The risk appetite conundrum
During the discussion of the annual report of the Financial Advisory and Intermediary Services (FAIS) Ombudsman, the Ombud recognised the fact that there are certain sectors within the insurance industry which are contributing the most towards the complaints brought before it. One of these sectors is the retirement industry, which is concerning bearing in mind South Africa’s poor retirement rate.
One of the biggest problems is that our client’s knowledge of the investment industry is often fairly limited, and pensioners rely on advisers and fund managers to give them guidance to grow their investments. The latest determination handed down by the Ombud shows a case of maladministration and a company acting against all Treating Customer Fairly (TCF) principles set by the Financial Services Board (FSB).
Trusting the experts
The complainants in this case are Godfrey and Elizabeth Botha who are pensioners living in Port Elizabeth. The complaint relates to the inappropriate advice given to the complainants by the respondents to invest in aggressive and risky funds that were ill suited to the complainants’ personal circumstances.
The couple retired and intended to draw a regular income from the investment, made in November 2007. The market crash of 2008 and the resultant material diminution in the unit pricing of the underlying funds eventually compelled the complainants to reduce and ultimately stop income withdrawals.As a result of the material reduction in the price of the underlying units, more units had to be sold to fund the complainants’ withdrawals.
The complainants had a previous interest bearing investment and met with Ronald Walsh (second respondent), who was a key individual of R&S Walsh Investment Consultants (first respondent), to find out whether the investment that he was offering would be able to provide better returns than their previous investment.
Throwing TCF out of the window
Following the advice from the second respondent, Godfrey Botha (first complainant) invested R70 500, while Elizabeth Botha invested R97 421. The investments were split between the Allan Gray Balanced Fund, the Allan Gray Equity Fund and the Nedbank Rainmaker Fund.
The investments in the Allan Gray Balanced Fund and the Nedbank Rainmaker Fund were switched by the respondent into the Investec Commodity Fund, the Investec Equity Fund and the Investec Managed Fund.
It is important to note that aside from the Investec Managed Fund, the portfolio was almost completely equity centric.
Further investments were made with Stanlib, but the Ombud dismissed these investments preferring to concentrate on the Investec investment. However, the determination does point out that the Stanlib investment was an aggressive equity portfolio.
With the investments occurring at the height of the financial crisis, one would view the move towards commodities as contrary to TCF principles as the respondent was focusing the risk in one area as opposed to spreading the risk.
Godfrey Botha had more than a few fears about the economy and met with the respondent to discuss this. In short these related to his concerns regarding the market volatility and its impact on the investments, particularly the monthly withdrawals. The complainant states that he was told to stick it out as it did not affect the units. Further, he was told that there would be a change in the markets and that he must not worry.
The Ombud pointed out that the complainants indicated that they would never have invested in the funds that they did, had they known about the volatility to which they were being exposed. The Ombud also pointed out that the complainants had major issues with the fact that their fears were ignored by the respondent who shifted their investments until they were essentially equity based.
An erroneous standpoint
When the Ombud approached the respondents for their side of the story, the feedback received pointed to the fact that the first and second respondents had a particularly obscured view regarding their actions.
Whilst the funds were moderate to high risk, the two respondents aimed, according to them, at meeting the complainants’ investment requirements of capital growth over the long-term. The changes to both the commodity and the equity funds were aimed at enhancing their clients’ long term stable capital growth and income objectives, which the balanced and moderate funds were not able to meet.
The respondents added that the complainants panicked and if the complainants had not gone contrary to the advice of riding the storm of the market, they would have recovered a significant portion of the capital lost during the financial crisis. Accordingly, the respondents pointed out that they cannot be held responsible for market volatility.
There was a third respondent in this case who was not materially involved in the actions of the first and second respondents. Guy Coleman was a key individual of the first respondent when the advice was given to the complainants. He was not involved in the allocations of their investments and resigned soon after he discovered the actions of the first two respondents.
Clarifying the issues
Risk profiling is a necessary activity when approaching investments as it gives a clear indication of the clients risk appetite. While the complainants’ risk was rated as moderate, the approach of the respondents to move the majority of their investments into equity investments was irresponsible as the companies that housed the funds that the investments were made in listed the funds as high risk.
The Ombud also pointed out that the complainants gave clear indications that if they were aware of the risk involved in their investments, they would not have taken out the investments. This shows that they were not educated on the investment industry and relied on the advice of the respondents to make informed investment decisions. The complaint was upheld and the respondents were ordered to pay equal amounts of R102 148 to the two complainants.
Editor’s Thoughts:
Gross negligence of risk appetite is a simple error which just cannot be made. The case in favour of passive investments continues to rage on while South Africa tries to keep pace with well performing global markets. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
Do you invest according to your needs or according to your appetite for risk??
I wonder what this client's reaction would have been if he was told to downscale on risk and just accept the lower income?? Sometimes it's just better to walk away from clients who didn't save enough, as somebody (mostly the broker) will pay for their ignorance. Report Abuse