Rarely does a retail investor sue their advisor for not taking enough risk, but that’s essentially what happened in a recent case against a broker with Scotia Capital Inc.
In the Québec Superior Court, an investor sued their former advisor and his firm, Scotia Capital, alleging that his portfolio was invested too conservatively, resulting in missed returns.
“He alleges that this negligence deprived him, his wife and their various trusts and companies of approximately $10 million in lost profits on a portfolio which was worth approximately $18 million,” the court noted in its decision.
The court ultimately rejected the investor’s claim, finding that the firm’s KYC documentation accurately reflected his risk tolerance and recommended asset allocation.
“While it is undeniably true that the [plaintiffs] could have afforded to take more risks, it is also apparent that they did not wish to do so,” the court said.
Additionally, even though the plaintiffs had built themselves considerable wealth through their businesses, they had relatively little investment knowledge, which also “supports a low-risk investment strategy,” the court said.
Despite rejecting the claim that the plaintiffs’ conservative strategy wasn’t properly matched to their investment objectives and risk tolerance, the court did find that the advisor, and the firm, made mistakes by constructing a portfolio that was too heavily invested in preferred shares.
It noted that the portfolio was 60% to 70% in preferred shares, and that this was “insufficiently diversified and thus not suitable for conservative investors…”
The court found that this high allocation to preferred shares also conflicted with Scotia’s internal guidance, which indicated that preferred shares should represent 20% to 50% of the total fixed-income portion of a portfolio.
It also said that the over concentration should have been flagged by the firm’s compliance department.
Ultimately, the court ruled that the investor’s portfolio had an over concentration in preferred securities when weighed against a conservative model portfolio. As a result, it ordered over $364,000 in damages against the firm and the advisor.