Denise had $900,000 to invest. Denise’s brother introduced her to his financial adviser. Denise had never owned shares before, but her brother had done well with his investments, so she decided to follow the advice of her brother’s adviser.
In June 2021, Denise instructed the adviser to invest $500,000 in growth funds. Denise initially invested 70% of the remaining $400,000 in a growth fund, with the other 30% in a more conservative fund. However, in September 2021 she instructed the adviser to increase the amount in growth to 100%. That meant she had all of her $900,000 invested in growth funds.
Unfortunately, this was a volatile time for the financial markets and Denise watched on worriedly as the value of the funds dropped. Eventually Denise instructed the adviser to get her out of the investments, but she lost around $200,000 of her original $900,000.
Denise complained to FSCL about the adviser.
Dispute
Denise said that she should not have had all of her $900,000 invested in growth funds. Growth funds are a higher risk investment than conservative funds and are generally more suited to long term investing. However, the adviser never talked to Denise about the investments being long term. A long-term investment didn’t suit Denise because she had significant health issues, and because she wanted all of the $400,000 preserved so she could purchase some accommodation for herself following a relationship separation.
The adviser knew about Denise’s health issues, but they were adamant that Denise didn’t tell them she wanted to buy a house or that her investment horizon was short term. The adviser said it was Denise who had insisted on all her money going into growth funds, contrary to their advice, because she saw how well her brother had done in growth funds.
Review
It was difficult for FSCL to definitively establish the facts that lay behind Denise’s complaint, because the adviser did not keep adequate records. It was not clear what Denise had told the adviser, or what advice the adviser had given to Denise.
We found some evidence that the adviser knew, before they gave advice to Denise, that she had it in mind to buy property. Although the instructions to invest in growth funds came from Denise, we also found some evidence that Denise’s instructions may have been prompted by some suggestions or pressure from the adviser. For example, we could see that, behind-the-scenes, the adviser was putting together information to show Denise how much she could make if she invested all her money in growth funds. It wasn’t clear that the adviser had included an assessment of risk in that information.
We also thought that, if Denise had decided to invest in a way that was contrary to the adviser’s advice, the adviser should have carefully documented it.
Resolution
Because we could not definitively establish the facts, and because the evidence we had wasn’t crystal clear either way, we worked to help Denise and the adviser reach an agreed settlement that they could both live with. In the end, the adviser settled with Denise by paying her $80,000 in compensation. Although that amount was less than Denise’s total loss, we thought it was fair because it left Denise in more or less the same position she would have been in if she had invested all of her $900,000 in more conservative funds.
Insights for participants
Financial advisers should be mindful of their record-keeping obligations. It is a regulatory requirement to ‘create in a timely manner and maintain adequate records’ in relation to an adviser’s financial advice service.
Additionally, where a client has complained to FSCL but the adviser’s record-keeping has been inadequate, FSCL may place more weight on the recollections of the client (whose finances and goals are being discussed) rather than the adviser (who frequently has similar discussions with a range of clients).
