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Fiduciary Duty and Financial Advisors

Published in the August 2006 issue of Litigation Notes - View Article

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In a case released in July, the Ontario Superior Court of Justice granted summary judgement to the defendant BMO Nesbitt Burns in an action brought by the plaintiff Tina Hanley for a breach of fiduciary duty based on disclosure of alleged confidential information without her consent.

In October 2001 Mr. Chris Hanley met with his investment advisor, Murray Becotte, who was employed by Nesbitt Burns (later BMO Nesbitt Burns) in its Thunder Bay office. Mr. Becotte prepared a retirement analysis for Mr. Hanley which was then largely forgotten until June of 2005 when Mr. Hanley requested a copy of it, which was mailed to him.

Mr. Hanley changed the date on the document to December 15, 2003, allegedly to correspond to a meeting that he had with Mr. Becotte relating to his personal finances at or about that time.

Mr. and Mrs. Hanley subsequently became involved in divorce proceedings. The valuation of Mrs. Hanley’s pension became an issue in the division of property. The parties agreed that each of them would retain their own pensions and the valuation of Mrs. Hanley’s pension was based on an assumed retirement age of 55, contained in the retirement analysis prepared by Mr. Becotte.

Mrs. Hanley had a spousal RRSP account with Nesbitt Burns from January of 2003 to August of 2005 and argued that she was therefore a customer of Nesbitt Burns to whom was owed a fiduciary duty. There was a question as to whether or not the retirement analysis was prepared in 2001, 2003 or 2005. If it was prepared during the time that she was a customer, there was an arguable case that Nesbitt Burns should not have included an assumed retirement age of 55 years in the retirement analysis without consulting with her in advance and obtaining her consent.

The trial judge considered the law with respect to fiduciary duty and identified 3 characteristics for fiduciary relationships: 1) The fiduciary has scope for the exercise of some discretion or power; 2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and 3)The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

The court considered the basis of a fiduciary relationship between an investment advisor and his/her client and concluded that the relationship is not fiduciary by definition. It cited the case of Varko v. Stirling, which held that there must be an element of trust and confidence and reliance on skill, knowledge and advice to establish a fiduciary relationship. These criteria have been confirmed by the Supreme Court of Canada not only in the context of investment advisors but in other professional advisory relationships, whether the advisors be accountants, stock brokers, bankers, or investment counsellors.

The court went on to consider the case of Hunt v. TD Securities Ltd., where it was established that in a financial investment context, the following factors should be taken into account in determining whether the advisor stands in a fiduciary relationship to his or her client: 1)Vulnerability – the vulnerability of the client that exists due to such things as age or lack of language skills, investment knowledge, education or experience in the stock market; 2)Trust – the degree of trust and confidence that a client reposes in the advisor and the extent to which the advisor accepts that trust; 3)Reliance – whether there is a long history of relying on the advisor’s judgement and advice and whether the advisor holds him/herself out as having special skills and knowledge upon which the client can rely; 4)Discretion – the extent to which the advisor has power or discretion over the client’s account; 5)Professional rules or codes of conduct – these help to establish the duties of the advisor and the standards to which he or she will be held.

The court applied these criteria to the facts of this case and concluded that BMO Nesibitt Burns did not stand in a fiduciary relationship to Mrs. Hanley. The court accepted the evidence to the effect that the retirement analysis had been prepared in October of 2001 and that it had been prepared entirely on information provided by Mr. Hanley and on information already known to Mr. Becotte regarding Mrs. Hanley’s pension plan. Although Mrs. Hanley had been a client of Nesbitt Burns in the period from 2003 to 2005, she was not aware of it at that time. The fact of her being a client did not in and of itself create a fiduciary relationship. The information as to Mrs. Hanley’s projected retirement age would have been no different, whether the retirement analysis had been prepared in 2001, 2003 or 2005. The elements of vulnerability, trust, reliance, discretion and professional rules of conduct were not present in this case.