Liability in Portfolio Management: Hindsight, a Missed Tax Change, the Duty to Inform and the Investor’s Profile

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In a case brought to our attention, a wealthy client sued a private bank in liability for losses on financial investments made under a discretionary portfolio-management agreement.

The principle: the manager’s fault cannot be inferred from the result

The Court of Appeal first recalled that the manager’s obligations are obligations of means, and that a portfolio loss alone does not establish fault. Fault must be assessed at the time the disputed act is done; evidence drawn from analyses made after the events is therefore inadmissible. While portfolio management is in principle assessed as a whole, isolated operations must nonetheless remain open to criticism.

The client’s profile: the “informed investor” and the professional’s duty to inform

On the client’s profile, the court held that his involvement in the manager’s decisions, notably placing orders directly and, at his request, running part of his portfolio on a high-risk basis, made him an informed investor. The duty to inform ceases where the person entitled to information has no need of it, already knowing the substance of the operation and its risks.

Different conclusions depending on the operation

The disputed operations must be distinguished.

1. SICAV units not liquidated by the manager. The client complained the bank had not sold units of a fund investing in convertible bonds in various currencies. But he had terminated the management agreement in favour of an investment-advice agreement and had not then ordered the sale. The bank’s liability as manager could not be engaged for the loss.

2. SICAV units not sold before an unfavourable tax law. The client complained the bank had not sold units before a new tax law took effect, generating additional taxation. The court held the bank liable: it should have anticipated the tax-law change, and ordered it to pay the additional tax.

3. Luxembourg SICAV partly invested in debt securities. On a reversal operation requested by the client but carried out by the bank as a purchase-sale without his consent, the court found the bank had breached its duty to inform. The absence of a transaction slip signed by the client does not, however, render the order void.

4. CMS bonds (perpetual variable-rate). A court expert found that, despite apparently complex features, the credit risk lay between that of a share and an ordinary bond. The bank’s liability as manager was not engaged on this point.

The diversification duty

The client also alleged breach of the diversification obligation, relying on a theoretical portfolio and a benchmark. The court recalled that the gap between a model portfolio and a real one is not a management fault, and that giving a model portfolio binding force would reduce individualised management to passive management and empty the agreement of its essence.

Finally, a portfolio-management agreement remains valid unless terminated, even if the client asks in writing to be warned of operations in advance. In such a case, the client may find it harder to dispute past operations after a certain time, given the stock-market maxim, often in the manager’s general terms, that failure to dispute operations promptly presumes their acceptance.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.