Former advisor faces $100,000 fine and suspension

Any financial professional worth their salt knows that the client’s investment objectives and risk tolerance should determine their portfolio allocations. But in many tragic instances, advisors put their clients’ interests last.

That was shown in a recent enforcement notice issued by IIROC against Calgary investment advisor Preston Henry Smith. As part of his settlement agreement, the national self-regulatory organization is requiring Smith to pay a fine of $100,000, inclusive of disgorgement, as well as a 2.5-year suspension from acting in a registered capacity.

The decision involved six groups of clients that Smith served from July 2011 to October 2015. In all cases, the clients were making investments to fund their impending or ongoing retirement; Smith was overseeing most or all of their liquid assets, which he placed in an unsuitably high degree of risk through investments that were unsuitable for their personal and financial circumstances.

“[O]ver the life of the accounts the high risk allocations on the New Client Account Forms (‘NCAF’) grew to inappropriate levels for most of the Clients,” IIROC said. Many cases involved NCAFs incorrectly indicating allocations of 100% high risk; several cases involved risk tolerances and objectives being changed to match the clients’ holdings.

According to the Settlement Agreement document from IIROC, the clients’ portfolios were inappropriately tilted toward high-risk and speculative investments; their holdings were concentrated in TSX Venture issuers, oil and gas sector players, industrial-sector issuers, and high-risk corporate debentures.

“[Smith] recommended these investments to many of his clients, including the above-noted Clients,” IIROC said, referring to the debentures. Over time, he reportedly earned around $1.1 million in compensation from selling such debentures, which was just over half the fees earned by the firm. “Of that, approximately $65,355.00 was earned from approximately $1,864,705.00 in sales of Debentures to these Clients.”

Smith incorrectly thought the debentures were low-risk investments, and many of the clients believed they were buying low-risk bonds. But as noted by IIROC, the debentures were actually speculative and high-risk, had no existing or planned liquid market through which they could be sold, and came with a risk of issuers being unable to pay the interest or principal when due.

When informed by his firm that the debentures were actually high-risk investments between August and September 2012, he continued to recommend them to a number of clients. In cases where the purchase of debentures put the clients’ accounts outside their identified risk tolerances and objectives, Smith had the clients change their NCAFs to match their high-risk holdings. In one case, he changed the document himself without the client’s knowledge or consent.

Smith’s high-risk recommendations led to declines in the accounts of all six groups of clients ranging from 15% to 37%; the documented unrealized losses from debentures ranged from 1% to 44%.

Aside from the fine and the suspension, Smith’s settlement agreement requires a 12-month period of close supervision, a successful rewrite of the Conduct and Practices Handbook exam, and payment of $5,000 in costs to IIROC.

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