In February 2012, George became a general client of a share broking firm. At this time George made decisions and instructed his adviser (Edward) to buy and sell certain investments in his portfolio.
In June 2014 George changed to the firm’s discretionary investment management service (DIMS). In essence, this meant Edward could make decisions about what investments to buy and sell, according to George’s mandate. George’s mandate noted he was a conservative investor and his only requirement was that his shares in a particular company (share lot A) be retained.
The share sales
In July and August 2014, Edward sold shares George owned in two New Zealand companies (share lots B and C). At that time, the shares had a “buy” recommendation. On 17 September, George met with Edward and they discussed the portfolio and the recent sale of New Zealand exposures. Edward maintained that George was happy with the progress made.
On 16 November, George complained to Edward about the share sale. On 20 March 2015, George and Edward met again. Edward explained the reasons for selling the shares and illustrated to George that the portfolio’s overall performance had exceeded George’s expectations. It was agreed from this point on that Edward would communicate with George if he intended to make significant changes to George’s portfolio.
On 22 March 2015, George emailed Edward about his concerns over the share sales. Edward told George the overall performance of the portfolio had a 3.81% return since George became a DIMS customer. On 13 May 2015 George met again with Edward and decided to revert to the general service.
George then complained to FSCL about the sale of shares lots B and C.
The broking firm’s view
Under George’s DIMS mandate, the broking firm could decide which financial products to acquire or dispose of on George’s behalf. In meetings held on 30 June 2014 and 10 July 2014, Edward believed he discussed the differences between being a general and a DIMS customer.
Edward said he also made a point of explaining to George that his risk profile meant he should trim or exit New Zealand shares exposures in favour of longer fixed interest investments. Edward also believed he stressed to George he would need to reduce his New Zealand investments (as they constituted 67% of holdings), though the intended sale of share lots B and C was not specifically discussed.
For these reasons, and because George had recently indicated he wanted to retain share lot A in his mandate, the broking firm considered George was aware share lots B and C could be sold. Also, following the meetings where the complaint was discussed Edward said he was left with the impression George was comfortable with Edward’s management of his portfolio and that Edward had George’s blessing to sell shares if Edward considered it the right thing to do.
The broking firm did not consider there were any shortcomings in the service it provided George or that it caused George any loss. It said Edward’s actions were in line with the mandate which George had signed, necessitating a move to fixed interest investments. In Edward’s eyes it was appropriate for him to sell the shares when he did in order to ensure George wasn’t overexposed to any one company.
George’s view
George could not see why Edward would sell shares the broking firm was recommending to purchase at the time. Furthermore, George said that when he met with Edward in June 2014, there was no discussion of Edward’s intention to sell George’s shares.
George believed Edward should have informed him of his intention to sell the stock before the sale took place. George thought he would have received an $80,000 gain on the shares if Edward had not sold them.
Review
From the correspondence between Edward and George it was evident that, although George was a DIMS customer, he expected Edward would consult with him about buying and selling securities. However, this level of communication was not required from Edward. Edward’s only requirement was that he act within the scope of the mandate (George being a conservative investor and wanting to retain share lot A).
Did Edward sell the shares at the right time?
Although Edward had the authority to sell George’s shares on his behalf, there remained a question about whether it was prudent to sell share lots B and C at the time he did.
FSCL sought an opinion from another broking firm as to whether the share sales in question were in line with industry standards.
The other firm’s opinion was that, whilst a general rating on shares is important (that is, a general indication to buy or sell), it is the least important factor. Elements like the client’s risk profile, asset allocation, and portfolio construction are more important. That is, the most important factor for Edward was to bring George’s portfolio in line with his investment mandate, which he did.
With the other firm’s opinion in mind, we determined that Edward had not acted imprudently in selling the shares when he did.
Communication issues
Whilst Edward was not required to consult George on the sale of specific shares, we thought there could have been better communication between the parties. Edward could have given George an implementation plan or identified the specific New Zealand share lots he was going to sell for George. George may not have had the ability to stop the sales proceeding, but at least it would not have come as such a shock when share lots B and C were sold.
Outcome
In recognition of this need for better communication, FSCL recommended a 25% reduction in the DIMS brokerage fee (being $2,200). Both parties agreed and settlement was reached.
Key insights
Edward’s file notes of his conversations and meetings with George were of real use in determining the extent of George’s knowledge of the DIMS mandate, and in assessing the explanations Edward said he gave George.
It is also important for DIMS customers to be aware of the terms of their mandate with their adviser, because the scope of their adviser’s authority may be different than expected.
