An Advisor's Litigation Risk: Private Asset Retailisation Is Opening a Regulatory Gap
Private assets, long confined to accredited investors, are now open to the public without the protections that traditionally came with public offerings — practices normalised in institutional settings become major litigation risk once ordinary investors are in the room.
The argument · tap a timestamp to hear it
Winning a case turns on evidence, not on fault
Taylor says a successful negligence claim almost always requires a failure in the suitability analysis first — KYC information not gathered accurately, KY product not understood. But "there was a failure" is not the same as "it can be proven." He splits the question into "what people know" and "what people can prove," and says the two rarely line up perfectly; it is the latter that ultimately drives the analysis. On evidence, the strongest thing is an advisor who used the same portfolio for everyone: a pile of clients with identical portfolios but completely different life circumstances turns "he said, she said" into "he said, she said, she said, he said, they said" — far more persuasive to a judge than one person's one-sided account.
— Matthew TaylorThe trading record is itself a red flag
Taylor lists a string of behaviours that are almost impossible to explain rationally: concentration above 80%–90% (he has seen it, and in small caps), churning done purely to generate commissions, and double dipping on multi-account clients — buying in a commission-based account first, then moving the assets into a fee-based or AUM-based account for no reason. Then there are trades entered without any confirmation, and off-book communications. He says these are powerful because in most cases the advisor or the firm simply cannot offer a reasonable explanation.
— Matthew TaylorCommunication that goes from eager to absent is a danger sign
Taylor describes a pattern that is not rare: extremely dense, solicitous communication while winning the account, then one or two contacts a year once the account is won — the bare minimum of communication. He thinks that gap is itself the problem. Another signal is that nobody ever talks to you about changed life circumstances — retirement, a layoff, the death of the breadwinner, a new child — all of which should feed into the recommendation. If you look back and think "so much happened and we never discussed whether my needs had changed," that does not necessarily mean something went wrong, but it is worth getting a second set of eyes on it.
— Matthew TaylorCheck the regulatory complaint record before you hire
Taylor says this is one of the strongest pre-hire signals, and it costs almost nothing: if the person is regulated (he says most large dealers are), complaint and investigation records are public information, and checking takes under 5 minutes. The mechanism he describes: these claims commonly involve someone who had a small complaint, was watched closely for a while, then reverted to form — only at a much larger scale. He also cautions that past outcomes do not necessarily predict the future, but this is a very worthwhile piece of information to fold into the decision.
— Matthew TaylorWhat victims share is vulnerability, not stupidity
Taylor says these investors are remarkably similar, and almost all share some form of vulnerability: advanced age, lower education, language barriers — official forms and statements exist only in the two official languages, English and French, so clients who struggle to understand rely more on the advisor, and people naturally seek out someone they can communicate with, which layers on another asymmetry. Another group is people who suddenly come into money: a life insurance payout, a large inheritance, people dealing simultaneously with a drastic change in their financial situation and a negative life event. He has personally advised a lottery winner and has heard peers describe the same situation.
— Matthew TaylorFee structures are the next litigation goldmine
Taylor says fees are the second big indicator after disclosure, and a wave of class actions has already formed around them; some fee types can no longer be charged because the law changed — for example, charging an advisory fee in a non-advisory account. He expects future litigation to concentrate on "how fees are calculated," and he names private asset managers as particularly fertile ground for lawsuits. For people in wealth management, this means the fee basis baked into product design is itself legal risk exposure, not just a commercial choice.
— Matthew TaylorPension funds manage litigation claims as an asset
Taylor cites a Stanford Law Review article from twenty years ago titled Letting Billions Slip Through Your Fingers: at the time, many pension funds and other asset managers simply did not participate in securities class action settlements, effectively leaving money on the table — possibly because they had not kept the records needed to participate, or because the decision-makers were philosophically opposed to suing. US pension funds later widely retained monitoring counsel, who are not paid, to flag potential claims, and built into their compliance and committee structures a decision process for "whether to participate in litigation, and in what capacity." Taylor says Canada has not caught up on this. His key judgment: under fiduciary standards, a claim in litigation is itself an asset, it can be sold, and it should be managed like any other asset.
— Matthew TaylorPrivate assets strip out the people who digest information
Taylor reduces the private asset problem to two umbrella issues: less information and less regulation, and both are by design. In public markets, the information asymmetry created by the separation of ownership and control is smoothed out by a set of checks: periodic financials, periodic audits, third-party verification, regulators, and a large group of people whose job is to digest and disseminate information — equity analysts track companies, what analysts say gets picked up by journalists, and an ordinary person opening the Globe and Mail can at least get a rough sense of what happened last quarter at a TSX company. Private assets strip all of that away: statutory reporting requirements are extremely limited, there is no comparable analyst coverage, and the raw information that is available is itself far scarcer.
— Matthew TaylorYou can follow the investment thesis but not the underlying structure
Taylor says the most "pernicious" thing about private assets is this: the investment thesis sounds easy to grasp — this fund is doing a roll-up of veterinary clinics, or holds a commercial real estate portfolio in some region — but lift the hood and there may be five to seven different entities involved in managing the fund in different ways: the people managing the money, the manager they hired, the property manager, the management company for the veterinary clinics, and every layer charges fees. That is far harder to understand than an ETF with a 6% management fee, but people feel they do understand it, and that is precisely where the danger lies. He also points to price discovery as another major difficulty: in public markets the price is the traded price, whereas private assets have no active market, so valuation is done by the manager itself or by someone they hire — and valuation directly determines how many units you get on subscription and redemption, which opens the door to "mischief."
— Matthew TaylorIRR and a stock return are not the same thing
Taylor says private asset returns are a stream of cash flows, not something you can turn into a 50% return by buying at 20 and selling at 30. The most commonly reported metric is the internal rate of return, IRR, which tries to collapse a stream of cash flows into a single percentage. His judgment: an ordinary person sees that percentage, compares it to the percentage from stocks, and assumes it is apples to apples when it is actually apples to oranges — the two numbers simply do not line up. IRR also carries an anchoring effect: a few very early returns keep influencing the number for many years afterward. Layer on top of that a complex fee structure that is hard to understand, and an ordinary person has almost no way to assess how what they hold is performing.
— Matthew TaylorLiquidity in private assets is an illusion
Taylor says the liquidity question should be front and centre when an advisor deals with private assets: these funds can essentially all be gated or locked, and clients may not understand that they cannot pull money out whenever they like the way they can redeem a mutual fund — a normal mutual fund pays out in a day or two, whether the roof is broken or you need a new car. Private funds are not like that. He advises that advisors must explain all the structural risks clearly and keep a written record, and if they also do planning, the plan must include a contingency for "the expected cash flows from the private asset side not arriving." He says gate news is everywhere right now, the calls he gets asking about gates are too numerous to count, this is happening, and it is very likely to persist for the foreseeable future.
— Matthew TaylorSomeone who can only sell private assets will only sell private assets
Taylor suggests clients first ask one question: what is the product shelf this advisor can sell me? In the inquiries he handles, most of these products were sold by people who hold only an exempt market licence, and what they can offer may be an entire shelf of private asset products. He uses an analogy: walk into a Ferrari dealership and they will certainly try to sell you a Ferrari, even if what you need is a Dodge minivan. He does not think private assets are always unsuitable, but if they are the only thing in your portfolio, it would take very exceptional circumstances for that to hold up — and that may be exactly the position you are in when you are facing someone who can only sell this.
— Matthew TaylorInstitutions don't sue; retail investors do
Taylor reduces litigation to an incentive problem. Historically private assets were the domain of sophisticated institutions, and they have many reasons not to sue: they have an ongoing relationship with the fund manager and do not want to sour it; this was a bad deal but there were good deals before and there will be more; someone wants to move into the private equity industry and does not want to be the one who pulls the trigger and damages their own career prospects; and in the US they are forced into binding arbitration. For Canadian retail investors, essentially all of those considerations vanish: they do not care about a long-term relationship with the fund manager, they just think "this is terrible and I never want to deal with this person again," and Canada makes it harder than the US to force retail investors into arbitration, with class action waivers also harder to enforce. So the incentives all point toward more litigation, and he expects Canadian courts to hear more and more of these questions.
— Matthew TaylorOntario securities law explicitly allows suing over misrepresentation
Taylor fully agrees with the judgment in the paper by Ludovic Phalippou and William Magnuson — an asset class long confined to accredited investors is now open to the public without the protections that traditionally accompanied public offerings, and this retailisation creates a significant regulatory gap: practices normalised in institutional settings (misleading performance metrics, manipulable valuations, opaque fees, limited liquidity, fiduciary duty exemptions) become major litigation risk once ordinary investors are in the room. Taylor says the paper is required reading in his course, and he thinks the situation it describes holds even more strongly in Canada: Ontario securities law has a section that explicitly creates a right of action for misrepresentation in a prospectus, and a prospectus is often part of the sales materials for these products.
— Matthew TaylorInfluencers have no insurance, so winning a judgment gets you nothing
Taylor says the first difficulty with the influencer problem is jurisdiction: video and audio are everywhere, listeners may be in Australia or South Africa, and who has authority if something goes wrong? Even within Canada, if someone records content in Manitoba, the company involved is in Alberta, and the trade happened in Ontario, you first have to work out who handles it. The second difficulty is that private enforcement incentives are limited: being an influencer requires no insurance, anyone can plug in a microphone and start recording, and it is easy to reach a large audience — but that does not mean suing them is worthwhile, because they may be completely bankrupt. Canadian regulators have sued several influencers, and when setting fines they did take into account that the person had almost no assets. So for an ordinary person, the first sentence of the conversation is always: can we actually get your money back? Is hiring a lawyer just throwing good money after bad?
— Matthew TaylorVaccinate clients with weakened versions of the misinformation
Taylor recommends the Ontario Securities Commission's research on investor behaviour and influencer engagement. Among the practices the research found reduce the probability of being harmed by bad advice, an advisor proactively addressing misinformation in advance is very effective — it has to be discussed before the client comes in with questions. The report also gives concrete forms, one of which is called inoculation: present the misinformation circulating in influencer circles to the client in weakened form, then have the advisor rebut it themselves, effectively one person performing a debate, building the client's resistance to influencer persuasion. Other effective practices include talking with clients about how to evaluate the information they consume and which signals to be wary of — essentially encouraging critical thinking.
— Matthew TaylorA regulator's job is not to get your money back
Taylor says an investor's recourse after following bad influencer advice is quite limited. In theory, if there is reason to believe the other party has assets, you can sue, but these claims differ from the class actions discussed earlier and the proof is different, and he has not seen many such cases in Canada. You can complain to a securities commission — the Alberta and BC commissions have both sued influencers, and the US SEC has too. But the key point: a regulator's job is not to return your money, it is to protect the market, impose fines, and restrict the person's participation in the market. So go into that path with your eyes open, knowing the probability it improves your financial position is limited. He regards "limited recourse" as one of the biggest problems in this area.
— Matthew TaylorEducation, promotion and advice are three different things
Taylor's advice for licensed advisors who produce online content: disclosure is a legal requirement, and any relationship must be made clear. There is a difference between education, promotion and advice, and the latter two — advice and promotion — are what get you into trouble. If you are not promoting a specific company and not recommending specific trades through your online content, and you stay at the level of education helping people understand concepts, you are on the right side of the line. He also cites a regulatory ruling on the form disclosure must take: if a viewer has to expand the box below the video and read five pages of material to find, at the very bottom or somewhere in the middle, that there is in fact a financial relationship, that does not count; it should be above the expand line, ideally displayed directly on the video itself, so the viewer sees it at a glance. Audio content also needs an actual spoken declaration — you cannot count on someone keeping a tab open and staring at it.
— Matthew TaylorA Canadian portfolio manager is not automatically a fiduciary
Canada is often described as "if you're a portfolio manager, you're a fiduciary," but Matthew points out this does not necessarily hold: courts look at how you actually behave. If a portfolio manager is taking orders and executing them without exercising discretion, they may not be treated as a fiduciary. Conversely, as soon as you hold yourself out as a fiduciary, or join an association that requires signing a fiduciary pledge or best interest pledge, a court is very likely to hold you to that standard — essentially, "acting from a position of trust."
— Cameron PassmoreIn their own words · checked verbatim
There's what people know and there's what people can prove. And very seldom do those two things perfectly overlap.
Matthew Taylor1:02
Legal claims are not like wine. They don't get better with age. They are like milk. They have a pretty set period of time in which they have value.
Matthew Taylor13:10
Theoretically, you can make suitable recommendations that result in higher compensation to you or there might be some other benefit flowing to you and you don't necessarily have to disclose that either.
Matthew Taylor26:19
And when we're talking about a fiduciary standard, an interest in a lawsuit is an asset. It's something that has potential value. It's something that can be sold.
Matthew Taylor43:30
And what's kind of pernicious is that the investment thesis might sound very easy to understand, but if you look at what's actually under the hood, you might have five, six, seven different entities that are involved in managing this fund in in different ways.
Matthew Taylor50:34
So somebody relies on this bad advice and the incentives to sue are less because of the fact that you don't need to have insurance as a influencer. Anybody can make a podcast. Anybody can plug in a mic.
Matthew Taylor1:06:44
So the prosecutions are happening, but the mandate of a regulator is not necessarily to return your funds. Their mandate is to police the market and you know levy out fines or reduce people's ability to participate in the market.
Matthew Taylor1:12:49
it's about education promotion and advice and you get into trouble especially on that middle one if you're promoting something or was deemed to be advice
Cameron Passmore1:18:53
Figures
| Time needed to check the regulatory complaint record | under 5 minutes | 7:07 |
| Number of questions on the PWL risk tolerance questionnaire | 6 | 15:12 |
| Annual withdrawal rate threshold in the risk tolerance questionnaire | 3% | 15:12 |
| Large withdrawal threshold in the risk tolerance questionnaire | 10% | 15:12 |
| Sinoforest peak market capitalisation | $6 billion | 46:32 |
| Management fee on the ETF Taylor uses as an example | 6% | 50:34 |
| Episode Harold Geller appeared on | Episode 236 | 1:21:57 |
Glossary
- suitability
- The regulatory standard for whether a recommendation matches the client's circumstances and objectives.
- churning
- Frequent buying and selling to generate commissions, to the client's detriment.
- double dipping
- Moving the same assets between commission-based and fee-based accounts to charge twice.
- exempt market
- Securities offerings that can be sold to accredited investors without a prospectus.
- gate
- A fund restricting or suspending redemptions, leaving investors unable to withdraw their money in time.
- IRR
- A metric that collapses a stream of cash flows into a single percentage return.
How to listen
Practitioners in wealth management, private asset sales or compliance, and high-net-worth individuals currently choosing or changing advisors.
The show wrap-up from 1:19:54 to the end can be skipped.