Civil law: the liability of an investment advisor in the case of poor management
In a judgement rendered in September 2016, the Court of Appeal confirmed the numerous obligations that must be respected by an investment advisor, notably when dealing with investors who have very little knowledge in investments and need to rely entirely on their advisor. In addition, the Court of Appeal specified that all these obligations are obligations of means, as the investment advisor will generally not undertake to deliver or guarantee a certain result (London Life Insurance Company v. Long, 2016 QCCA 1434 (CanLII)).
THE FACTS
In 2004, Long and Yang migrated from China to Montréal as immigrant investors. As Long and Yang only spoke Mandarin fluently, they decided to consult Mister Wang, an investment advisor, who they had seen self-advertise, in Mandarin, as being a specialist in American investments. The proof at trial showed that the two immigrant investors had very little knowledge in investments and had explicitly informed Wang that they wished to protect their capital, obtain approximately a 5% return and have the ability to withdraw their money at any time, without having to pay a penalty.
In September 2008, Long and Yang asked Wang to transfer all their invested money into a low-risk investment account. Despite these clear instructions, Wang chose to instead transfer their sums in London Life’s real estate funds. Following the financial crisis in 2008, Long and Yang’s investments suffered a notable loss.
Long and Wang’s lawsuit against Wang, amongst others, for damages resulting from a faulty management of their investments, was granted by a Superior Court judge, who decided that Wang had failed to demonstrate that he had taken into account his clients’ wishes and needs when investing their money.
Unsatisfied with the Superior Court’s judgement, Wang, amongst other, chose to appeal the decision before the Court of Appeal.
THE COURT OF APPEAL’S DECISION
After having considered the arguments invoked by the parties, the Court of Appeal draws the following conclusions :
1. A representative in insurance of persons and/or a mutual fund dealer must be honest and loyal when dealing with clients, and must personally obtain all necessary information in order to properly identify the wishes and needs of his clients.
2. More specifically, the representative must ensure, before offering a given product to a client, that the proposed product is appropriate, given the financial situation and investment objectives described by the client.
3. Furthermore, the insurance firm for whom the representative works must supervise and guarantee the quality of the work provided by the representative; the firm will be held liable for any faults committed by its employees.
4. An advisor will generally not be held liable for any fluctuations in the stock market, but may be held liable if ever he commits a fault that results in the fulfilment of certain risks.
5. The obligation to minimize damages does not prevent investors from selling their shares, even if the sale occurs at the worst possible financial moment, as investors cannot be forced to hang on to an investment portfolio that does not correspond to their specific investor profiles.
6. The proof that shows that the investors would not have only recuperated their lost capital, but would have also made important profits if they had conserved their investment portfolios, cannot be used against them during trial.
THE LESSONS TO BE LEARNED
1. The financial advisor must know and more importantly, respect his clients’ investment objectives, as well as their knowledge in the area of investing.
2. A financial crisis does not necessarily provide a cure-all option to the financial advisor who is at fault and attempts to evade his responsibility.
3. The victim of an investment advisor’s poor management should never be forced to support a risk that he never accepted to take in the first place, in order to minimize his damages Dubé Légal inc., Montréal litigation lawyers.
