As global capital markets enter a period of volatility and
retraction after several years of outsized gains during the
COVID-19 pandemic, some investors may have occasion to make a
critical assessment of their investment portfolios. Investors who
have suffered losses during the recent market downturn may look to
place blame on their investment advisors, which may result in an
uptick in lawsuits and regulatory complaints against investment
advisors and dealers. It is a good time for investment advisors and
dealers to refresh their understanding of their civil and
regulatory liability and catch up on recent decisions from Canadian
In this article, we provide a high-level overview of investment
advisor liability in Canada, including the most common claims
brought against investment advisors and dealers in court
proceedings. We also summarize recent notable decisions from
Canadian courts involving some of those claims and provide a few
brief comments on the new regulatory regime for investment advisors
that commenced on Jan. 1, 2023.
The most common claims made against investment advisors are in
negligence, breach of fiduciary duty and breach of contract, with
fraud claims less common.
In general, investment advisors owe their clients a duty to
carry out client instructions with care, skill and diligence and
provide investment advice fully, honestly and in good faith. In
most cases, if the investment advisor discharges those duties, then
the advisor will not be considered negligent if the resulting
investment turns out to be unprofitable.
In some cases, investment advisors will owe additional duties to
their client, which will depend on the type of advice requested and
provided, the kind of investments at issue and the sophistication
of the client. Canadian courts have expressed the duties that may
be owed by investment advisors as existing on a
“spectrum,” ranging from an advisor who is a “mere
order taker” at the low end of the spectrum, to heightened
duties for advisors who have been provided discretionary authority
by their clients to make trades without obtaining specific
instructions for each transaction.
The “know your client” rule and the corresponding
concept of suitability are the cornerstones of the duties owed by
investment advisors and dealers to their clients. The “know
your client” rule is both a regulatory requirement and a
common law obligation that requires the advisor to know and
monitor, among other things, the client’s investment
objectives, risk tolerance, investment timelines and investment
knowledge. The related duty to make sure that the client is placed
in suitable investments involves a consideration of the particular
characteristics of the client, including age, income, net worth,
investment knowledge, investment objectives and risk tolerance.
While investment advisors and dealers are not guarantors of
investments made by their clients, they are required to ensure that
the client is aware of all positive and negative factors involved
in a potential investment. They must also anticipate and provide
appropriate advice to mitigate against foreseeable market
While regulatory rules will provide guidance as to the duties
owed by investment advisors to their clients, civil cases are
determined on a case-by-case basis; a breach of a regulatory rule
does not automatically lead to civil liability.
In order for a court to find that an investment advisor is
liable in negligence, the plaintiff must prove that they suffered
an investment loss caused by the investment advisor’s act or
omission that did not meet the required standard of care.
It bears noting that even where the client is able to establish
that the investment advisor was negligent, the advisor may be able
to argue that the client was contributorily negligent. This defence
may be available if the client’s actions contributed to the
loss — for example, failing to make proper inquiry about the
risk and nature of their investment holdings or failing to avoid or
limit investment losses when given the opportunity to do so. If a
contributory negligence defence is available to the investment
advisor, then a court may apportion liability according to the
relative fault of the advisor and client.
Breach of fiduciary duty
The default position is that the relationship between investment
advisor and client is contractual, not fiduciary. However, the
court will weigh the following factors to determine whether a
fiduciary relationship exists:
- The degree to which the client is in a vulnerable position,
having regard to the client’s age, language skills, investment
knowledge and education.
- The degree to which the relationship between investment advisor
and client is based on trust and confidence.
- The history of dealing between the investment advisor and
client, particularly whether there is a history of the client
relying on the advisor’s skill and judgment or specialized
knowledge of the advisor.
- The degree to which the investment advisor has discretion to
make investment decisions in the client’s account.
- The applicable regulatory rules or professional codes of
No one factor will be used on its own. Instead, the court will
consider all five factors to determine, on a case-by-case basis,
whether there is a fiduciary relationship between the investment
advisor and client. If the court finds such a relationship, then
the investment advisor will owe the client a fiduciary duty. This
requires, in addition to the duties identified in the negligence
section above, a duty to warn of risks inherent in any investment,
avoid all non-disclosed material conflicts of interest and act in
the client’s best interests.
Unlike claims of negligence or breach of contract, the client
does not have to prove that he or she suffered an investment loss
to establish liability for breach of fiduciary duty. If the client
proves that the investment advisor owed a fiduciary duty and the
advisor breached that duty, the client can elect to require the
advisor to disgorge any profits or other benefits earned as a
result of the breach.
Breach of contract
The relationship between investment advisor and client will
almost always be governed by an account agreement or other
contract. The investment advisor owes an implied contractual duty
to discharge their obligations with an appropriate degree of skill
and diligence and to ensure that the client is fully informed about
all important matters involving the investment portfolio.
If the account agreement states that the investment advisor has
discretion to make investment decisions on behalf of the client,
then the investment advisor must adhere to the client’s
investment objectives. If the investment advisor deploys an
investment strategy that departs from the client’s objectives,
then the investment advisor may be at risk of breaching the
contract and being liable for any investment losses suffered
because of the breach.
If the account agreement states that the investment advisor does
not have discretion to make investment decisions on behalf of the
client, the investment advisor will require express authorization
to make trades in the account. Unauthorized trades that result in
investment losses will put the investment advisor at risk of
liability for breach of contract.
A breach of contract claim will often be brought concurrently
with a claim of negligence or breach of fiduciary duty.
A finding of civil fraud requires proof that the investment
advisor intended to mislead or deceive the client for the
advisor’s own financial gain. Fraud claims typically involve
fraudulent misrepresentations made by the advisor to the client
about the type and nature of the investment, or a flat-out Ponzi
scheme. Thankfully, fraud in the investment advisor industry is not
prevalent in Canada, although successful claims are established
from time to time.
There are four elements that must be present for a finding of
- A false representation made by the investment advisor to the
- Some level of knowledge of the falsehood of the representation
on the part of the advisor, whether through actual knowledge or
- The false representation caused the client to act.
- The client’s actions resulted in a loss.
An investment advisor who is found to have committed fraud will
be required to make restitution to the client for the amount of the
investment plus interest and investigation costs. The client will
have the ability to trace liability for recovery to property
purchased with the proceeds of fraud and, potentially, to third
parties who received proceeds of fraud if they received the funds
with knowledge (including constructive knowledge) of the fraud.
Recent civil cases
While most claims brought against investment advisors do not
proceed to trial, there are usually a handful of cases each year
that result in court published decisions. Since published decisions
are relatively rare, they must be scrutinized carefully to
determine whether the decision fits within existing authority or
whether there are facts that are peculiar to the case that would
preclude general applicability to other cases.
We have identified the following decisions, published since
2019, to illustrate the types of claims that have recently been
advanced against investment advisors and dealers:
Miller v. RBC Dominion Securities,
2021 BCSC 1811 and 2022 BCSC 485. In this case, the investment
advisor changed his client’s investment risk profile from
medium-risk to high-risk without his client’s consent. The
advisor also refused to follow his client’s instructions to
cash out investments for a strategy known as
“go-away-May,” which involves selling investments in the
month of May and purchasing the same securities in June. The client
therefore sued the advisor for negligence and breach of
The court held that there was no breach of contract as the
client’s risk tolerance was not a part of the contract.
However, the court held that the advisor acted negligently when he
raised the client’s risk profile without consent. Since the
client was unable to prove any financial loss resulting from the
change, the court did not award damages to the plaintiff.
Fisher v. Richardson GMP Limited,
2022 ABCA 123. In this decision on a proposed
class action, the Alberta Court of Appeal confirmed that there is
an important distinction between the duty of care and standard of
care in investor negligence cases. While general duties of care may
be broadly applicable to advisors and dealers, the nature and
extent of the standard of care will be specific to each client.
In the context of a class action, the standard of care for each
client may not be appropriately resolved as a common issue.
Instead, whether the standard of care was met by an advisor is a
factual question that must be answered in every class member’s
claim. The answer for one class member will not advance the other
class members’ claims if their circumstances are too
For further details on this case, please see the summary prepared by the BLG lawyers who argued
the case on behalf of Richardson Wealth.
Wu v. Ma, 2022 BCSC 1737. In this
case, the investment advisor entered into a trading agreement with
an unsophisticated client. The client was a citizen and resident of
China who spoke no English and had a high school education. She was
considering moving to Canada and invested with the advisor while on
a visit. The client gave the advisor full authority to make
investment decisions. However, the advisor did not have (and never
had) a licence to trade securities. The advisor invested most of
his client’s money into a single stock that lost 90 per cent of
its value within six weeks of the investment. The client sued the
advisor for negligence, breach of fiduciary duty and breach of
contract. The court held that the advisor was liable for negligence
and for breach of fiduciary duty.
The court evaluated the facts of the case according to the five
factors outlined above and concluded that there was a fiduciary
duty owed by the advisor to the client and that the advisor had
breached that fiduciary duty.
Agar Corporation Ltd v. Lee, 2019 ABQB
886. This decision is an example of a successful claim against an
investment advisor for civil fraud, breach of fiduciary duty and
negligence. In this decision, the investment advisor recommended a
high-risk $2-million investment in a company that was not suitable
for his client’s investment objectives. The advisor failed to
disclose to his client that he was an officer and director of the
company and did not fully explain the risks involved with the
The client was a corporation with a principal investment
objective of capital preservation. The advisor described the
investment as safe. However, in the prospectus, the investment was
described as “speculative, with a high degree of risk and
suitable only for those willing to risk a total loss of their
investment and who had no immediate need for liquidity.” The
investment advisor also failed to tell the client that the
company’s liabilities exceeded its assets and that its
debentures had little or no liquidity. The resulting investment
represented 48 per cent of the client’s portfolio.
The court awarded the client over $2 million in damages and
noted that this was a particularly egregious example of a breach of
the investment advisor’s fiduciary duty to his client.
Boal v. International Capital
Management, 2022 ONSC 1280. In this proposed class
action, the representative plaintiff advanced a claim arising from
her purchase of a high-interest promissory note from her investment
advisor, who was also a licensed mutual fund salesperson. The
plaintiff alleged that her investment advisor, his colleague, and
the affiliated mutual fund dealer failed to properly disclose that
the promissory notes were issued by a company that was controlled
by the investment advisors and their family members. By the time of
the certification motion in December 2020, the proposed class
members had not suffered any investment losses, and it appeared
unlikely that they would do so in the future. Accordingly, at
certification, Ms. Boal focused solely on causes of action that did
not require proof of loss, such as breach of fiduciary duty.
A majority of the court dismissed the certification motion in
its entirety. The plaintiff’s claim rested on the argument that
an investment advisor’s ad hoc fiduciary duty can be
established on a class-wide basis (for over 170 individual clients)
based on the Mutual Fund Dealers Association’s rules and bylaws
and the Certified Financial Planners Code of Ethics alone. In
particular, the plaintiff argued that the advisor’s regulatory
requirement to act “in the best interests of the client”
created a fiduciary duty with respect to all of the advisor’s
dealings with his client. The court did not agree that this
regulatory standard in itself created a fiduciary duty relating to
existing or potential conflicts of interest between the client and
advisor. Whether or not a fiduciary duty exists in a financial
advisory relationship depends on the facts of each case.
In every province and territory except Québec, the
relationship between investment advisors and their clients is not
presumed to be fiduciary in nature. Instead, based upon the facts
of a particular case, clients may be owed ad hoc fiduciary
duties. The existence of an ad hoc fiduciary duty is
determined by a contextual, multi-factor analysis. The relevant
factors of the analysis include the claimant’s vulnerability,
the degree of discretionary power exercised by the alleged
fiduciary, and applicable professional rules or codes of
For further details on this case, please see the
summary previously published by BLG.
The new SRO
Historically, investment advisors in Canada have been regulated
by two separate self-regulatory organizations under the authority
of the provincial Securities Acts: the Mutual Fund Dealers
Association (MFDA) and the Investment Industry Regulatory
Organization of Canada (IIROC).
Effective Jan. 1, 2023, the MFDA and IIROC merged to become a
single self-regulatory organization called the New Self-Regulatory
Organization of Canada (new SRO), which is responsible for
regulating both investment advisors and mutual fund dealers.
BLG hosted a webinar on Jan. 17, 2023, that identified key
regulatory enforcement trends and what is known and unknown about
the new SRO.
The organizations formerly known as the MFDA and IIROC will
continue to operate in silos for a few years while integration
takes place. From an investigations and enforcement perspective, it
is expected to be business as usual for now, although investment
advisors should stay tuned for investigation and enforcement
changes that may be announced by the new SRO in the coming
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.