A Manitoba lawsuit involving a disagreement between a retired couple and their insurance advisors over a failed financial plan highlights the importance of following up with clients and documenting information.
The Manitoba Court of Appeal overturned a lower court’s ruling that had awarded the couple $276,500 for negligence by their advisors. But the case is notable, says Harold Geller, a lawyer in Ottawa, because the court also held that an insurance advisor who offers financial planning advice will be held to the same standard as someone who is a certified financial planner (CFP) or a registered financial planner. The case also highlights the importance of keeping liability insurance in place after advisors retire.
“The evidence in this case was weird,” notes William Gange, who represented the estate of Richard Kirk, the insurance advisor at the centre of the case who worked for Toronto-based Canada Life Assurance Co. (Canada Life was named in the suit, but settled before trial.)
Gange says the case highlights the need for advisors to be diligent when producing financial plans. He says the costly litigation could have been avoided, had the advisors better communicated the assumptions of the plan and followed up in writing with the couple.
“It’s smart planning,” says Gange, “in terms of making sure that clients understand that things change. Put it in writing so that there’s no mistaking later down the road what took place.”
Kirk and his colleague, Ronald Browning, were sued for negligence by Nora and Abram Giesbrecht a few years after the couple took early retirement. The Giesbrechts soon discovered they didn’t have enough money to last till the age of 90, as set out in their financial plan, and returned to work.
The Giesbrechts met Kirk in 1989 in Winnipeg and purchased insurance policies. In 1999, when the couple had moved to Calgary and both were employed, the Giesbrechts told Kirk they would consider retiring when their investments could generate $35,000 annually until Abram reached the age of 90 in 2033.
Kirk obtained information about the Giesbrechts’ assets and provided a four-page document, which contained an illustration of two income projections. Under the 5% rate of return, the plan would run out of money when Abram was 78. A 7% return showed the money lasting till Abram was 90.
The financial plan called for the Giesbrechts to transfer their RRSP assets and provide an additional $113,000, including $60,000 from the sale of their home.
Evidence at trial indicated little further discussion between Kirk and the Giesbrechts about the plan. The couple transferred their RRSP assets, but did not provide further funding.
The Giesbrechts retired in 2000 after Abram received a retirement package from his firm and moved back to Winnipeg.
In 2003, the couple learned their investment portfolio was no longer capable of producing the desired income. They re-entered the workforce and sued for negligence. The couple sought damages for lost income due to early retirement, interest on lost retirement income, and lost capital and interest.
Kirk died during the litigation but had been questioned in discovery. The suit continued against his estate.
In court, Abram Giesbrecht admitted he never intended to fund the plan with sale proceeds from the couple’s home. Giesbrecht claimed that Kirk and Browning guaranteed the 7% return. Giesbrecht also testified he did not understand the plan, saying neither advisor explained the assumptions. Giesbrecht claimed he did not rely on the plan in making his decision to retire, but relied on the advisors’ representations that Giesbrecht had sufficient assets to retire.
The Giesbrechts also testified that when payments stopped, they contacted Kirk, who met them at a restaurant, admitted he had made a mistake and suggested they contact a lawyer.
Kirk and Browning testified they recalled discussing the plan with the Giesbrechts and advising them that it was merely an illustration of income, which might be generated based on certain rates of return, and not a guarantee.
Kirk admitted that he used the term “mistake” at the restaurant meeting but denied attaching blame or admitting he was at fault. He said that in hindsight, the Giesbrechts should not have retired and their money should have been invested in a guaranteed investment certificate, not in 100% equities in a seg fund. Kirk also said Browning should have followed up on the underfunding.
The Giesbrechts’ expert witness, Anthony Ross Davidson, a chartered accountant who has testified in numerous trials involving securities issues and is a former director of standards enforcement with the Financial Planners Standards Council of Canada, said the standard of care that applied to the development of the plan was equivalent to that expected of a CFP.
Kirk’s and Browning’s expert witness, George Boyd Sigurdson, a licensed insurance agent since 1970 who was testifying in his first lawsuit, argued that because the men were insurance advisors, a “lesser standard of care” applied.
The trial judge found there was no guarantee of return. However, the judgement found the only information Kirk and Browning sought from the Giesbrechts was “an itemization of their current investment portfolio,” which “falls far short of the KYC [know your client] requirement…. I find that Kirk and Browning did not take reasonable steps to inform themselves of the Giesbrechts’ financial situation, investment experience and risk levels.”
The trial judgment also notes that there was “woefully inadequate discussion about the plan and its implementation,” which Browning and Kirk should have initiated. The judge accepted Davidson’s “standard of care argument” and found the Giesbrechts’ plan failed to describe the illustrations adequately. But he also found the Giesbrechts contributorily negligent for 40% of their loss because they did not fully fund the plan and failed to read it thoroughly or seek an explanation. The judge awarded the couple $276,500 and costs.
On appeal, however, the court found that the trial judge erred in assessing the cause of the damages the Giesbrechts suffered. The decision to retire early was the Giesbrechts’; it was that decision that caused the problem, not a negligently produced plan. The appeal court noted that the Giesbrechts retired because Abram had received a retirement package and wanted to return to Winnipeg. “I am not persuaded by their argument that had the plan been better prepared, they would not have retired,” the decision says.
The appeal court overturned the damages award.
Gange says it’s important that advisors maintain “tail insurance” once they retire to cover future liabilities. Kirk had the proper insurance in place; Browning didn’t.
Adds Geller: “There are all sorts of time bombs in files that regularly explode long after advisors think they are done with the issues.”IE
Correction: An earlier version of this article incorrectly stated the Davidson is still with the Financial Planners Standards Council of Canada.
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