Financial Advisor Misconduct and Negligence Claims

What Is Financial Advisor Negligence?

Negligence may involve careless or inadequate advice or account management.

Examples may include:

• Recommending investments that did not fit your needs
• Failing to understand your financial circumstances
• Failing to explain important risks
• Failing to update your information
• Failing to reconsider a strategy after your circumstances changed
• Failing to follow your instructions
• Poor recordkeeping
• Inadequate product knowledge
• Giving you “off book” advice
• Failing to respond to warning signs

Read more about financial advisor fiduciary duties.

What Is Financial Advisor Misconduct?

Misconduct may involve more serious or improper behaviour.

Examples may include:

• Unauthorized trading
• Forged or altered signatures
• Misleading statements
• Hiding important information
• Undisclosed conflicts of interest
• Misuse of client funds
• False account information
• Pressure to sign blank documents
• Recommendations made for commissions or personal benefit
• Attempts to conceal losses or activity

You do not need to determine whether the conduct was negligence, misconduct or something else.

That can be assessed after the evidence is reviewed.

Warning Signs That Your Advisor’s Conduct May Need Review

You may want to take a closer look if:

• Your advisor is no longer responding to you
• Losses that you could not afford
• You see trades you do not remember approving
• Money was transferred without a clear explanation
• Your advisor avoids direct questions
• Your statements do not match what you were told
• You were asked to sign blank or incomplete forms
• Information on your forms is inaccurate
• The explanation changed after the loss
• You were pressured to act quickly
• You were discouraged from getting another opinion
• Fees or commissions were not clearly explained
• Your advisor recommended investments connected to the advisor or firm
• Your advisor became difficult to reach after problems appeared
• The advice seems to have benefited the advisor more than you

One confusing transaction may have an innocent explanation.

A pattern of unexplained activity, inconsistent records and changing explanations may be more serious.

Unauthorized and Discretionary Trading

In many advisory relationships, an advisor must obtain the client’s approval before making a trade.

For non-discretionary accounts, the advisor is required to get explicit instructions on the security to trade; the price to trade at; the quantity of shares or total amount to be traded; and the timing of the trade. These are specific elements. Few advisors comply with these mandatory requirements.

A concern may arise when:

• A trade was made without your approval
• One investment was discussed but another was purchased
• You were told about the transaction only after it happened
• The advisor treated your silence as approval
• The advisor exercised control that you did not knowingly provide
• A series of transactions occurred without meaningful instructions

The fact that a transaction later appeared on a statement does not necessarily answer whether it was properly authorized at the time.

Do not be thrown off if the advisor or investment dealer says that you “ratified” the trade. While ratification can occur, often this assertion does not hold up under legal scrutiny.

Blank, Pre-Signed and Altered Forms

You may have been asked to sign documents before all of the information was completed.

You may also discover that information was later added or changed.

Those documents may record your:

• Financial circumstances
• Investment objectives
• Risk tolerance
• Investment knowledge
• Time horizon
• Approval of a transaction
• Quantum of the amount at risk of absolute loss (private securities)

A review may consider:

• Who completed the document
• When it was completed
• Whether information was changed
• Whether you understood it
• Whether it reflects what you actually said

Conflicts of Interest

An advisor may receive commissions, referral fees or other financial benefits connected with a recommendation.

An advisor may have their own money in a smaller company and the company needs more money.

Compensation does not automatically make advice improper.

A concern may arise, however, if:

• The compensation was not clearly explained
• The advisor recommended a product because it paid more
• The advisor had a personal or business interest in the investment
• More suitable alternatives were not considered
• The advisor’s interests were placed ahead of yours
• A conflict was hidden or poorly managed

Investment Fees, Commissions and Excessive Trading

Frequent trading can generate costs.

Depending on the account, those costs may include:

• Commissions
• Transaction fees
• Management fees
• Embedded fund costs
• Interest
• Tax consequences

A concern may arise when trading activity did not make sense for your goals or appeared to create costs without a reasonable investment purpose.

Off-Book Investments

A financial advisor may sometimes introduce a client to an investment that does not appear on the firm’s approved product list or regular account statements.

The advisor may give advice, recommendations, etc.

You may have been told:

• It was a private opportunity
• The firm did not need to be involved
• Money should be sent directly
• Only certain clients were being offered the investment
• The advisor was personally investing as well

These circumstances may warrant closer review.

Can the Advisor’s Firm Also Be Responsible?

Possibly.

Investment dealers, banks and wealth-management firms may have responsibilities relating to:

• The advice and omissions of their financial advisors
• Supervision
• Advisor conduct
• Account documentation
• Product approval
• Complaint handling
• Conflicts of interest
• Unauthorized activity
• Training
• Compliance

A firm may argue that the advisor acted alone or outside its instructions.

That does not necessarily end the analysis.

A review may consider what the firm knew, what it should have known and whether its supervision or systems failed.

What Should You Do If Something Feels Wrong?

Start by preserving the records.

Useful documents may include:

• Account statements
• Trade confirmations
• KYC documents
• Risk questionnaires
• Emails and text messages
• Meeting notes
• Fee schedules
• Cheques and transfer records
• Brochures
• Complaint letters
• The firm’s response

Write down a timeline while the details are still clear.

Include:

• When you began working with the advisor
• What you told them
• What was recommended
• Which transactions concern you
• When you first questioned the activity
• What explanation you received

Do not alter or discard original records.

What Recovery Options May Be Available?

Depending on the circumstances, options may include:

• A complaint to the investment firm
• An OBSI complaint
• Negotiation
• Mediation
• Arbitration
• Civil litigation
• A coordinated group claim
• A class action

Explore Investment-Loss Recovery Options →