This matter dealt with a retired couple who suffered financial loss due to inappropriate advice given by their financial advisor. The respondents were the key individuals of R&S Walsh Investment Consultants CC, an authorised FSP. The advice given was deemed as inappropriate as it did not suit the complainant’s personal needs and circumstances.
Complainants had an interest bearing investment and approached the respondent to invest in something which would generate a better return. Their investment was placed via a platform into selected funds. About a year later the funds were switched to a portfolio which was almost entirely equities. This resulted in an investment in predominantly more high risk funds. The switch occurred in 2008 during a volatile period due to the global financial crisis. This was considered as counter intuitive as the clients now faced an increased risk allocation.
It is important to note that there was no record on file of clients being so informed. This in itself constitutes a violation of the General Code of Conduct (the Code).
The financial advisors’ defended themselves by stating that a needs analysis was conducted and a risk profile was done to determine the client’s appetite for risk.
However, there was no evidence to prove that the client’s circumstances were considered. There was also no documentation to show the financial standing of the clients. There was no record of the advice given, nor was there a record of the basis on which the products were chosen as best suited to the clients’ needs and objectives.
Based on all the documentation provided to the Office of the FAIS Ombud, it was concluded that the clients were not able to make an informed decision. The Code requires that an adviser seeks appropriate information so that appropriate financial advice can be given on products suitable to the client’s risk profile and financial needs. The purpose of the Code is to ensure that an educated decision based on the client’s profile and circumstances was made.
The Ombud found that the advisers’ actions led to the financial loss suffered by the clients. The complainants had identical portfolios but the back testing was conducted on the first complainant’s portfolio only. To this end, the money market funds reflected a difference in their favour should their funds have been so invested.
The respondents were ordered to pay, jointly and severally, an amount of R102,148.54 to each client, at an interest rate of 9% per annum.
Lessons to be learnt:
1. Know your client
- In this instance the clients were pensioners looking for a better income. However, there was nothing about their financial standing which could justify high risk investments.
- Clients rely on advisors for proper and sound financial advice. Advisors must make sure that a client understands and accepts the risk of an investment. This means educating clients so that when completing a form such as a risk profile they are able to answer any question with understanding.
- Information given to a client must be clear and easy to understand and advisers must take into consideration the knowledge and education of a client.
2. Keep comprehensive records
- Keep a record of all correspondence with clients.
- Make sure the advice given to a client is documented and that there is evidence that a copy has been given to the client.
- Include the different products which were considered as the basis of advice and supporting reasons must also be recorded.
- The reasons justifying why products were chosen for the client must also be clearly recorded as motivation that the product is suitable in the client’s circumstances.
Time and administrative responsibilities carry challenges for any business. Streamlining business processes will ensure that there are appropriate controls in place and free up valuable time to ensure that correct records are kept.
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