Canada: Investment And Financial Security Advisors: Respect Your Clients’ Goals And Document Your Files!

Last Updated: November 16 2012
Article by Dina Raphaël

Two recent decisions of the court of appeal1 remind us of the duty on investment advisors and financial security advisors to know their client and the correlative duty of information. In both cases, the court of appeal held that the advisor had breached his duty to know his client, assess the client's needs, and inform and advise the client. Both cases also dealt with the client's possible contributory negligence.


The owners of Alimentation Denis & Mario Guillemette inc., acting both through their business and in their personal capacity, wished to provide for their retirement by investing in safe and low-risk investments. They retained the services of an investment advisor who was duly informed of these goals. At the start of their relationship, which extended from 1990 to 2008, the advisor made investments that yielded a good return. However, over time, he concentrated his clients' portfolio in high-risk products, and they ended up losing all of their savings.

1 Souscripteurs du Lloyd's v. Alimentation Denis et Mario Guillemette inc., 2012 QCCA 1376; Audet v. Transamerica Life, 2012 QCCA 1746.

2 Laflamme v. Prudentielle Bash Commodities Canada Ltd., [2000] 1 S.C.R. 638.

After referring to the fundamental principles that an advisor must know his client and must properly inform his client, the Court held that the advisor failed to respect his clients' wishes by not adequately diversifying their portfolio and by investing in high-risk securities. In addition, the advisor invested a part of the amounts entrusted to him in financial products that he was not authorized to trade in under the various certificates he held during the periods in question.

In his defence, the investment advisor pleaded the contributory negligence of his clients, arguing that they ought to have informed themselves more fully of the investments he suggested to them. The Court wrote that while one may find that the clients were naïve, they could not be considered to be negligent for failing to "pierce the wall of appearances that the investment advisor had erected", since he got caught in it himself by choosing investments based on the recommendations and studies of recognized financial institutions. The Court indicated that the respondents were relatively modest, educated people who had no knowledge of investments in the stock market or financial products. It applied the rule laid down by the Supreme Court in the Laflamme case,2 citing the following excerpt:

I would add that the sense of trust that is characteristic of a contract of mandate also has a significant impact on the state of mind of a client who is the victim of a fault committed by a manager. In this case, that trust lay in the belief acquired in the professional merit of the manager, as a result of which a client, especially one who is not knowledgeable, may be unable or at least reluctant to believe that the manager is incompetent. Both that trust and the confusion resulting from a loss of trust will make it particularly difficult for the victim to take charge of the situation. Awareness of the extent of the injury dawns more slowly. This situation, which the manager himself has created by representing himself as a professional worthy of trust, must be taken into account before blaming the victim for any want of diligence in mitigating damages, especially since the measures to be taken were not obvious and responsibility for taking or advising those measures rested primarily on the respondents, as knowledgeable dealers and managers.3

The Court added that considering the complexity of investments and the associated risks, where a person entrusts his affairs to an investment advisor precisely because he doesn't know much about investing, he cannot be required to be constantly checking and double-checking the investments when the very reason for relying on the professional was to avoid such worries in the first place.4


Following the death of their mother, Pierre and Marie Audet entrusted their assets to a financial security advisor who had previously advised their mother. The advisor had convinced their mother to take out several life insurance policies with Transamerica, which provided a considerable inheritance. The Audets continued doing business with the same advisor.

The trial judge found that the advisor failed to prepare the investment profile of his new clients and to conduct an analysis of their financial needs.

The advisor convinced the Audets to take out a myriad of life insurance policies without ensuring that they had the necessary cash available to pay the annual premiums. As a result, they were forced to finance them with bank loans. The advisor received commissions of $228,508.00 for the issuance of two of the policies purchased by the Audets. The Court noted that "he made a huge return on the transaction."

In addition, on the advisor's suggestion, the Audets invested in index funds. This was the first time that the advisor had sold such products. He explained to his clients that the return on the funds would primarily be in capital gains and that 10% of the invested amounts could be withdrawn annually without penalty. He did not however inform his clients of the guarantee on the principal, which was reduced by any withdrawal made before maturity. He also did not clearly explain the freeze option and the fact that the crystallized amounts had to remain invested for ten (10) years. The advisor received commissions of $156,188.00 on the investments in these index funds.

The advisor also insisted that the Audets should each take out a leverage loan to give them access to cash to purchase new products.

Finally, he did not provide them with the correct information on the tax treatment of the returns earned on the invested funds or the consequences of the withdrawals on the guarantee of the principal invested in the insurance policies.

The Audets lost nearly $2M in this adventure.

The Court of Appeal affirmed the trial judgment which had held that the tax treatment was not a determining factor in the Audets' decision to invest in the Transamerica fund, but found that there were other clear transgressions by the advisor.

It noted that knowledge of the investor's profile, objective analysis of his needs, and an extensive understanding of the products offered are necessary to properly advise the client.5 The Court believed the testimony of the client, Pierre Audet, who stated that the advisor asked them no questions regarding their needs, expectations or sources of income. The Court of Appeal wrote:

[Translation] Given the absence of a writing, it was up to Thibault (the advisor) to convince the trial judge that he nevertheless tried to determine the financial and personal situations of each of the Audets, as well as their needs.

The Court found that the advisor knew that Pierre Audet had a house charged with a mortgage and an approximate salary of $50,000. Marie Audet had two children, a house with a small mortgage and earned about $37,000. The Audets did not need the money from their inheritance to live and their sole objective was to protect the inherited amount and grow the capital.6 The advisor maintained that he did not need any more information to properly advise his clients.

The Court also noted that even if the lack of diversification could be considered a risky strategy in the circumstances, and maybe even a breach of ethics, it did not cause any prejudice because the principal was guaranteed and the results showed that there had been an impressive return. The problem was precisely that this exceptional return resulted in a significant tax burden, forcing the Audets to choose between i) borrowing the necessary amounts to pay off the taxes, or ii) selling off a portion of their investments in the funds in order to generate the cash.

The liquidity problem was also aggravated by the fact that the advisor had convinced the Audets to take out multiple life insurance policies requiring the annual payment of substantial premiums which, in 2000, stood at $279,000 for one of them and $309,000 for the other. The evidence showed that the Audets did not have the means to maintain these multiple insurance policies and that they had purchased them on the advisor's insistence.

In summary, the investment strategy suggested by the advisor to each of the Audets was not suited to their circumstances due to his poor knowledge both of their actual financial situation and of the products he recommended to them, in particular, their tax consequences, and finally, his obvious desire to pocket a maximum in commissions on the products sold.

Here again, the issue was raised of the causal link between the wrongdoing committed by the advisor and the damages suffered. The advisor pleaded that the Audets caused a portion of their own losses by suddenly liquidating their investments, and that they failed to reduce their damages.

The Court rejected this argument and upheld the trial judgment on this point, finding, in particular, that the decision by the Audets to liquidate their investments actually insulted the financial security advisor who then abandoned them when he realized they no longer wished to follow his advice unconditionally. The Court noted that the most striking example of this abandonment was the financial security advisor's refusal to accompany and support Ms. Audet when she wished to meet a Transamerica representative to discuss the tax problems on the return on the investments.7

The advisor also pleaded that the trial judge ought not to have used a return of 5% which would have been obtained on an investment certificate as the basis for assessing the damages because the Audets were familiar with this product and had chosen not to purchase it. The Court wrote:

[Translation] the argument is unconvincing. If the Audets did not choose this product, it was because Thibault enticed them with greater returns from other products.


Investment and financial security advisors must not only know their clients and identify their needs, they must also know their own products so that they can make appropriate recommendations. Advisors must never overestimate their clients' knowledge and must take the necessary time to explain the recommended products and ensure their clients understand them.

Finally, advisors should ensure they do not engage in actions which the court could perceive as a means for the payment of multiple commissions and therefore a source of exorbitant income: the multiplication of transactions and purchase of excessive insurance combined with the payment of large commissions to an advisor expose him to both civil and regulatory proceedings.

In a context in which the regulatory authorities are taking every possible measure to strengthen client protection and more strictly regulate the advisor-client relationship (IIROC notice #12-0107, "Client Relationship Model - Implementation", dated March 26, 2012), advisors must be transparent and ensure that they know their clients and their products. They are well advised to document their files both during the first meeting with the client and throughout their business relationship: without paper trail, the advisor will be helpless!


1 Souscripteurs du Lloyd's v. Alimentation Denis et Mario Guillemette inc., 2012 QCCA 1376; Audet v. Transamerica Life, 2012 QCCA 1746.

2 Laflamme v. Prudentielle Bash Commodities Canada Ltd., [2000] 1 S.C.R. 638

3 Idem p. 662.

4 Lloyd's, paragraph [36].

5 Paragraph [79].

6 Paragraph [80].

7 Audet judgment, paragraph [100].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions