In August 2021, Jeannie’s mother wanted to transfer investment funds of just under $500,000 to Jeannie. The idea was that Jeannie would use the money to buy her first home.
Jeannie and her mother engaged a financial advice firm. First, they spoke to Anand, one of the principals of the firm. Anand referred Jeannie to Conrad, also at the firm, for advice about a mortgage. Anand also arranged for his colleague Kara to provide investment advice. Kara advised Jeannie to invest all of the money in a growth fund, and Jeannie followed her advice.
The following month, Jeannie entered into an agreement to buy a townhouse off the plans. The townhouse was due to be completed in October 2022.
By March 2022, the equities market and Jeannie’s fund balance were declining. Jeannie became worried about having all her money in a growth fund, but Kara reassured her that there would be a ‘turnaround’ in her investments by October 2022. Unfortunately, that did not happen. By the time Jeannie cashed up her portfolio in November 2022, she had suffered a loss of $160,000, meaning she needed to borrow an additional $160,000 to complete her townhouse purchase.
Jeannie complained to the firm. She took part in a mediation with them, but they were not able to resolve her complaint. Jeannie then complained to FSCL.
Dispute
Jeannie said the firm should not have advised her to put all her money into a high-risk investment such as a growth fund. She said the firm knew she wanted to buy a house within a short period of time, so they should have advised her to put her money in a low-risk investment like a term deposit.
The firm said Jeannie told Anand and Conrad she wanted to buy a house ‘at some stage’, but she didn’t tell them she was actively looking for a house. The firm said that Jeannie didn’t ever tell Kara she wanted to buy a house, even though she had just decided to purchase the townhouse when Kara gave the investment advice. Kara thought Jeannie wanted to invest the money for her retirement. The firm said an adviser’s advice is only as good as the information provided by the client.
Review
We thought there were a number of issues with the advice the firm had given to Jeannie. It looked as though there had not been an adequate handover from Anand to Kara: Anand didn’t appear to have told Kara that Jeannie wanted to buy a house, and there was information that didn’t make it from Anand’s fact find to Kara’s statement of advice (SOA). Conrad didn’t appear to have told Kara about it either. Having said that, we thought Kara should have raised it with Jeannie anyway – Jeannie was aged around 30, and a prudent adviser would have explored the possibility that she might want to buy a house before thinking too seriously about retirement savings.
We thought the SOA seemed largely to be a pro forma computer-generated document. It didn’t discuss Jeannie’s tolerance for risk. It recommended putting 100% of the funds in a 100% growth fund, but it didn’t have any warnings or explanations about the risks around doing that. Although Jeannie and Kara spoke about the SOA afterwards, Kara didn’t make any notes of those discussions.
The SOA also didn’t explain the recommended timeframe for investing in a growth fund: usually a minimum of 5-7 years.
We could see from the correspondence that Kara knew about the house purchase before she reassured Jeannie about a market ‘turnaround’. We were concerned about this. We didn’t think any adviser should be trying to forecast with such certainty how the markets might perform over the next six months, particularly during times of market volatility.
We asked the firm to give us documentary evidence that all the advisers giving advice to Jeannie met the competency requirements set out in Standard 7 of The Code of Professional Conduct for Financial Advice Services.
Resolution
We thought a fair result would be to hold the firm responsible for 80% of Jeannie’s loss: $128,000. We thought Jeannie was responsible for 20% of her loss because she had some prior limited experience of growth funds, and because she didn’t point out to Kara that the SOA didn’t include her house purchase – although these things were minor. We also considered that the firm should pay $5,000 for inconvenience: a total of $133,000.
Once we explained our view to the firm, the firm offered the sum of $133,000 to Jeannie to settle her complaint. Jeannie accepted the settlement offer.
The firm hadn’t answered our question about whether the advisers were suitably qualified to be giving investment advice. Because Jeannie and the firm had reached a settlement, we did not need to investigate that any further. However, it is something we would have pursued if the complaint had not settled.
Insights for participants
It is important for advisers within a firm to share information with each other about a client’s needs. It is also important for an adviser to ask questions about the client’s intentions and wishes, and to give – and record – advice about risk and investment timeframes. Advisers should be very careful about forecasting market performance, especially during times of market volatility.
