‘I Trusted Him with My Money’: Woman says Broker ‘Churns’ Her Account, Rakes in Over $250,000
Financial adviser claims client consented to hundreds of transactions that earned him commission
A Vancouver senior is suing her former financial adviser and his investment firm, claiming her retirement nest egg was decimated largely by excessive commissions her broker earned by purchasing risky investments she didn’t authorize.
“I trusted him,” says 70-year-old Louise Field softly, her speech slow and slurred — the result of 40 years of dealing with multiple sclerosis. “I had no reason not to.”
Field first turned to financial adviser Simon Jaques 15 years ago, after her father recommended him.
She gave the broker at Mackie Research Capital over a million dollars — largely an inheritance — and filled out a new client application form stating she wanted him to keep most of her money in low and medium-risk investments.
Over the next nine years, she withdrew money for a $500,000 condo and some living expenses. But after Jaques told Field and her husband that they were almost out of money because they were spending too much and lost money in the market downturn of 2008, the couple took a closer look at the investments.
They were stunned to see how the account had dwindled to just $45,000 in 2011.
“I remember feeling, ‘How could this have happened?'” says Jonathon Haddon. “It just seemed impossible that this had taken place.”
In hindsight, Haddon wishes that he and his wife had noted the abundance of activity on her account, and checked the financial statements he describes as “confusing” more closely.
“The few statements I saw, I had trouble understanding,” he says.
Field filed a lawsuit in 2015, alleging in her statement of claim that — among other things — her broker churned her accounts “in order to earn unwarranted commissions.”
None of the allegations have been proven in court.
Commissions were ‘eye-opening’
Go Public took Field’s financial statements from Mackie Research Capital to a professor of accounting at University of B.C.’s Sauder School of Business, for analysis.
“The amount of commissions I saw was eye-opening,” says Kin Lo, who tallied them up over a four-year period from 2003-06, during which most of the activity on the account occurred.
“It was more than $253,000. I was quite surprised to see the total.”
‘There is some degree of churning.’– Kin Lo, UBC accounting professor
Lo noted numerous instances where Jaques bought and sold stock in a particular company, and then bought and sold it again — sometimes on the same day.
“There is some degree of churning,” says Lo, describing an illegal and unethical practice of buying and selling of securities solely to generate commissions.
During the same period that the broker was generating “excessive” commissions, says Lo, the stock market was performing well. He says Field could have doubled her money if she had invested her portfolio in a broad market index such as the Toronto Stock Exchange Index.
Her adviser made a high number of trades — hundreds over the four-year period — and many of them were in high-risk investments, says Lo.
“I was surprised to see that there were also quite a number of trades involving the more speculative penny stocks,” he notes.
In general, the higher a stock’s risk, the bigger the commission paid to the broker and investment firm.
“I feel really betrayed by [Jaques],” says Haddon. “He was using the account as his private piggy bank.”
Financial adviser disciplined
In 2014, the Investment Industry Regulatory Organization of Canada(IIROC) fined Jaques $80,000 for failing to ensure that investments he made for Field were suitable for her, and for failing to co-operate with its investigation.
He was also permanently banned from being a registered adviser and ordered to pay $20,000 in costs.
To date, Jaques has not paid any of the fines. Unlike in Ontario, P.E.I., Alberta and Quebec, IIROC does not have the power in B.C. to use the courts to collect fines.
Broker says he had consent for all transactions
Jaques could not be reached for comment and his lawyer was unavailable for an interview.
In his statement of defence in the lawsuit, Jaques says Field consented to all transactions, relied upon her own, independent research and judgment, and that the account suffered because Field relied on advice from others, including Haddon. There was also a change in market conditions and Field herself removed funds, the court document says.
Go Public requested an interview with a representative from Mackie Research Capital, but the firm’s lawyers said no one could comment because the matter is before the courts.
In its statement of defence, Mackie Research Capital denies that it failed to supervise its financial adviser, or that Field suffered any damages.
The investment firm also states that it is not responsible for the alleged actions of its broker, and described Field as “a sophisticated investor with extensive investment experience and knowledge” who “actively participated in the … decision-making relating to the accounts.”
‘A known problem within the industry’
That defence makes lawyer Harold Geller bristle.
The financial loss litigator and his Ottawa firm have handled more than 1,500 cases over the past decade, and Geller says more often than not, investment firms try to blame their clients for mismanagement of accounts.
“Almost every case I deal with, the consumer is told absolutely ludicrous things like, ‘You’re sophisticated. You should have known. You made the decisions,'” says Geller.
“Commissions put a financial adviser in a conflict between doing what’s right for the client and selling as much as they can,” he says. “It’s a known problem within the industry.”
‘The results are unambiguous’
Whether commissions encourage financial advisers to make poor investment choices for their clients was long debated, until the Canadian Securities Administrators commissioned a team of academics in 2015 to conduct the largest study ever done in Canada on what’s called “embedded commissions” — commissions paid to a financial adviser by a mutual fund company, rather than directly by the investor.
Douglas Cumming, a professor of finance at York University’s Schulich School of Business in Toronto, led the research, examining over 1.5 million pieces of data from mutual funds across the country.
“The results are unambiguous,” says Cumming. “Advisers recommend the funds that have the best kickbacks.”
He also found that even when mutual funds start to perform poorly, advisers are more likely to leave their clients’ money in them, rather than move the investment to a fund paying lower commissions.
“People have an incentive to behave in a very self-interested way,” says Cumming. “That’s how the world works.”
‘Status quo is not an option’
The Ontario Securities Commission recently convened a roundtable aimed at discussing the end of the little known commissions for financial advisers.
“The status quo is not an option,” OSC chair Maureen Jensen told a packed room of players from the investment industry. “We can’t ignore the evidence that the current model does not work for investors.”
The OSC aims to present its policy recommendations in the spring of 2018. Regulators in British Columbia and Quebec are also discussing the option of banning embedded commissions.
Places like England, continental Europe and Australia banned embedded commissions several years ago.
‘I just want what’s right’
Meanwhile, financial worries have meant Field’s husband has had to delay retirement from his job as a mental health worker. Field’s disease has prevented her from being able to work for three decades.
The court case has been adjourned because of Field’s deteriorating health, and no future date has been set.
“I’m not vindictive,” says Field. “I just want what’s right.”