Adviser firm pays $133,000 for part of house deposit lost in growth fund

Advisers have been reminded they need to be careful about forecasting market performance, especially during times of market volatility after the Financial Services Complaints (FSCL) ordered a firm to pay $133,000 for money lost when advice went awry.

Tuesday, October 3rd 2023, 8:58AM

The warning follows a case of a woman who went to a financial adviser in August 2021 after her mother gave her $500,000 to buy her first home. She wanted advice about a mortgage. The adviser also arranged for a colleague to give her investment advice, which led to the client investing all of her money in a growth fund.

A month later, she signed an agreement to buy a townhouse off the plans, which was due to be finished by October last year.

In March last year the equities market and the woman’s fund balance was dropping. She became worried about having all her money in a growth fund, but the adviser reassured her there would be a “turnaround” in her investments by October. That did not happen.

By the time she cashed up her portfolio in November, she had suffered a $160,000 loss and had to borrow an extra $160,000 to buy the townhouse.

She complained to the firm and took part in a mediation, but this did not resolve her complaint. She then complained to FSCL saying the adviser should not have told her to put all her money into a high risk investment. The firm knew she wanted to buy a house within a short time, so it should have advised her to put her money in a low-risk investment like a term deposit, she says.

The firm says she told the first adviser she wanted to buy a house “at some stage”, but she didn’t tell her she was actively looking for a house. It says the client didn’t ever tell the second adviser she wanted to buy a house, even though she had decided to buy the townhouse when just given the advice to invest in a growth fund.

The adviser says she thought the client wanted to invest the money for retirement. The firm says an adviser’s advice is only as good as the information provided by the client.

The FSCL says the handover between the advisers was inadequate. The first adviser hadn’t appeared to have told the second adviser the client wanted to buy a house and there was information that “didn’t make it” from the first adviser’s fact find to the second adviser’s statement of advice (SOA) to the client.

Having said that, the FSCL says the second adviser should have raised it with the client anyway. “She was aged about 30, and a prudent adviser should have explored the possibility she might want to buy a house before thinking too seriously about retirement savings.

“The SOA seemed largely to be a pro forma computer-generated document. It didn’t discuss the client’s tolerance for risk. It recommended putting 100% of the funds in a 100% growth fund, but it didn’t have any warnings or explanations about the risks around doing that. Although the client and adviser spoke about the SOA afterwards, the adviser didn’t make any notes of those discussions. The SOA also didn’t explain that the recommended timeframe for investing in a growth fund is usually a minimum of five to seven years,” the FSCL says in its decision.

From the correspondence between the client and adviser, the FSCL says the adviser knew about the house purchase before she reassured the client about a market “turnaround”.

“We are concerned about this. We don’t think any adviser should be trying to forecast with such certainty how the markets might perform over the next six months, particularly during times of market volatility.”

Resolution

The firm has been held responsible for 80% of the client’s loss: $128,000. FSCL says the client is responsible for 20% of her loss because she had some prior limited experience of growth funds, and because she didn’t point out to the adviser the SOA didn’t include her house purchase – although these things were minor. It also considered the firm should pay $5,000 for inconvenience: a total of $133,000.

Both sides accepted the settlement.

The FSCL says it is important for advisers within a firm to share information with each other about a client’s needs. It is also important for an adviser to ask questions about the client’s intentions and wishes, and to give – and record – advice about risk and investment timeframes.

Tags: advice risk