In a decision released July 6, 2017- Shinoff v BMO Nesbitt Burns Inc et al.– Justice France Dulude of the Québec Superior Court provided helpful guidance on the duties owed by investment advisors to their clients.  The plaintiff claimed that the defendants had failed to provide investment advice that was appropriate for his financial objectives.  He claimed that the defendant’s negligent decision to make significant investments in preferred shares led to a loss of $5.3 million, for which he sought damages pursuant to Article 1463 of the Civil Code of Québec.

The plaintiff was unsuccessful at trial. According to Justice Dulude, the evidence firmly established that the plaintiff had not communicated his objectives and risk tolerance consistently to the defendants.  Furthermore, the plaintiff’s expert witnesses “did not present credible and reliable opinions to establish the transactions recommended by the defendants were not suitable in light of [the plaintiff’s] objectives.”[1].  The judge considered standards of conduct set by a variety of sources, including the Know Your Client (KYC) rule from the Canadian Securities Institute[2], the Securities Act and Securities Regulation[3], and the rules of Mandate, which Justice Dulude explained as follows: “the investment advisor must act as a knowledgeable professional, demonstrating honesty, prudence and diligence in the best interest of the client.”[4]

This decision is useful for the investment advisor community, because it provides further guidance on the required standard of conduct. Investment advisors should be aware of some of the key takeaways from Justice Dulude’s reasoning:

• KYC remains the cardinal rule. Conducting a thorough client intake and taking detailed notes for all client meetings establishes a strong basis from which later investment decisions can be justified. Ensure that you understand and take into account the client’s financial situation, return objectives, risk tolerance, investment knowledge, and time horizon.[5]
• Communicate risks to clients as clearly as possible. The plaintiff said it best in an email to a defendant: “my measuring stick will always be the downside!”[6] Communicating risk appears to be even more crucial for non-traditional investments (in this case, preferred shares), or when the client is an inexperienced investor and may not understand a conventional explanation of risk.
• Take the necessary time: In a busy investment advisory practice, advisors may be tempted to rely on monthly or quarterly portfolio updates to keep clients informed. This may not be sufficient to avoid liability. Instead, consider inviting clients to speak over the phone or in person periodically. Justice Dulude put significant weight on the evidence that the plaintiff was in constant contact with his investment advisor, asking many questions related to the proposed transactions.[7] With this level of communication, a client’s claim of being misled or kept in the dark will be less persuasive.
• Sophie Melchers and Francois-David Paré of Norton Rose Fulbright were counsel to the BMO Nesbitt Burns Inc. and the investment advisor

The author would like to thank Eric Vice, summer student, for his contribution to this article.