Moonstone: Sharemax back in the spotlight

Property syndications, and specifically Sharemax, made an unwelcome return to centre stage last week.

The FAIS Ombud’s annual report singled out these investments as a major contributor of complaints to her office.

In the same week, she ordered a financial services adviser and his company to repay a retired woman from Johannesburg R800 000 of the R1.4m she was advised to invest in a property syndication scheme promoted and marketed by Sharemax Investments. The complainant agreed to abandon R600 000 of the amount invested to bring the amount of the damages within the jurisdiction of the Ombud’s office. The determination also refers to a further investment in another Sharemax scheme which is dealt with separately, and for which the advisor may equally be held liable.

A report in Business Report notes that the determination is the first issued by the ombud’s office regarding financial advice given to a consumer related to an investment in Sharemax since the company ceased making monthly payments to investors at the end of August last year.

An exposé in yesterday’s Rapport on the perceived lavish lifestyle of former top management, including luxury yachts and game farms, will no doubt contribute to the already dubious reputation of this form of investment.

Of bigger concern to advisors who placed investments with Sharemax will be the finding against the advisor mentioned above.

If one reads the actual determination, it appears that he was not totally ignorant of the required disclosure requirements, nor was the client oblivious to the risks involved in this particular type of investment. The advisor is appealing the finding on these grounds.

There is bound to be a significant increase in the number of complaints to the Ombud, particularly in view of the fact that investors, according to the article in Rapport, are highly unlikely to get any of their investments returned by Sharemax.

This raises an issue that we have often expressed our concern about in the past: the product provider’s responsibility to disclose all material information required to make an informed decision. Bear in mind that all providers are also obliged to register as financial services providers.

The easy way out in this case is to shoot the messenger, but the question that needs to be answered is to what extent the provider of the message should be held accountable?

The Ombud refers to prominent attorneys and accounting firms in the marketing documentation of Sharemax which must have contributed to a sense of assurance to both potential investors and advisors. This sounds ominously close to what the previous Ombud referred to as a “web of deceit“ spun by the management of the Leaderguard group to deceive both advisors and investors.

It is heartening to note that the Ombud has recommended that the attorneys involved should be reported to the Law Society. Surely there is a reporting duty on accountants and attorneys where they suspect untoward dealings? If not, then there is at the very least an ethical obligation, or am I living in a fool’s paradise?

The FAIS Act places an obligation on advisors to conduct a due diligence investigation into the provider where they place funds; however, one has to ask how well the average advisor is equipped to conduct this?

I am not trying to single out any specific providers, good or bad, in this article. Some have been in the news for a long time for the wrong reasons. Those who chose to continue marketing their products will have to live with the consequences of their choice.

The issue for me is the obligation on a financial advisor to do a due diligence.

One of my friends, a sole proprietor, and a highly experienced person in the industry, put this to the test, a few years ago. He walked into the offices of one of the prominent investment houses in Cape Town, and said that he was there to conduct a due diligence of the firm as he was contemplating investing a client’s funds with them.

The product house was totally surprised as no IFA had ever approached them for this reason.

There was in fact no process in place to facilitate an IFA due diligence at any of the product providers approached. Therefore, notwithstanding the imposed obligation, it cannot, in practice, be fulfilled.

Furthermore; how does an IFA do a due diligence on an international conglomerate? It is all well and true, and very easy, to point out possible signs in hindsight, but how many of the current woes in the world economy were foreseen by some of the cleverest financial brains in the world?

Is it fair to place the responsibility for verifying the facts in marketing documentation on the advisor?

To my way of thinking, this should be the terrain of the Regulator. After all, that is why the industry funds it by way of levies, or am I missing something here?

Prevention, in matters of this nature, is decidedly better than cure. Thus far, it appears that most of the actions taken against scams were reactive, and not preventative, in nature.

Is the focus in the right place?