. Although AI programs are not a replacement for the courts, they can help both sides of a dispute assess their chances of success and estimate the value of their claim. This can help bring the sides to a quicker resolution. In this way, AI can help provide access to justice to investors who may lack the funds or time to go through the courts. The Queen’s Conflict Analytics Lab works on these types of issues, helping design AI tools that can solve access to justice issues in a variety of legal fields, including securities. Visit our MyOpenCourt tool to get a taste of how AI could help shape the future of the legal field.
Conclusion
In short, if your investment professional does not make sound investment decisions that align with your goals and financial circumstances, then you may have some recourse to recover subsequent financial losses. You should always start by informing the investment professional or firm of your complaint. If their reply is not enough, you can try to settle the dispute through the OBSI or use one of the tools offered by industry organizations such as IIROC (arbitration) or MFDA (investigation). If you still cannot reach a satisfying conclusion, you can try the courts.
Disclaimer: The information provided in this response is for general informational purposes only and is not intended to be legal advice. The content provided does not create a legal client relationship, and nothing in this response should be considered as a substitute for professional legal advice. The information is based on general principles of law and may not reflect the most current legal developments or interpretations in your jurisdiction. Laws and regulations vary by jurisdiction, and the application and impact of laws can vary widely based on the specific facts and circumstances involved. You should consult with a qualified legal professional for advice regarding your specific situation.
[1] https://www.obsi.ca/en/consumer-complaint-process.aspx
[2] https://www.iiroc.ca/investors/gettingyourmoneyback/Pages/default.aspx
[3] https://mfda.ca/investors/
[4] https://lautorite.qc.ca/en/general-public/assistance-and-complaints/making-a-complaint