The 18-Month Need and the Seven-Year Surrender Schedule
Marcus, 79, has $120,000 maturing from a GIC. He tells the advisor he will need $30,000 in about 18 months for roof repairs and dental work. The advisor recommends a segregated fund contract with a 75% maturity guarantee at 10 years, a 100% death guarantee, an MER of 3.2%, and a seven-year declining surrender charge schedule starting at 7%. The advisor says the investment is 'guaranteed, so it is safe' and has Marcus sign the application; the Fund Facts and Information Folder are delivered the next day. Marcus has a small emergency fund and no other liquid savings. The advisor notes the 10-day cancellation period and files the application.
1. Identify the suitability and disclosure failures in this sale.
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The sale is unsuitable on liquidity and disclosure grounds. Marcus needs $30,000 in 18 months, but the maturity guarantee is 10 years away and the surrender schedule starts at 7%. Redeeming $30,000 in year two could cost roughly $2,100, and redeeming the full $120,000 early could cost up to $8,400. The guarantee is therefore irrelevant to the money he needs soon, while the 3.2% MER and surrender charges reduce returns. Marcus has no other liquid savings, so the recommendation also ignores his emergency-fund requirement and capacity for loss.
The disclosure is misleading. Calling the product 'guaranteed, so it is safe' omits that the guarantee applies only at maturity or death, is reduced by withdrawals, and does not protect capital on early redemption. Point-of-sale disclosure was late: Fund Facts should be delivered before or at the point of sale, and the Information Folder before or at contract delivery; delivering them the next day is a compliance breach. The 10-day cancellation right is a safety net, not a substitute for suitability.
2. What should the advisor have recommended instead, and what should the firm do now?
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The advisor should have split the money by time horizon. The $30,000 needed in 18 months belongs in a GIC, high-interest savings account, or short-term bond ladder, not a 10-year guarantee product. The remaining $90,000 could be considered for longer-term growth only after confirming Marcus's true liquidity needs, risk tolerance, health, income, estate goals, and emergency reserve. If a segregated fund is appropriate for part of the money, it should be a lower-cost contract without a long surrender schedule, with clear disclosure that the guarantee is at maturity or death.
The firm should review the sale as a potential unsuitable recommendation and disclosure breach. It should contact Marcus, explain the actual liquidity and cost consequences, and, if he wishes, cancel or correct the transaction within any applicable cancellation period. Compliance should retain the KYC, the product comparison, the late-delivery evidence, and the supervisory review. Given Marcus's age and limited liquid savings, the firm should also apply its elder-client and diminished-capacity protocols, and consider whether the advisor's conduct warrants remediation or discipline.
3. What records should support the recommendation and the client's understanding?
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The file should contain a current KYC, including Marcus's income, assets, liabilities, emergency fund, tax situation, time horizon, liquidity needs, risk tolerance, and risk capacity. It should show the specific $30,000 need in 18 months, the analysis of surrender charges, the guarantee's maturity date, the MER comparison, and why a GIC or short-term ladder was or was not chosen for that portion. It should also document the alternatives presented, the client's questions, and the advisor's explanation that the guarantee is not a short-term safety net.
Because disclosure was late, the firm should record when the Fund Facts and Information Folder were actually delivered, what was explained, and whether Marcus understood the early-redemption cost. A signed client acknowledgment is useful but not conclusive. The supervisor's review, any corrective action, and the client's decision to retain, cancel, or restructure the investment should also be documented.