Moonstone Monitor 7 August 2008: FAIS Ombud finds for Broker
A broker invested a R700 000 in Ovation and R440 000 in Sharemax for a client and his wife. Their daughter was not happy when she heard about this and requested cancellation of the investments. When she was informed about the cancellation penalties charged by Sharemax, she laid a complaint with the FAIS Ombud.
After hearing both arguments the Ombud had to decide on the following issues:
- Whether the broker failed to properly consult with the Complainants.
- Whether he failed to draw the Complainants’ attention to the alleged high risk nature of the products sold and invested almost their entire portfolio in the Ovation and Sharemax products.
- Whether he misrepresented the penalty for early withdrawal of their funds in two Sharemax investments.
The background is briefly as follows:
1. The complainants' daughter (Eybers) who acted on their behalf on a power of attorney was of the view that Respondent, (Hans Kema, the broker) should re-imburse the complainants for the early withdrawal penalties of R30 800.00 in total levied by Sharemax.
2. She also wants Kema to make good any shortfall of interest earned less than 2% per month on the Ovation investment up to the date of withdrawal of that investment.
3. She also claimed that her parents had placed their “main investment portfolio with Mr Hans Kema which was in the region of R1.1 million.”
4. Kema had an “[a]pparently ...relatively short consultation” with her parents whereafter he advised them to place their “entire portfolio” in two companies, namely, Ovation and Sharemax. Eybers says: “The broker briefly discussed the investments and proceeded to complete the necessary documentation without affording my parents an opportunity of properly considering the investments.”
5. Eybers says further, “At all relevant times my parents were led to believe that their investment portfolio would be placed in a balanced portfolio without risk.”
6. After the investments in Sharemax her parents were told by Kema during a “later consultation” that withdrawal of the investment prior to maturity would attract an approximate penalty fee of 3 to 4%. In fact a 7% penalty was levied. Eybers says it does not appear that the cost or penalties were properly disclosed by Kema to her parents.
The respondent was asked to comment on the allegations and provide a copy of his record of advice to the Complainants. He provided a comprehensive record of advice and responded to Eybers’ allegations as follows:
He says he consulted with the Complainants on 24 and 26 October; 1, 2, 18, 23, and 28 November as well as 7 December, 2005. On 23 January 2006 he visited them again when he delivered the “contracts, letters, copies of deposit slips etc.” Ms Eybers’ contention that it was only a relatively brief consultation is therefore clearly not correct.
He disputes the allegation that he invested their “entire portfolio of total assets.” The investments in the Ovation and Sharemax products together comprise approximately 30 per cent of the somewhat large total investment portfolio and can hardly be construed to be ‘almost their entire portfolio’ as alleged by Eybers.
Kema says further that at all times risk was discussed. The documentation provided to the clients contained the following warning: “...the attention of the public is drawn to the fact that the shares on offer are unlisted and should be considered as a risk capital investment. Investors themselves are therefore on risk as unlisted shares are not readily marketable. Should the company fail, this may result in the loss of investment to the investor.”
The Sharemax withdrawal fee was not only discussed, he says, but is reflected clearly in the prospectus that was given to Mr Jacobs. Mr Jacobs had kept the prospectus and all other documentation from 26th October until 1st November, 2005 when the first investments were placed.The prospectuses of both companies state in at least three different places what the cost of withdrawal from the respective syndications would be. Should investors, however, wish to sell their Units over a shorter period, Sharemax will assist them to effect such sale at a market-related commission which currently is 7% of the selling price of such Units.”
The interest on the Ovation ‘Common Cents’ Investment of 2% per month, payable quarterly in arrears, was paid until the investment was withdrawn. He denies saying that the 2% was guaranteed. The documentation signed by the clients clearly states that: “An anticipated return of 2% (per cent) per month calculated on the capital amount invested, is envisaged....The anticipated return can however not be guaranteed.”
He avers further that Mr Jacobs had informed him that he was an accountant and he was proud of a worksheet on which he had meticulously worked out his wife’s existing investments to the last cent. He also showed Kema how he would verify all interest received on investments.
The complaint was dismissed and the broker instructed to pay the case fee of R1 000.
Call me boring if you like, but anyone out there who still thinks that proper record keeping is an unnecessary schlep, is possibly also fond of ducking taxis on the highway.
