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The Fall out from the Global Financial Crisis Continues

07-12-2011

In October 2009 I wrote about some decisions by the Financial Ombudsman Panel ("the Panel") in relation to compensation claims by investors against their financial advisors.

The Panel has remained busy dealing with claims against financial advisors. Referrals to the Panel may increase with the popularity of do it yourself super funds ("DIY funds") and a possible continuation of the 2008 Global Financial Crisis ("GFC"). In good times investors are less likely to realise they had poor advice.

Some recent Panel decisions have involved clients who were elderly and retired, or contemplating retirement, where the Panel said the clients sought financial security and capital protection, with their retirement in mind, rather than strategies featuring aggressive growth and risk.

The Panel has said financial advisors must explain the material risk of an investment strategy in a personalised manner, and in terms the client is likely to understand.

In one case the client explained to the financial advisor that he was losing his eyesight and because he could not read the relevant documents, he would "take the advisor’s word on any investment recommended". The Panel determined the advisor’s duty to verbally explain the risk was of particular importance in that circumstance.

In addition, the directors of the financial advisory company had an "extremely strong and lucrative commercial relationship with one of the recommended funds", which they had failed to disclose. The majority of the investments were found to be worthless or close to worthless.

The Panel found the advisor had not complied with his duty and ordered the advisor’s company to pay compensation.

The maximum award that can be made by the Panel on any one claim is $150,000.00 but in that case there were a number of separate claims totalling $440,311.00 plus interest.

In another Panel case an elderly couple were persuaded to set up a DIY fund when previously they had an allocated pension, and blue chip shares in their own name. Their DIY fund invested in a high risk property fund investment which the Panel found was not appropriate for them.

Another Panel decision involved a middle aged couple who were persuaded to borrow funds and invest $300,000.00 in an investment portfolio outside their superannuation and also set up a DIY fund. Their Investments included an agribusiness project, and a mezzanine finance project (highly risky in my opinion) was described as a "high growth portfolio".

The Panel noted "it is a commonly accepted principle in the investment industry that the higher the return the higher the risk". The Panel noted that "it is part of the role of the advisor to educate the client in relation to whether such investments are appropriate to their circumstances." The Panel found the financial advisor did not properly explain the investment risk and ordered repayment of the investment, and interest.

Any investment in a yet to be completed building project is, to most people, a very high risk investment. (My comments).

However I do not want to scare you off seeing a financial advisor as most of them are very reputable and competent. The reality is you read about the bad advice, and not the countless cases of good advice.

In my opinion most people should consult a financial advisor unless they have the necessary skills themselves. It can be worthwhile talking with your family and friends as well about their strategies and experiences.

At all times however you need to remember the principle quoted by the Panel "that the higher the return the higher the risk".

 

Details:  agoode@mellorolsson.com.au    or    8414 3400