The elephant in the financial advice space
Economists and financial analysts love using the English phrase “elephant in the room”. This phrase (or metaphorical idiom if you prefer) refers to an obvious truth that is being ignored or goes unaddressed. Last night I read an article by Cees Bruggemans, chief economist at FNB, who singled out political will (or the lack thereof) as the proverbial “elephant in the room” for South Africa Inc. Professionals in the financial advice space have an elephant of their own, namely Sharemax! If recent determinations by the FAIS Ombud are anything to go by, advisers who invested client funds into this struggling property syndication should be extremely concerned.
Sharemax is arguably the largest among dozens of property syndications to run into difficulties in recent years. It is estimated that some 40, 000 South African investors – often assisted by financial intermediaries – poured in excess of R5 billion into the group’s 50-odd property syndicates. As 2011 draws to a close investors are coming to terms with the fact they’ve lost most (if not all) of their invested capital. Who is to blame? According to City Press (and others) the group’s former managing director, Willie Botha, and his marketing manager, Andre Brand have assets in trust topping R250 million. But, as is often the case, the masterminds of the scheme are virtually untouchable thanks to the legal structure of their syndication empire. Investors keen on compensation will inevitably turn to the FAIS Ombud and lodge complaints against their financial advisers.
Unsuitable investment, exorbitant commission
While paging through the FAIS Ombud 2010/11 Annual Report it became clear that financial adviser can and will be held to account for their client’s investments in failed property syndications… The overarching theme in recent syndication-related determinations is whether the adviser’s decision to invest his/her client’s funds in the financial instrument was appropriate. A couple of determinations regarding the Blue Zone property syndication provide insight into how Sharemax complains might play out:
Black versus Moore: The FAIS Ombud introduced this case as “demonstrating provider incompetence”. In January 2007 Mr Black (a pensioner) invested R350 000 into two property syndications, namely Sharemax (R250k) and Blue Zone Spitskop Village Properties Limited (R100k). Some 10 months later Blue Zone was flagged for operating as an illegal scheme. It was subsequently liquidated with the result the pensioner lost his entire investment. The respondent, Mr Moore, had described the investment as of low- to medium risk to the complainant. The FAIS Ombud thought otherwise: “Unlisted shares and debentures are, in fact, high risk. It also turned out that the provider, Moore, had done no independent assessment of the viability of the investment he had recommended…” The FAIS Ombud ordered the respondent to pay back the R100 000 with interest.
Naidoo versus Swanepoel, Van Zyl & Lamprecht: The complainant invested R400 000 in Blue Zone which was liquidated in 2009. The FAIS Ombud determined: “In advising the complainant, the provider, Swanepoel, said that the investment was seen as a moderate-risk investment and at that stage Blue Zone was able to deliver a return of 9.5% on capital whilst banks were offering a ‘return’ of 7% with no chance of capital growth.” On the facts presented the Ombud determined that “it was the respondent’s incompetence that had led the complainant to invest in the scam in the first place.”
The writing is on the wall
Will similar arguments hold when Sharemax cases land on the FAIS Ombud’s desk? Early feedback is that advisers who invested their client’s funds in this syndication will be ordered to pay compensation. And the flood of complaints and determinations could come earlier than expected. In one of the earliest determinations, FAIS Ombud Nolantu Bam made a ruling despite there being various alternatives under consideration to save the group. (Advisers were hoping the possibility of a solution would preclude claims at this early stage).
Bam dismissed calls by a financial adviser that a Sharemax complaint was premature. “The issue is not whether some monies will be recovered by the complainant at some future unknown date,” she said. “But rather whether the advice, given the complainant’s circumstances, was appropriate.” In Barnes versus Deeb Risk and D Risk Insurance Consultants, the Ombud ordered the respondents to repay Barnes R800 000 of the R1.4 million she was advised to invest in Zambezi Retail Park, a Sharemax syndication. Incidentally, the complainant in this case was prepared to “forego” R600 000 of her investment by bringing the case to the Ombud, which can hear on matters up to R800 000 only.
This case is extremely concerning from an adviser perspective. And it remains to be seen whether the Ombud has overstepped the mark by determining the quantum of a particular loss at such an early stage.
Editor’s thoughts: The latest FAIS Ombud ruling re Sharemax should be viewed in an extremely serious light. All the evidence suggests that a broker who sold Sharemax to a client will have an extremely limited defence if (or when) the case is brought to the office... Has the Ombud overstepped the mark by awarding compensation while a Sharemax solution is still being thrashed out? Please add your comment below, or send it to [email protected]
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