Segregated Funds On Trial

A.The Discovery B.Arguing The Case C.Settlement vs. Judgment D.What Can We Learn From This Case

A. The Discovery Non-Contested Facts 1. Clients approach Advisor A in 1999, concerned about returns. Experienced Investors, markets were hot and they wanted performance. 2. Unhappy with single digit returns, the clients were within 5 years of retirement and decided to test Advisor A’s ability to perform.

A. Discovery cont’d 3. Advisor A’s business card referred to him being a Financial Advisor. 4. A year later, the clients had experienced an approximate 30% ROI, and brought over their remaining funds.

A. Discovery cont’d 5. Approximately $550,000 was invested into an insurance company segregated fund family. Roughly 50%:Nasdaq index units Remainder:Sprinkled over other equity segregated funds 6. The segregated fund units matured 10 years after purchase, with 100% capital protected through insurance company reserves. 7. The clients received the product Information Folder.

A. Discovery cont’d 8. By 2003, account had shrunk to approximately $200,000. The clients moved account to Advisor B as they lost confidence in Advisor A, and he wasn’t returning phone calls. 9. Advisor A verbally stated that, if the units weren’t sold, on maturity the guaranteed capital could be maintained. The clients stated that Advisor B would make the recommendation what to do next.

A. Discovery cont’d 10. In 2003, the clients sold the segregated fund units, crystallizing their losses, and forfeiting the maturity guarantee. DSC fees were paid. 11. Subsequently, Advisor B invested the proceeds into segregated fund units with the same insurance company, but now with a 75% maturity guarantee level.

A. Discovery cont’d 12. In 2004, lawyers for the clients issued a Statement of Claim to Advisor A for their losses, plus all legal expenses. Their lawyer hires an Expert Witness. 13. Advisor A does not have E & O coverage.

B. Arguing The Case Advisor A’s lack of E & O coverage impacts selection of Lawyer A, contestability, and settlement funds. Eventually, Lawyer B was hired to defend Advisor A Lawyer B hires his own Expert Witness.

Clients’ Expert Witness Report Transcripts for Discovery Statements of Claim and Defence Plaintiff’s and Defendant’s Affidavit of Record Insurance Company Performance Report Bell Charts Advisor B’s Client Questionnaire Alberta Insurance Council: Code of Conduct cont’d

Clients’ Expert Witness Report “Comparative Study of Individual Variable Insurance Contracts” (IVIC’s) released May 7, 1999 by CSA and Canadian Council of Insurance Regulators Financial Consumers Act

Clients’ Expert Witness Conclusions Poor asset allocation caused losses Financial Advisor must provide suitable advice or product to clients Advisor A didn’t utilize questionnaires or industry checklists Allocation was 100% equities, and as clients were in late 50’s, income portion should have been over 50% Know Your Client (KYC) and suitability standards not followed

Clients’ Expert Witness Conclusions Financial Consumers Act states: “the supplier, agent, or financial planner must give or provide a named financial product that is suitable, based on information provided by the consumer”

Clients’ Expert Witness Conclusions Alberta Insurance Code of Conduct states “the agent is required to stay informed of, and comply with, professional standards, determine the information that is pertinent to the client’s insurance needs, and provide informed and competent advice” Several additional pages of academic review followed, culminating in the “determination” of Advisor A being responsible for the losses

Advisor A’s Expert Witness Report Individual Variable Insurance Contracts/Segregated Funds are not securities “KYC Rule” procedures aren’t statutory requirements of the insurance industry Fact gathering is less formalized and suitability is more macro in insurance Agreed that the regulatory joint study set goals to protect consumers. However, disagreed that insurance regulators agreed to securities rules.

Advisor A’s Expert Witness Conclusions Insurance statutory requirements are that Information Folders must be delivered to prospective clients, proof of delivery must be available, and policy contracts must be delivered. All disclosures required are within the documents. It is not required to ascertain whether clients read the documents.

Advisor A’s Expert Witness Conclusions Losses were widespread in the period the clients held their segregated funds. The clients’ decision to liquidate their holdings, and forfeit the maturity guarantee, significantly impacted the outcome. The insurance industry doesn’t consider the term Financial Advisor as a technical designation, and preclude it from use.

Advisor A’s Expert Witness Conclusions “Determined” that the clients’ Expert Witness is holding an insurance agent to the standards of conduct held to securities advisors. The Information Folder fulfilled all statutory requirements of Advisor A.

C. Settlement vs Judgment What the clients hoped for What Advisor A hoped for What the lawyers hoped for The outcome

D. What Can We Learn From This Case? 1. Advisor A  No E & O Policy – major impact on case  Return all client messages  Segregated fund guarantees & portfolio risk  Some advice needs to be in writing  Select your legal council carefully  Select your mentor carefully

D. What Can We Learn From This Case? 2. Advisor A’s Mentor  E & O policy not worth paying for

D. What Can We Learn From This Case? 3. Advisor B  Fortunate not to be sued  Another Financial Advisor’s story

D. What Can We Learn From This Case? 4. Insurance Company  Fortunate not to be sued  Created & promoted the environment

D. What Can We Learn From This Case? 5. Clients  Financial Consumers Act cuts two ways  Personal accountability

D. What Can We Learn From This Case? 6. Industry  Advocis’ Best Practices Manual  Fair and Full Disclosure  What practices put the public first?