Insights for consumers and participants
This case highlights the importance of ensuring that you don’t make a snap decision to liquidate your investment, locking in your losses. It also highlights to fund managers that they need to be alive to any information they’re provided by clients about their investment goals, and to explain the risks of investing in a managed fund generally, and more particularly, the risks of investing in a higher risk fund like a growth fund.
What happened?
In June 2024, Jordan had $77,000 to invest, following a relationship property settlement. On 26 June he contacted a fund manager and spoke to one of their staff members about investing his money.
About a month later, on 29 July, Jordan completed an online application to invest his money in the fund manager’s growth fund. Jordan said in his application that his reason for investing was ‘retirement’ and that his investment goal was to ‘buy a property’. Jordan transferred his money into the growth fund, and approximately one week later he withdrew the funds, because his investment had decreased in value by $2,800 in that week. Jordan asked the fund manager to pay him $2,800 in compensation. The fund manager did not agree to pay the compensation, and Jordan complained to FSCL.
What were the parties’ views?
Jordan felt he had not received suitable financial advice about his investment. In particular, he felt that information he had provided in his initial telephone call with the fund manager on 26 June 2024 should have raised a red flag that investing a growth fund was not suitable for him. He also said that the fund manager gave him no advice about the possibility of keeping his money invested for a longer time period to give his investment time to recover.
The fund manager said that they had given Jordan appropriate advice at the appropriate times.
What did we find in our investigation?
We firstly outlined to Jordan that it is distressing to see an investment drop in value, especially if that is a comparatively large amount over a short period of time. However, this is part of the risk that comes with investing. Investments with the potential for higher returns (like a growth fund) carry more risk and generally experience more fluctuations. While it’s expected that the investment will trend upwards in the long term, there will be peaks and troughs in value along the way.
We also listened to the telephone calls between Jordan and the fund manager. In the 26 June call there was some discussion about Jordan’s investment timeframes and goals, and the staff member gave Jordan some general information about the different types of managed fund that were available. Jordan said in the call that he wanted to put the funds towards a deposit on an investment property at some stage. He wasn’t sure when a suitable property would become available and when he’d need to access his funds. Jordan said he’d been looking at 90-day term deposit rates because he could unlock money in a comparatively short period if he needed to, but said he might not touch the funds for five years.
The staff member Jordan said they would pass notes of the 26 June call to another colleague who could then provide Jordan with personal financial advice about which of the funds on offer would be most appropriate for Jordan.
When Jordan then contacted the fund manager a month later on 29 July to proceed with the investment, a staff member responded to make a time to speak. Without taking this opportunity to get advice, Jordan applied online to invest his money in the growth fund. Jordan had a telephone call with a staff member just before the funds were transferred, because there was a problem transferring the funds from his bank. The staff member asked whether Jordan had any questions, and Jordan said no.
As part of this online application process, Jordan was given the following information about the growth fund:
- A growth strategy aims to grow investments over the long term.
- That by investing in a growth fund a person should be able to tolerate volatility of returns, in the expectation of higher returns, because they have ‘time on their side’.
- A suggested minimum investment timeframe of seven years, with a risk factor of 5 on a scale of 1 to 7.
What was FSCL’s view?
The staff member said that the notes of the 26 June call would be passed on to another colleague. This meant that when Jordan had the phone call with another staff member on 29 July, just before he transferred his funds into the growth fund, that staff member would have had access to the notes and the opportunity to understand Jordan’s investment goals.
We could see from the application form that buying an investment property was Jordan’s primary goal. In the original 26 June call, Jordan had said both that he was looking at a shorter-term investment such as a 90-day term deposit but, at the same time, he might not touch the funds for five years. This indicated to us that investment in a growth fund with a minimum timeframe of seven years may not have been suitable for Jordan. It was possible that no managed funds investment was suitable for Jordan. This was because even the conservative fund had a minimum investment timeframe of three years and there was a chance that Jordan would need to have the funds available at short notice to buy an investment property if one became available.
We thought that more could have been done by the staff member in the 29 July call to outline the risk of investment in a managed fund where even the most conversative investment option had a suggested investment timeframe of three years.
However, at the same time, we said that the biggest contributor to Jordan’s loss of $2,800 was that he had decided, within a week, to withdraw his funds, having received warnings about the minimum timeframe for investing in a growth fund, as part of the online application process.
We considered whether the fund manager had done enough to advise Jordan about the risks of withdrawing his funds after such a short period of time. We were satisfied that the fund manager was clear in their advice to Jordan that he should leave his money in the fund and not make a snap decision, and he did not follow this advice.
We thought it was fair that the fund manager should pay Jordan $1,000 compensation. This was just over a third of his total loss, recognising that it was Jordan’s swift withdrawal of the investment, without giving it time to recoverin value, which had been the major contributing factor in his loss.
How did FSCL suggest that the complaint should be resolved?
We suggested that the fund manager should pay Jordan $1,000 as compensation because they had not taken the opportunity available to them on 29 July to advise Jordan about whether the growth fund, or investment in any managed fund, was appropriate for him, having been on notice that the investment may not have been suitable for his investment purpose.
Both the fund manager and Jordan accepted this resolution, and the complaint was resolved.
