Sat., Feb. 21, 2009
Robert Swenor wanted a "safe portfolio." He insists he made that clear to his new adviser back in 2006.
Income security was critically important because Swenor was to retire early last year at age 69. His 56-year-old wife Brenda was working only part-time, and neither of them has a company pension.
What the adviser recommended for their $583,000 of savings turned out to be a volatile cocktail – 80 per cent equity investment funds and 20 per cent balanced funds, which hold both stocks and bonds. The funds did well at first. Savings grew quickly to $632,000 in 2007. But after losses and withdrawals they fell to $420,000 by last October.
They insisted on switching to the relative safety of money market funds. They dodged a further 12 per cent decline in North American stock markets since then, including an agonizing 8.4 per cent decline in Toronto this week. But they still want compensation for about $111,000 of investment losses.
"I have worked for 52 years since I was 17, 48 of those years as an equipment salesman and, considering I had both legs amputated when I was 2, it has not been easy," Swenor said. "I would not like to have to go back to work at this point in my life."
Lawyer and investment industry expert Harold Geller of Doucet McBride LLP declined to comment on the Swenors' chances of suing in court. He did repeat the advice he travels the province to give to advisers.
"Any adviser who puts more than 50 per cent of the savings of a client approaching retirement, or in retirement, into equities had better get the client to sign a letter accepting the risk of volatility and loss," he said.
Swenor said he was not given such a letter. Manulife's internal complaints department has rejected his complaint.
Many investors are bemoaning large investment losses these days. Some, like the Swenors, complain their well-compensated advisers did not propose investments suitable for their financial needs and tolerance for risk.
David Agnew, Canada's Ombudsman for Banking and Investment Services, whose staff acts as a dispute-resolution service for investors, said complaints about the "mismatch between a client's objectives and needs, and what ends up in their portfolio" are up substantially. "In the last couple of years our case load has more than doubled. We anticipate we will be even busier down the road. What the industry is telling us is (their complaints departments) are very busy."
When Manulife rejected his complaint, Swenor turned to the Canadian Life and Health Insurance Ombudservice. Manulife and Swenor's adviser say it would be inappropriate to respond to questions from the Star while Swenor's complaints are being reviewed.
The Markham couple dealt with a Waterloo agent for Manulife Financial, Keith Graham. He sold them the life insurance industry's version of mutual funds known as segregated funds.
Their mounting concerns are evident in a series of emails Swenor sent to Graham, who urged him to stay the course.
"You are invested for the long term," he consoled Swenor early last September, when the couple still had about $560,000. "The markets will come back. They always do. In these times, the best thing to do is filter out what the media and our friends are saying."
"I have no pension," Swenor wrote back later. "... how will I ever make these losses back at age 70? You should have moved me to the sidelines like others have done."
"Bob, no problem, as discussed your funds have guarantees," Graham wrote in October.
Segregated funds do come with a guarantee. Only lately has Swenor realized that the guarantee mentioned prominently and reassuringly in the names of the investment funds would be of little use to him.
He would have to wait 10 years to recover 75 per cent of the capital he had in June of 2007, when the guarantee period was last reset. Only if he were to die sooner would his wife recover 100 per cent.
Swenor now realizes the value of that guarantee is eroding as he draws an income; proportionately faster now that he has suffered market losses
He received an eight-page letter denying his initial complaint to Manulife, and a second, six-page letter on Feb. 10.
The letters make no mention of the adviser providing a letter of warning that such a high exposure to stock markets would not be appropriate for a senior drawing income for retirement. The second letter says the risk of investing in open markets is "fully described" in an information folder, and points out that Graham is not an agent and not an employee of Manulife.
"Manulife does not stand behind the quality of advice given by the agent to the consumer," says Geller, the investment industry expert and lawyer. He notes life insurance agents do not fall under the same requirements to know their clients as advisers licensed to sell mutual funds and securities, and that is a problem for consumers. But judges have ruled in court that insurance agents must make suitable recommendations.
That is also the standard set by Advocis, The Financial Advisors Association of Canada and other licensing organizations.
Swenor said he now feels "foolish." He admits he didn't read the disclosure documents that came with his investment funds. He did not ask enough questions, particularly about the agent's credentials. He has always trusted his advisers to look out for him.
He had turned to another Manulife adviser in 2001 to make investments.
Previously, he had invested all of his savings in guaranteed investment certificates. His first order for investments funds happened to be filled on Sept. 11.He lost a lot of money but soon recovered. Later the Manulife life insurance agent sold him an investment with Portus Alternative Asset Management that was supposed to be guaranteed. But Portus had a hedge fund strategy that went sour when money went missing, and Manulife stepped in to reimburse investors who had dealt with its agents.
Finally, in the fall of 2006, the Swenors turned to Graham on the advice of neighbours. Graham advertises that he has been in the financial services industry since 1970. He is not a certified financial planner.
Swenor said Graham interviewed them for about an hour, which is not a lot of time to get to know new clients. Yet an hour is about all the time that prospective life insurance agents are urged to read about investment funds before writing a licensing examination.
Graham and the Swenors talked about other options; an annuity that would pay an income for life, guaranteed investment certificates and a newly announced variety of guaranteed investment fund from Manulife that would pay an income for 20 years. Since then, Manulife has introduced a version that pays an income equal to 5 per cent of the capital invested for life. Swenor was hoping for an income of about $32,000 a year, or close to 7 per cent of his portion of their savings.
Graham returned for a second meeting with a list of investment funds similar to ones he had recommended to a client in 2002. The first letter to Swenor from Manulife's internal complaints department says Graham insists he showed the Swenors how other client's funds had initially fallen in value, and how long it took for them to recover. But Swenor said he did not understand.
Swenor recalls that Graham spent about an hour to present information brochures and have him sign sales contracts. Other life insurance agents familiar with Manulife's sales commissions say Graham would have earned a quick $20,000, plus about half a per cent of the Swenors' savings each year. Equity segregated funds typically charge annual fees of more than 3 per cent of assets.
In a Dec. 3 letter to Swenor, Manulife's client relations officer, Shari Loney, wrote that Graham knew "safety was a high priority." She recapped the email messages Swenor had sent to Graham expressing concerns about safety as his investments fell in value.
Loney pointed out that Swenor had objections with other products that would have guaranteed a fixed income, and pointed out his high income expectations. "You have not provided any evidence that Mr. Graham neglected your portfolio and that you suffered a loss as a result of his neglect. Some people like to buy and hold, while others like to sell at the first sign of market decline."
"Mr. Graham advised you to keep your portfolio as it was, until there was a recovery in the market. We do not believe this advice – Mr. Graham's investment style – was careless, as this is a strategy many advisers suggest."
Loney notes Graham chose funds ranked low on Manulife's "volatility meter." But Dan Hallett, a leading analyst of investment funds, argues such simplified volatility guides depend on the period analyzed, and may be meaningless as conditions vary.
Hallett said the funds proposed to the Swenors came through the stock market crash of 2001-02 comparatively well. But, as he warned advisers in 2007, such funds would not necessarily do as well in the next bear market.
The Swenors' savings would have been safer in some other Manulife Financial products that guarantee a minimum annual income. In a recent book and in marketing videos Manulife has on its website, York University business professor Moshe Milevsky argues that a mix of life annuities, segregated funds with an income guarantee and other investments are advisable to reduce the risk of financial ruin for those unlucky enough to retire before a bear stock market.
Jason Pereira, an MBA graduate who studied under Milevsky and published a paper about the value of income guarantees, said Swenor's income expectations and exposure to stock markets put him at a high risk of running out of money.
"I ran the calculations at 7 per cent withdrawals (and 90 per cent equities) and the result is between 14 and 15 per cent probability of ruin," said Pereira, now a financial consultant with Woodgate Financial Partners, IPC Investment Corp.
Geller said suing in court usually produces greater reimbursement after costs than complaints to industry-sponsored ombud services. But he discourages suing over losses less than $150,000. Swenor is weighing his options. He is not impressed with the solution proposed by Manulife's Loney:
"Since it seems your investment style does not match that of (your current agent), it may be advisable in this situation that you move your investments to another Manulife adviser, whose investment style matches more closely with that of your own."