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Warning: A greedy investment advisor may be taking advantage of your elderly parent

by Wayne Cheveldayoff, 2004-05-06

Investment advisors are supposed to provide proper advice that takes into account a personís age, investment knowledge and objectives. Most advisors do a good job and earn the trust that is placed in them.

But not all advisors put a clientís interest first. Some are driven more by commissions.

When it comes to elderly clients, who tend to have lots of money but low investment knowledge, an advisor sometimes lets greed prevail, and it can lead to a bad result.

Take the example of Norah Cosgrove, a 92-year-old Toronto woman who fully trusted her investment advisor, a broker with a large bank-owned firm, to do the right thing with her in savings but now regrets doing so.

Mrs. Cosgroveís case came to light only because her daughter (who asked that her name be withheld) eventually became concerned, thoroughly researched the brokerís actions and then tried but failed (though not for lack of effort) to recoup the losses directly from the firm and through regulators and in small claims court. A statement of claim and other information on this case are available at a website which monitors Canadaís self-policing regulators (see http://regulators.itgo.com, click on cases and Cosgrove).

I have deliberately not named the broker and investment firm involved in order to avoid singling out anyone in particular because it is not just a question of one firm or one broker. There are numerous cases of broker malfeasance at many firms, especially with the elderly as targets, and usually these are kept quiet either because the client doesnít want the publicity about being duped or the client is prevented from talking by a non-disclosure clause the investment firms insist upon in any cash settlement.

Here is a brief summary of the case from the clientís point of view. Mrs. Cosgrove asked the broker, a close personal friend of her daughter, for help with her savings in 1993 when she was 82 years of age. She started initially with approximately $380,000, and then added more later.

Mrs. Cosgrove fully trusted the broker. When the broker called to suggest the sale of one stock to buy another, Mrs. Cosgroveís attitude was, ďIf you (the broker) believe it is the right thing to do, then go ahead.Ē There were few specifics given by the broker.

The money was mainly in stocks, mutual funds and bonds until 1997, when the broker recommended (Mrs. Cosgrove as usual went along) that some of it be switched into a wrap account of managed funds (equities), to which an annual fee of 2.7 per cent applied. More was transferred in later. After Mrs. Cosgrove became concerned with losses and her daughter investigated, the money was pulled out in June 2001 with losses of $26,000 on the wrap account.

But what was most objectionable about the brokerís actions was what the daughterís research turned up.

First, when setting up the account in 1993, the broker filled out a Know Your Client (KYC) form (required by regulators) showing that Mrs. Cosgrove desired 50 per cent growth (stocks) and 50 per cent income. Mrs. Cosgrove had never asked for this and never was shown the KYC form. She had asked for safety of capital. The KYC indicated that Mrs. Cosgrove had previous investment experience; the broker was told she did not.

Stocks are supposed to be for the long-term and putting half of the assets in stocks for an 82-year-old, already past the age of life expectancy for women, was reckless in the extreme. The rule of thumb in the industry is that the percentage in fixed income should be the personís age.

But putting half of money in stocks served the broker better, since there are more commissions to be earned by trading stocks for clients than simply holding bonds. Again, by recommending the switch into managed funds, the broker earned hefty commissions on selling stocks and then personally earned a 1.25-per-cent annual fee from the managed funds, which contained some of the stocks that had been previously held. To her detriment, Mrs. Cosgrove also suffered redemption charges on mutual funds that were sold to buy other investments.

In 1997, the broker revised the KYC form to 75 per cent growth and 25 per cent income, again without telling Mrs. Cosgrove who was then 85. Furthermore, by January 2001, the portfolio was 85 per cent in equities and only 15 per cent in fixed income, which was obviously inappropriate for a 90-year-old.

What was also inappropriate was the mix of equities. An elderly person should have solid, low-risk equities, if any. While there were some of these in the portfolio, the broker had also recommended high-volatility technology companies like Mitel and Celestica and speculative managed and mutual funds investing in overseas stocks.

If Mrs. Cosgrove, with the help of her daughter, had not called a halt in 2001, the losses would have been much higher, as stock markets continued to fall until October 2002. Several of the wrap pools still remain well below what they were sold for in June 2001.

In trying to get a repayment of losses and justice in this case, Mrs. Cosgroveís daughter has been stonewalled by the broker and investment firm and ignored by the Ontario Securities Commission.

She didnít get anywhere with the industry run Investment Dealerís Association (where, the daughter says, an official inferred that Mrs. Cosgrove was too old to be a good witness and might die anyway before a case could be fully investigated) or the new banking ombudsmanís office (which is industry sponsored). The size of the loss was too small to take to regular court, so she tried to get $10,000 (the maximum allowed) back through small claims court. The investment firm sent a high-priced Bay Street lawyer to the pre-trial hearing in Ottawa and the judge inexplicably insisted that the daughter couldnít represent her mother in small claims court.

What are the lessons? First, know enough to trust. In other words, to ensure your parent or you are not being taken advantage of by an unscrupulous broker, you must get yourself educated about investments and learn about the pressures advisors are under to generate commissions.

Second, if you want to get back your losses, you will have to pay for a lawyer and court costs, which means the losses will have to be over $100,000 for even partial financial redress to be a reality.

And donít expect anything from the regulators. As Robert Kyle, Executive Director of the Small Investor Protection Association, points out, the investment industry is basically policing itself in secrecy and the system is stacked against the small investor.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2004 Wayne Cheveldayoff