Client planning home renovation suffered losses after advisor’s KYC and suitability failures, says regulator
The Canadian Investment Regulatory Organization (CIRO) has handed out a $40,000 fine to a mutual fund advisor for failing to ensure a leveraged investment strategy he recommended was suitable for a client’s circumstances.
According to a settlement agreement dated June 19, the advisor, Andrew David Tachauer, has been registered as a dealing representative in Ontario since 2009.
In 2019, a client informed Tachauer that she planned a house renovation to accommodate her parents. The project was estimated to cost around $450,000, requiring the client to take out a second mortgage.
Upon obtaining the second mortgage, the client told Tachauer in December 2019 that she wished to invest some money over a three- to five-month period to pay for the renovations. In February 2020, Tachauer discussed a plan to invest $380,000, which the client told him would have to be partly taken from her second mortgage.
“[Tachauer] failed to explain to client MS the risks of using borrowed monies to purchase mutual funds,” CIRO said. He also failed to report to his dealer firm that the client was making an investment using borrowed monies.
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In proposing the investment plan, Tachauer presented multiple short-term, conservative, savings and fixed-income investment options, and recommended that the client purchase certain several mutual funds in her existing TFSA and in a new non-registered account that she would have to open.
The client had informed Tachauer the invested money would be used to pay for renovations to be completed in a few months, including ongoing costs to be paid in the interim. However, the funds he recommended for purchase – on which he received around $2,800 in commissions – were suitable for investors planning to invest for the long term, according to their associated prospectus and fund facts documents.
He also failed to update the KYC information on the client’s TFSA to change her primary investment objective for it, which was originally for retirement savings. For the new non-registered account, Tachauer indicated her investment horizon as 1 to 3 years.
He should also have considered the client’s limited investment knowledge and experience, as well as her low risk tolerance, in his recommendations, CIRO said.
Things came to a head around three weeks later on February 26, 2020. The client raised concerns about the decline in value of her investments, and Tachauer reassured her that the downturn would be short-term.
Around a month later, she lodged a complaint with Tachauer’s firm about the decline in her investments. Asserting that his investment recommendations were inconsistent with her objectives and time horizon, she sought compensation for the losses she suffered.
When she redeemed the balance of her investments from the non-registered account and TFSA a few days later, she incurred a loss of just over $34,000 on the proceeds from the loan she’d invested.
Apart from the fine, Tachauer has been ordered to pay $5,000 in costs.
