Markets worldwide continue to feel the aftershocks of tariff policies initiated under the Trump administration. In these tumultuous times, the duties and professional responsibilities of financial advisors have come under heightened scrutiny. A refresher on the existing law in this area is warranted.
Financial advisors cannot guarantee that financial success will result from their professional services. So how do long-standing principles from Canadian case law apply to professional liability of advisors in the context of tariff-induced market disruptions?
As notably held by the British Columbia Court of Appeal in Rhoads v. Prudential-Bache Securities Canada Ltd. (1992):
“A market downturn is not an independent intervening act but rather a foreseeable event that an Investment Advisor should anticipate and so advise”
As early as November 2024, President-elect Trump took to social media to announce a campaign promise to impose tariffs on all products imported into the United States from Canada and Mexico, among other countries, as one of his first executive orders. By January 2025, media outlets had begun identifying the investment sectors exposed to these proposed trade measures.
While advisors are not expected to predict such events with precision – nor do they act as guarantors of investment success – recessions, downturns, and global disruptions have long shaped the investment landscape and must be mitigated through prudent advice aligned with each client’s goals and risk tolerance.
This article summarizes long-standing principles of financial advisor liability from Canadian case law that remain applicable in wake of the tariff-induced market volatility.
Rhoads v. Prudential-Bache Securities Canada Ltd.
In Rhoads v Prudential-Bache Securities Canada Ltd., the British Columbia Court of Appeal upheld a $132,000 award against two stockbrokers for negligently investing a retired couple’s life savings.
The Court rejected the brokers’ argument that the 1987 “Black Monday” market collapse was “unique, unpredicted and an unpredictable catastrophe, … and against which they could not have been expected to warn.”
The brokers had advertised themselves as money management experts, who would “grow and manage retirement wealth” and “keep investments safe.”
The couple had made their intentions clear: they wanted low-risk, income-producing investments, they had no stock market experience, and they were looking for someone to manage their investments.
The brokers recommended purchasing growth-oriented mutual funds which, as established by expert evidence presented at trial, were inappropriate for the couple’s needs.
Despite media warnings of a potential “market meltdown,” the brokers failed to make reasonable efforts to contact the couple while the couple were away on vacation to discuss the market declined.
The stock market collapsed. The brokers refused to provide further advice and the couple directed the brokers to liquidate their investments.
Following a review of the contextual, multi-factor analysis by the trial judge, the court of appeal concluded that the market collapse was not an independent intervening act, but rather a foreseeable danger from which the brokers could and should have protected the couple by advising them not to invest in the equity market at all.
As Justice Taylor wrote in the Appeal decision: “[T]he possibility that shares in a growth-based equity mutual fund would decline in value in the event of a downturn in the stock market must have been foreseeable” … “Damages may well be foreseeable without being predictable”.
Note: civil liability of investment advisors, financial advisors, stockbrokers, and financial planners is assessed on a case-by-case basis – an overview of the contextual factors considered by the courts is discussed below.
Civil Liability: Common Claims against Advisors
The most common claims made against financial advisors are negligence, breach of fiduciary duty and breach of contract.
Investment advisors, financial advisors, stockbrokers, and financial planners are distinct professional services, with different scopes of responsibility and duties ranging from mere order-takers to discretionary authority to act without specific instruction for each transaction. Each must answer to professional rules or codes of conduct – but the applicable legal principles often overlap.
Generally, the degree of reliance a client places on an advisor for advice determines the nature and scope of the advisor’s duties, as well as the regulatory obligations (for example, the Canadian Investment Regulatory Organization or the Canadian Securities Institute professional guidelines).
Breach of Contract
The relationship between financial advisors and their clients is fundamentally contractual, with the investment agreement outlining the terms of engagement and the client’s objectives. Losses arising from an advisor’s failure to adhere to these terms may give rise to liability for breach of contract. There are also implied terms based on regulatory standards.
Fiduciary Duty
A financial advisor-client relationship is not automatically fiduciary, but it may be elevated to a fiduciary level depending on the circumstances.
When determining whether there is also a fiduciary duty owed by the advisor to the client, the courts will look to factors such as: the degree of vulnerability or sophistication of the client, trust and confidence placed in the advisor, whether the advisor holds him or herself out as having special skills and knowledge, and the extent to which the advisor has power or discretion over the client’s account.
Negligence
Financial advisors owe a duty of care to their clients – they must advise with reasonable care, skill, and diligence.
When determining whether a professional’s conduct has fallen below the applicable standard of care, the court will often look to the objective evidence of both a qualified expert as well as the regulatory obligations.
The standard of care owed to an inexperienced investor will also be considerably higher than the standard that exists between an advisor and a sophisticated and seasoned investor.
The fundamental principle underlying professional negligence, recognized by the common law and across regulatory bodies, is the duty to “know your client” (expanded upon below – The “Know Your Client” Cardinal Rule).
A duty to warn of risks inherent to an investment, depending on the circumstances, flows from a duty of care in negligent cases (expanded upon below – The “Duty to Warn”).
Breach of professional standards will be actionable where there is a nexus between this breach and the loss suffered.
The “Know Your Client” Cardinal Rule
The “know your client” rule is closely tied to the advisor’s duty to ensure all investments are suitable and aligned with the client’s objectives and risk tolerance, with ongoing monitoring required to ensure ongoing suitability as the client’s personal or financial circumstances change.
Suitability is the cornerstone of the investment industry. It requires consideration of the following factors relating to each specific investor:
1. Age
2. Income and net worth
3. Investment knowledge and sophistication
4. Investment objectives (including time horizon for investments)
5. Risk tolerance
Referred to as the “cardinal rule” of investment advising, when advice is sought, advisors must provide suitable recommendations tailored to that particular client.
The “Duty to Warn”
As held by the Court in Young v. RBC Dominion Securities (2008):
“[t]here is no law that prevents competent adults from making their own foolish investments”
That said, financial advisors do have a responsibility to disclose the risks associated with their investment recommendations, particularly when a client’s lack of sophistication prevents them from fully understanding those risks.
This obligation, known as the “duty to warn”, is closely linked to the “know your client” rule, which requires advisors to understand their clients’ financial situations and capabilities.
As summarized in the case of Robinson v. Fundex Investments Inc. (2006), the context and extent of the duty to warn is grounded in the standard of care owed to a particular client. Justice Forget for the Ontario Superior Court of Justice succinctly notes:
“If the client wants to make an investment that is not suitable for the client, then the extent of the duty to warn depends on the level of sophistication of the client.”
Examples where a financial advisor may have breached these obligations, depending on the context, could include:
- Recommending high-risk speculative investments to a conservative investor nearing retirement;
- Continuing to manage a portfolio based on outdated information resulting in unsuitable investment strategies;
- Advising a client to heavily invest in a single industry without assessing whether the client understands or accepts the risk of poor diversification.
Conclusion
Financial advisors are exposed to liability when a client’s financial loss is caused by a breach of their obligations. Non-compliance with the standards or regulations do not, in and of themselves, give rise to damages.
While these professionals are not insurers against poor investment outcomes, financial advisors must “know” their clients and provide suitable advice.
Canadian courts and regulators alike have made it clear: it is reasonably foreseeable to financial advisors that there might, at any given time, be a market downturn. This applies even though the precise timing of a downturn may not be predictable.
Whether or not this creates a heightened responsibility to ensure that a client is financially positioned to withstand a downturn in the market depends on a multitude of factors, including the degree of vulnerability of the client and the discretionary power exercised by the advisor.
In the wake of tariff turmoil, it seems inevitable that there will be fresh disputes between financial advisors and their clients. It will be interesting to see whether these new circumstances will lead to an evolution of the existing law.
Keira Zlahtic