Advisors should be aware of what they sign, including loan agreements with their dealers.
That’s because advisors can find themselves on the hook for loans after dismissal, no matter the cause, says recent commentary by John Fabello and Gillian Dingle, partners at Torys in Toronto.
In the case they outline, the dealer-advisor relationship was governed by an agreement that included the provision of a forgivable loan. The dealer’s loan to the advisor was to be forgiven in seven years, provided there was no termination of employment.
According to the agreement, the advisor had to repay the loan if he was terminated “with or without cause,” Fabello told Advisor.ca, which means regardless of the advisor’s conduct.
The case happened to involve misconduct. When the advisor’s off-book transactions came under investigation, the dealer ended the agreement. After the advisor was disciplined by IIROC, the dealer sued him for the loan’s balance.
The advisor’s defence was based on wrongful dismissal, but the court accepted that the dealer had proven the advisor had breached the agreement by refusing to repay the loan, the commentary says. And the court accepted that without the IIROC decision as a factor.
Fabello stressed that where the agreement wording includes termination “with or without cause,” advisors should know that “only in unique circumstances will they be relieved of the obligation to repay that loan. Even where an advisor is terminated without cause—provided the termination is in good faith—the advisor would likely have to repay the loan, he said.
He added that some agreements specify loan repayment is required only if termination is with cause, which would be more favourable for the advisor. However, such wording is less common.
For more insights from the case, read the full Torys commentary.