The investment advisory business is always evolving. All manner of securities are created and traded to fund businesses, new and old, and to even bet on the performance of enterprises. Amid all of this, investors look to advisors to help them navigate risks and achieve financial goals.
The aims of investors and advisors are not always congruent with one another. Two things advisors can and must do to understand and properly advise their clients are captured under the headings of “Know Your Product” and “Know Your Client”.
Know Your Product: advisors need to understand the investment approaches, securities, and other investment vehicles they pitch to their clients. If the advisor does not understand a certain approach or investment opportunity, they cannot properly explain the investment’s relative merits and risks to the client.
Know Your Client: the advisor needs to understand the risk profile of the investor. The extent to which the client is risk-inclined (younger, wealthier typically) or risk-averse (older, more limited or fixed means) needs to be understood and documented clearly and fully.
Courts have held that advisors need to discharge their duty of care to their investor clients to the standard of a “reasonable investment advisor”. The recent Alberta Court of Appeal case of Cunningham v. Wiltzen provides a clear example of where an advisor specifically failed to discharge their duty to that standard.
The investors in Cunningham, a married couple, were not sophisticated. Their advisor and vicariously his employer were found by the trial judge, as affirmed by the province’s highest court, to have been negligent in their performance. Specifically, the advisor touted 2 high risk stocks to the investors, even though he did not make any, let alone meaningful, enquiries as to the risk profile of the investors. No explanation as to the risks involved in the investments was provided. The advisor even went so far as to flagrantly have the investors change their “risk tolerance” to 100 percent high-risk without asking them any questions. To boot, the advisor made no mention of the fact that the president of one of the two companies was his brother. In short, the Know Your Client report was done sloppily and without any regard to the investors’ circumstances.
The key takeaway for investment advisors is the following. While not guarantors, custodians, insurers, or fiduciaries, advisors must take the interests of their clients into account. They must, at a minimum, know their product and know their client and give advice consistent with the risk profiles at hand. Advisors need to provide a balanced presentation regarding the investment’s prospects and warn clients of risks.
Invitation for Discussion:
Our litigation lawyers are skilled in negligence law. If you would like to discuss this blog in greater detail, or any other business litigation matter, please do not hesitate to contact Mohamed Amery or one of the lawyers in the Business Litigation Group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.