IIROC has reached a tentative settlement with an advisor who concedes that he met with a risk-averse client only once in 12 years and increased trades on her accounts by 600% while generating a 1,640% increase in revenue – all over a 19 month period.
The advisor “failed in his due diligence obligations and … In particular, failed to ascertain that (the client) 1. had a low to medium tolerance for risk; and 2. did not want a more aggressive investment strategy in order to receive greater returns.”
A settlement agreement reached with IIROC enforcement staff but yet to be accepted by a hearing panel outlines the high volume of trades that began shortly after the Manitoba advisor began dealing with the client directly and no longer through her investment-savvy father.
When the client’s father was assisting, her account averaged 32 trades and generated an approximate average of $4,892.00 in revenue, annually for the dealer. Under the advisor’s direct control, the annual average for trades jumped to about 192, producing $85,837.00 in revenue, annually, for the dealer.
From June 2009 to December 2010, the advisor personally received compensation of approximately $58,221.97 from trades conducted in account.
The activity was out of step with the client’s expressed risk tolerance.
“This is a financial assault on an investor,” says industry advocate Ken Kivenko, president and CEO of Kenmar Associates. “It’s egregious. It should have been detected within a day, certainly two days with that kind of trading… Somebody broke down.”
The advisor’s supervisor was also part of the settlement, which proposes a $65K fine for the advisor, but no suspension, and $20K for that manager.
Making things worse, the advisor used margin to amplify the returns and while it worked, the results could have been disastrous were it not for an extremely bullish market. It’s worth noting that the client actually saw her accounts increased in value from $564,948.92 to $808,581.27 (less net withdrawals of $77,538.68) from April 2009 to December 2010. That is an increase of value of 44% net of fees.
The healthy returns -- beating the S&P/TSX Index’s 31 per cent gain over the same period – suggest that the client came forward to complain, said one advisor.
“I’m assuming it’s a client complaint of some sort that triggered this,” asked a Kitchener advisor who prefers to remain anonymous. “Was it the number of trades? If the client is making money typically you don’t see clients complaining if they have 39 per cent returns.