It was a nightmare scenario for a 73-year-old woman who watched virtually all of her Colgate-Palmolive stock, which she had carefully accumulated for retirement over 28 years of employment with the company, disappear.
The Financial Industry Regulatory Authority in the United States recently barred Craig David Dima, a registered stockbroker in the Ronkonkoma, N.Y., office of K.C. Ward Financial, from the securities industry as punishment for having made a series of "unauthorized and unsuitable trades" totalling about $15-million (U.S.) without the customer's permission – even after receiving explicit instructions not to sell her Colgate-Palmolive shares.
The transactions deprived the customer of substantial Colgate dividends. To add insult to injury, FINRA said Mr. Dima charged the client more than $375,000 in transaction fees.
In accepting FINRA's findings, Mr. Dima neither admitted to nor denied the charges.
"There is no place in this industry for brokers who take advantage of elderly customers. Protecting senior investors from predatory behaviour such as unsuitable and unauthorized trading is part of our core mission and will always be a priority for FINRA," says Susan Schroeder, the New York-based acting head for enforcement at FINRA.
This disturbing case in the United States raises the question: Can seniors in Canada become the victims of predatory behaviour from financial professionals entrusted with their investments?
"The current regulation in Canada imposes a duty on registered advisors and dealers to deal fairly, honestly and in good faith with their clients, including senior clients," says Debra Foubert, director of compliance and registrant regulation at the Ontario Securities Commission (OSC).
Advisors who manage accounts on a discretionary basis, such as portfolio managers, are subject to a fiduciary duty. Dealers and advisors must generally ensure that any security purchase or sale recommended for a client is suitable, and a registrant must take reasonable steps to explain the attributes and associated risks of the products they are recommending to clients, Ms. Foubert adds.
"We are also looking at targeted reforms and a best-interest standard to further strengthen investor protection," says Ms. Foubert. She notes that the OSC, together with the Canadian Securities Administrators, published a consultation paper in 2016 to explore reforms to enhance existing obligations regarding suitability, proficiency, know-your-client and know-your-product requirements.
"With an aging population, senior investors are a priority for the OSC," she stresses.
In addition to the authority of the securities commissions, there are two self-regulatory organizations in Canada covering firms and members who sell investment products to clients. They are the Investment Industry Regulatory Organization of Canada (IIROC), whose members can sell a wide range of financial products, and the Mutual Fund Dealers Association of Canada (MFDA), whose members are authorized to sell mutual funds.
"MFDA rules specifically state that no advisor can make a discretionary trade. Trades can only be processed upon receipt of client authorization," says Ian Strulovitch, the MFDA's director of public affairs in Toronto.
There are two ways that authorization can be given. In most cases a client will provide the MFDA member firm with written authorization through a trade form for a specific trade. Alternatively, a client may sign a limited trading authorization (LTA) or be in a nominee account which enables an advisor to receive verbal authorization from a client, explains Mr. Strulovitch.
"A dealer would then be able to, for example, accept phone instructions without having anything in writing from a client after an LTA is in place," Mr. Strulovitch elaborates.
"However, in cases where it can be done over the phone, we still expect that the advisor will maintain an adequate record of each order and any instruction given, such as notes of that conversation involving the trade instructions. And a trade confirmation is always sent to the client," he adds.
Experts stress that a key foundation of the client/advisor relationship involves the "know your client rule" so the advisor can make suitable recommendations to his or her client based on the products they are authorized to sell and that they know will benefit the client.
But just as advisors need to know their client, it should be a two-way street with the client also getting to know their advisor.
"That's a drum we've beaten an awful lot," stresses Paul Bourbonniere, an investment advisor with HollisWealth and principal of Polson Bourbonniere Financial in Markham, Ont., a financial advisory firm specializing in working with seniors and people at or near retirement.
While some dealers have rules in place to protect senior investors by, for example, preventing transactions considered too high risk, or prohibiting leverage investing, rules can be circumvented, ignored or downplayed. That places a lot of importance on the quality and ethics of the individual advisor and the advice they are providing, Mr. Bourbonniere says.
Polson Bourbonniere Financial is a member of Advocis, which is The Financial Advisors Association of Canada, a voluntary professional membership association.
"If the advisor is a member of a professional association like Advocis, which has a code of professional conduct, that should give some comfort to clients. The code doesn't have legal force, but if the prospective client is looking at their advisor's credentials, they at least know there are standards that individual has subscribed to," Mr. Bourbonniere says.
The Advocis code of professional conduct specifies that members are obligated to act in the client's best interests, and to act with integrity and transparency.
Estate planning presents special challenges for investment advisors, because it is very different than dealing with younger clients who are still in the investment accumulation stage of their life. Some seniors lose capacity because of age or illness, notes Mr. Bourbonniere.
Mr. Bourbonniere says most of his client meetings take place face-to-face, and in addition to receiving verbal instructions, there is internal documentation upon which his firm records agreed-upon transactions.
When conversations take place over the phone with seniors, "you want to make sure 'did they really hear what you were saying?' For example, if you know they wear hearing aids, you don't know how well they understood the words, and a word or two can make a difference. So I think it is important to have confirming e-mails or another form of confirming hard copy," he stresses.
"If there's a subsequent dispute, it's going to be messier if you don't have any hard copy to indicate that this is what you had talked about," he adds.
Experts say the first step the client should take for protection is to carefully read over any documentation they receive and sign from their dealer or financial professional looking after their investments. And if they receive a trade confirmation that looks wrong to them, or it looks unfamiliar, or suspicious, they should act on that right away, calling on the firm or their advisor to inquire as to what the situation is.
The federal government's Ombudsman for Banking Services and Investments offers a free, independent service for resolving investment disputes between participating firms and clients who are unable to solve them on their own. OBSI can make recommendations for client compensation up to $350,000.
Regulatory agencies have the power to mete out discipline. "The range of what we have the power to do is set out in our bylaws," explains Mr. Strulovitch from the MFDA.
"It includes suspensions and terminations – permanent prohibitions from acting in the industry, and monetary fines related to the type of misconduct. We've had fines in the thousands of dollars and we've had fines in the millions – it really ranges depending on the type of misconduct," he says.