Is moderate risk appropriate at 90?
There are thousands of professional financial advisers who ascribe to the ‘life stages’ investment methodology. This strategy requires an assessment of the client’s risk and return requirement in light of the number of years to (or since) retirement. Given this information there are those who might, in the absence of additional information, question a decision to move a 90-year old saver out of cash and into a riskier investment class. This is exactly what happened when Hermanus Gerhardus Raman of Centurion, Pretoria approached Old Mutual Life Assurance Company, represented by Ernie Lottering, for financial advice. On 4 April 2006 Lottering recommended that Raman withdraw R560 000 from a Standard Bank savings account and invest it in the Old Mutual ‘Dynamic Floor’ unit trust fund instead.
Raman had approached Lottering for a fixed income investment solution to supplement his pension needs. The “Dynamic Floor” unit trust ‘sold’ to him would provide R5 000 per month income and ‘guarantee’ 90% of the capital sum. Raman received an investment statement three months after making the switch. On 17 July 2006 (after three income payments had been made to him) his fund value reflected R492 836, “a decrease of R52 163 even after taking into account the R15 000 already withdrawn.” When Raman exited the product, on 7 August 2008, he received the sum of R450 833.
Fit and proper advice
Unhappy with the product performance, Raman lodged a complaint with the insurer. The FAIS Ombudsman’s determination includes an extract from Old Mutual’s deputy internal arbitrator decision:
“Having considered the documentation presented, it is our respectful view that there is insufficient evidence of any negligence or misrepresentation on the part of the Old Mutual Financial Adviser.
“It is noted further that neither Mr Raman, nor his son, raised any concerns during the meeting regarding the risk profile or workings of the product, thereby indicating that the investment vehicle was understood and accepted.
“One must not lose sight of the fact that Mr Raman affixed his signature to the relevant documents, thereby declaring that the product was fully explained to him, and understood by him.
“With the evidence available to us, it is our respectful submission that by signing (amongst others) the Client Advice Record, Mr. Raman accepted the product after due consideration and was satisfied that a full disclosure had been made.”
The case was referred to the FAIS Ombudsman soon after this dismissal. Raman listed a number of ‘issues’ with the advice given by Lottering. He claimed that he hadn’t understood the “sophisticated” computer presentation that he was shown. He further alleged there were no ‘actual’ numbers to illustrate the product performance and that in the absence of such estimates he was unable to reasonably assess the risk associated with the product. The complainant advised “that whilst the 90% guarantee initially sounded good, given that he did not work with figures on a regular basis, he had no comprehension that this meant that only R504 000 was guaranteed. In addition he was unaware of the nature of the product, or that commission totalling R18 194 was paid.
The Ombudsman disagrees
The respondent’s case hinged on documentation supplied with its response. At first glance, all the requirements of the FAIS Act were met. But on closer inspection, FAIS Ombudsman, Charles Pillai concluded that there were too many “inconsistencies.” One of his concerns was with the structure and ‘promise’ contained in the Old Mutual ‘Dynamic Floor’ Fund Structure Document. “Whilst the aim of the fund is to avoid capital losses greater than 10% over any 12 month period there is no explicit guarantee in this regard,” said the Ombudsman. “The term within which complainant intends to start withdrawing money is given as six to nine years. Now whilst one wishes the complainant a long life, given that he was 90 at the time of making the investment this time frame is in my view a bit too optimistic,” said Pillai. “Clearly there was no rational explanation for putting complainant in [the moderate risk] category.”
Pillai determined that Raman suffered a financial loss due to “inappropriate advice and related issues of non-compliance by Lottering” at the time the financial advice was rendered. “The only rationale conclusion is that the product was first sold and the compliance documentation completed thereafter in a manner so as to align it with the product,” writes Pillai, ordering Old Mutual to compensate the complainant in the amount R40, 359.
Is this censure adequate?
The FAIS Ombudsman press release on this matter leads with: Insurance giant Old Mutual’s seemingly solid defence against a 93-year old pensioner who complained he had suffered financial losses in an investment has been smashed by the Ombud for Financial Services who found documents had been altered to suit the evidence. On the basis of evidence led, the man charged with ‘policing’ advice in the financial services provider space concludes that a representative of one of the country’s largest life insurers tampered with documents to ‘forge’ compliance. The question is whether ordering Old Mutual to reimburse the respondent is sufficient censure for this type of post-contract manipulation?
Editor’s thoughts:
The FAIS Ombudsman was also concerned that commission figures appeared to have been added to the documents after the client signed them and that there were two identical versions of the Risk Assessment Document, with one not signed (by Lottering) or dated. Do financial intermediaries still complete (and sign) documentation without their client’s knowledge? Add your comments below, or send them to [email protected]
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