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Financial advisors are crucial in guiding individuals and businesses through the complex landscape of investment, wealth management, and financial planning. You rely on these professionals to provide sound advice and make informed decisions per your financial goals.
However, financial advisors failing to observe their duty of care can lead to grave consequences for their clients. In Toronto, as in many jurisdictions, professional negligence for financial advisors is serious. Understanding its components is essential for practitioners and clients.
Defining Professional Negligence
Professional negligence, often called malpractice or professional misconduct, happens when a practitioner fails to meet the standard of care expected in their industry, harming their client. In the context of financial advisors, negligence may arise from errors, omissions, or breaches of duty.
However, these must lead to substantial financial losses or other damages for the client. Not all potentially negligent actions add up to professional negligence. For example, losing out on a checking account bonus because your advisor did not tell you about it does not apply.
Elements of Professional Negligence
Establishing a claim of professional negligence against a financial advisor in Toronto requires specific elements. These generally include the following:
Duty of Care: Financial advisors owe a duty of care to you as a client. This duty implies they must act with the care and diligence established for a reasonably competent professional. Establishing a duty of care is the foundational element of a professional negligence claim.
Breach of Duty: A breach happens when a financial advisor fails to meet the expected standard of care. It could involve providing incorrect advice, making negligent investment decisions, or failing to disclose important information to you. The breach must be a departure from accepted professional standards.
Causation: Causation requires a direct link between the financial advisor’s breach of duty and resulting harm to you. You must demonstrate that the advisor’s negligence was a significant factor in causing the losses or damages suffered.
Damages: To succeed in a professional negligence claim, you must have suffered actual damages because of the financial advisor’s breach of duty. These damages can take various forms, such as financial losses, lost opportunities, or emotional distress.
Identifying Financial Advisor Malpractice in Investments
Financial advisors make mistakes, but not all of them lead to a negligence claim. Here are some common issues that might:
Misleading advice
If a financial advisor provides misleading, inaccurate guidance or fails to consider the client’s financial goals and risk tolerance, it can constitute professional negligence. For instance, recommending high-risk investments to a client with a low-risk tolerance without proper disclosure could lead to a negligence claim.
Failure to diversify
Diversification is a fundamental principle in investment management to mitigate risk. Suppose your financial advisor fails to diversify your portfolio adequately and concentrates investments in a particular sector or asset class. That can result in significant losses to you and may lead to professional negligence.
Unauthorized trading
Conducting trades without the client’s authorization is a serious breach of duty. Financial advisors must obtain explicit consent before executing transactions on behalf of their clients. Unauthorized trading can lead to substantial financial losses and may form the basis for a negligence claim.
Negligent supervision
Financial advisory firms must supervise their employees to ensure they comply with industry regulations and ethical standards. Suppose a firm fails to oversee its advisors, allowing misconduct to occur adequately. In that case, the court may attribute vicarious liability to the company for the professional negligence of their employees..
Failure to disclose conflicts of interest
Financial advisors must reveal any conflicts of interest that may hinder their ability to provide unbiased advice. Failure to disclose conflicts, such as receiving commissions for recommending certain financial products, can be grounds for a negligence claim.
Laws and Statutes Governing Financial Advisors
In Toronto, two agencies provide the regulatory framework for financial advisors. These are the Financial Services Regulatory Authority of Ontario (FSRA) and the Investment Industry Regulatory Organization of Canada (IIROC). These organizations establish rules and standards that financial advisors must adhere to.
The FSRA regulates various financial sectors in Ontario, including insurance, pensions, and loan and trust companies. Financial advisors in these sectors must comply with FSRA regulations that protect consumers and maintain the integrity of the financial services industry.
On the other hand, the IIROC is a national self-regulatory organization overseeing investment dealers and their representatives in Canada. It establishes rules and regulations to ensure fair and equitable dealings in the market. It maintains high professional standards among financial advisors.
Aside from these regulatory frameworks, professional negligence of financial advisors is also subject to the Securities Act in Ontario. It is a key piece of legislation governing the securities industry. It outlines the registration requirements for individuals and firms in securities. It also sets out the obligations and standards of conduct for registrants, including financial advisors.
Case Law
In addition to statutory regulations, common law principles developed through judicial decisions may apply. They play a crucial role in defining the standard of care expected of financial advisors. Precedents set by court decisions contribute to the evolving understanding of professional negligence in the financial services industry.
The legal landscape surrounding professional negligence for financial advisors is dynamic, with court decisions shaping and refining the standards of care. Consider the circumstances surrounding Hunt v. TD Securities Inc. The plaintiffs opened a non-discretionary investment account where their financial advisor could only trade on their behalf with their authorization.
The plaintiffs transferred all their holdings to their new account, including BCE shares. The defendant subsequently sold a significant amount of the BCE shares, claiming that one of the plaintiffs had authorized the transaction. The defendant further claimed the sale followed the investment strategy they had discussed.
The plaintiffs denied giving authorization and sued the defendant when the value of BCE shares rose after the sale. The Court found that the sale was unauthorized and that the defendant was liable for breach of contract.
Another significant case is that of Davidson v. Noram Capital Management Inc. The plaintiff opened a discretionary investment account with the financial advisor that specified conservative objectives. It emphasized the safety of the plaintiff’s capital by directing investments in diversified fixed-income securities.
The Court found that the defendant failed in their contractual duty by not following the terms of the investment agreement. It also found that the defendant failed to explain the associated risks of specific investment strategies he employed. While investors have to decide about the nature of their investments, the financial adviser must carefully and thoroughly clarify all implications of investment strategies.
These cases highlight the evolving nature of professional negligence jurisprudence in Toronto. It also underscores the importance of financial advisors staying informed about legal developments and maintaining a high standard of professional conduct.
Invest in Toronto With Care
Identifying professional negligence for financial advisors in Toronto involves carefully examining the duty of care, breach of duty, causation, and damages. Financial advisors must diligently meet the standards set by regulatory authorities, such as the FSRA and IIROC. They must also adhere to common law principles established through case law.
On the other hand, as an investor, you should be aware of your rights and manage your expectations. Your financial advisor should not make all your decisions for you.
When considering a professional negligence claim, you should consult legal professionals with expertise in financial services law. They can navigate the complexities of establishing liability and seeking compensation for damages.
Ultimately, pursuing a professional negligence claim holds financial advisors accountable for their actions and maintains the integrity of the financial services industry in Toronto. As laws and regulations evolve, advisors and clients must stay informed to ensure ethical and compliant financial practices.
About Jeremy Diamond
Jeremy Diamond is a lawyer and member of both Ontario and Florida Bars. Jeremy practices in the area of Plaintiff personal injury litigation. Click here to learn more about Jeremy Diamond.
