Determination: Risky advice
One cannot help but look at some of the determinations handed down by the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud) and wonder what the adviser actually expected to get out of the investigation. There are times when the actions of certain advisers can only contribute to their own downfall.
There are already question marks regarding the level of record keeping in the industry. Some industry experts believe that this is a major contributor to some of the determinations, but we need to be honest and also admit that poor advice is another contributing factor. While the majority of the advisers in the industry are honest and serve their clients in the best possible manner, there are isolated instances where this is not the case.
A desperate cry for help
The complainant in this case is Aletta Roos who is a widow. In 1996, following the passing of her husband, the complainant invested the money she received from her late husband’s pension into a five year investment. Upon the maturity thereof, a friend advised her to get guidance from “a well-respected and award winning adviser”, Johan Kunneke (respondent) on how to invest the proceeds.
The complainant met with the respondent in 2001 whereby he recommended that the complainant invest R620 000 in a Liberty endowment for a period of five years. Subsequent to this, the respondent also advised the complainant on a range of other financial products. In November 2004, the respondent left the brokerage he was working for.
According to the complainant, after going independent, the respondent advised the complainant toinvest in shares in a company called MGHDC. She surrendered her Liberty policy early and was assured the penalties she had to pay would be recovered by the new investment in a short amount of time. Shortly after her Liberty investment was paid out, she committed R480 000 towards the new investment.
In 2006, MGHDC merged with MGHDH and the complainant was advised to transfer her shares, which she agreed to. Dependent on the money, she made three withdrawals from the investment totalling R180 000.
In 2011, she received a notice that her shares were worth R863 376. Her attempts to terminate her investment were unsuccessful as MGHDH was not in a position to repurchase the preference shares. This is contrary to the original undertaking that was given to her when she entered into the agreement. She was in desperate need of this money as she was dependent on her late husband’s pension of R6 200 a month, which she said was not enough to support her. She pointed out to the Ombud that she made the investment on the assurance from the respondent that her money would be safe.
Crying wolf
The respondent denies that he ever provided advice to the complainant. This would be easy to uncover if one had to go back to the record of advice which showed that some level of advice was given.
As for the conversion of the shares in the merged company, the respondent pointed out that the complainant was offered a number of options where she could have cashed in on her shares or she could have converted her shares. He added that the complainant opted for a part cash, part share option. He also pointed out that he was not involved in this process, which he feels was the essence of the complaint to the Ombud. In accordance with this assertion, the respondent did not provide the documentation showing the choice offered to the complainant.
Uncovering the web of deceit
In the determination, the Ombud pointed out that there were a number of issues which needed to be investigated.
The first was whether the respondent offered financial advice. The respondent was adamant that he was employed by MGHDC when he offered the complainant the shares in the investment. He adds that he did not offer financial advice to the complainant as was therefore not bound by the FAIS Act.
However, there are a few undisputed facts in this case. The first is that the respondent did advise the complainant on the Liberty investment and that the money used from the termination of this investment was going to be used for the MGHDC shares. Therefore, the Ombud found that he did offer financial advice. Was he negligent? The Ombud consulted with the Financial Services Board (FSB) on the provisions of the respondents licence and the registrar pointed out that the respondent was not authorised to sell market shares such as the shares in MGHDC.
The second issue to be determined was whether the adviser was instrumental in causing the complainant financial loss. It was common cause that the complainant entered into the Liberty investment because it would fund her retirement needs. Given the amount of her late husband’s monthly pension pay-out of R6 500 a month, she could not afford to lose any capital.
The complainant was uneducated in the financial services industry and depended heavily on the advice given by the respondent. She also invested her money in unlisted shares. Unlisted companies do not need to follow the same rules as listed companies because they are not required to maintain a certain level of cash to sustain the company. Their financial affairs are also not open to public scrutiny. So even if the complainant could understand the workings of the financial services industry, she would never have known if the company was in financial dire straits.
As for the assertion that the complainant dealt directly with the company, this also proved to be false. Every time the complainant wanted to draw money out of her investment, she faxed a request to the respondent. There is also no documentation showing that the complainant was offered the cash or share option at the time of the company’s merge.
The Office soon established that MGDHD was liquidated. It is safe to say that complainant lost her capital. Had it not been for the respondent’s inappropriate advice, the complainant’s funds would not have been exposed to risk. The respondent has not disputed the balance of the complainant’s funds, following the withdrawals of R180 000, being R300 000. The respondent was ordered to pay the complainant R300 000 plus interest at 9% a year.
Editor’s Thoughts:
The crux of this determination was the complainant’s risk aversion. The adviser acted wrongly in that he should have known the urgency of the complainant not to lose any of her capital. Selling shares in an unlisted company to this type of client is very risky and the respondent did not comply with appropriate levels of Treating Customers Fairly (TCF) regulation. Is the role of the adviser in risk aversion an issue that the Ombud will question in the future? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
Relying purely on a determination and what is stated in this has created a somewhat one-sided article, with a somewhat one-sided drafter's opinion. There is much more to the situation than what has been published above.
The client is not always as innocent, or ignorant, as made out.
My appeal here is for responsible journalism which serves to educate and enlighten the general public and advisors alike.
As for "miffed" above - your statements are also completely inaccurate. Not sure where you did your checking, but the advisor has definitely not been suspended, (so you are chasing a red herring), was legitimate (written confirmation from the Regulator about licencing requirements, which were complied with at the time) and is in the process of considering an appeal.
And to Five above, no, there was virtually no commission.
The crux of this determination, if you look at all the facts, and the lesson to be learned from this is clear. For advisors to be able to comfortably continue providing services to the general public, it is critical that every statement, every explanation, every consideration and every risk discussed, be documented, and the client MUST SIGN. It is not sufficient for an advisor to have a client sign a generic document stating "all risks, and terms and conditions have been fully explained to me..." as the client can turn around at any time and deny that something material was disclosed. The only way to ensure that the client IS protected, and disclosures are properly made, is to record this, and this will further serve as proof in the event of there being a query later. My appeal to every client out there: Make sure your advisor explains everything to you in language you understand,every point of every recommendation, every considered solution, and finally what was recommended and why.
Insist that this is properly and comprehensively documented, and signed by you. Even if it takes your whole afternoon, just for the explanation. Money matters are not to be taken lightly, and too often we see people signing documents like bond applications, vehicle finance, and records of advice, as quickly as possible, just to get it over and done with, without properly reading or understanding the contents. Report Abuse