Think before you act when it comes to investments
While the Office of the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud) has had a better year in terms of determinations and the way in which they approach complaints, there are still some worrying sectors in the industry which advisers need to make clients aware of.
Abel Sithole, Chairman of the Board at the Financial Services Board (FSB), and Noluntu Bam, the FAIS Ombud, both expressed their concerns at the number of complaints to the Ombud relating to the investment industry. In fact, according to the 2013/14 Ombud’s report, close to 1 500 complaints relate to investment products.
The nature of these complaints can be frightening and can have a significant impact on the parties involved. This was then indeed the case with a recent determination handed down by the Ombud.
The desire for financial growth
The first complainant in this case is Maryke Marx who is a physiotherapist residing in the Western Cape. She and her husband, Petrus Marx (second complainant), had a long standing relationship with Wayne Gray, (first respondent), who was their financial adviser for a number of years. Their relationship was close and ongoing and the first respondent would often call the complainants to discuss their financial portfolios.
In 2004, the first respondent called the first complainant and advised her that an investment she had with Old Mutual was underperforming. He then introduced her to a “wonderful forex investment” that he assured her was a sound investment. This would be administered by a trading company called Quantum Leap (third respondent).
He also presented the complainant with an organogram showing the credentials of the company. If the complainant made the investment, she would earn a profit of up to 3% a month and the company she was investing in could not afford to lose more than 5% a month therefore mitigation strategies were in place to achieve this.
The complainant drew the money out of her Old Mutual portfolio and invested R66 843 into a US Bank that was affiliated to the third respondent. The first respondent earned a commission of R3 000 for assisting with this deposit.
Further complications
At the time of these investments, the complainants were living in Gauteng. In 2005, the second complainant got a job offer in the Western Cape and was eager to relocate. This did not sit well with the first complainant as she was not able to find employment in the Western Cape and she was reluctant to leave her Gauteng practice behind because she would not have an income. She approached the first respondent who assured her that she could draw 2% of her investment as a salary and reinvest 1%.
Happy with these assurances, the complainants sold their Gauteng home. They were eager to take the proceeds from the sale of their Gauteng home to help pay off the bond of the house they were buying in the Western Cape. The complainants again consulted with the first respondent who advised them against this and told them to invest the money in the third respondent. The second complainant made an investment of R100 000, and the first respondent earned a commission of R1 000. The first complainant also made an investment of R560 000, and the first respondent earned a commission of R11 200. The total investments that the complainants made were R726 843.
It all went wrong
Originally, the first complainant was able to live off the salary of her Gauteng business. However, after three months she contacted the first respondent to enquire how she would go about drawing money out of her investment as a salary. The complainants however, received statements from the third respondent pointing out that their investment had in fact suffered heavy losses because of global financial events at the time.
The complainants then consulted another financial adviser who told them that meetings with the first respondent and Gary Gray (second respondent), who was a key representative of the third respondent, showed that the complainants investments were suffering severe losses.
The complainants even went as far as meeting with the third respondent in Johannesburg to discuss this. In the end, the complainants withdrew what was left of their capital. The first complainant suffered a R557 100 loss and was only left with R69 742 of her investment. The second complainant withdrew R18 630 which meant that he suffered a loss of R81 369.
Response and order
The respondents were adamant in their stance that they were not responsible for the losses suffered by the complainants. They pointed out that the complainants knew that they were investing in a high risk product. The respondents also said that they could not be held liable for global events which caused the losses.
However, the Ombud found that the first respondent should never have recommended the product in the first place. The first respondent also misled the complainants in assuring them that the company could not suffer losses of over 5%. The fact that the third respondent moved away from forex towards bullion was also a contributing factor to the losses.
In the lengthy response provided to the Ombud, the respondents never dealt with the principal issue of whether the product was suitable for the complainants given their risk appetite.
The issues the Ombud had with the respondents were extensive and can be read in the full determination. The Ombud ruled in favour of the complainants and ordered the respondents to pay the first complainant R557 100 and the second complainant R81 369. Interest of 9.5% was also ordered to be paid.
Sharing responsibility
While there is a responsibility on the part of the adviser to make full disclosures to their clients, the Ombud is sending out an urgent call for the public to do their own background checks into the products that they are investing into. If the complainants in this case had done so, they may not have made the investment.
However, can we blame the complainants in this case? They made their investments off the back of a relationship with an adviser that stretched back many years and was based on trust. The adviser also gave assurances to the clients that there were measures in place by the company to avoid significant losses.
Editor’s Thoughts:
The investments and the losses suffered by the complainants were made in 2005, yet the determination was only handed down seven years later. The financial loss that may have happened in those years is significant and shows the impact that a bad investment can have on a family beyond the obvious financial losses. Advisers and clients need to think before they act when it comes to investments. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
