On 21 January 2016, after finding that a 58 year old unemployed woman with no other income had lost all of her invested capital, the FAIS Ombud made a ruling that the advisor’s failure to comply with the general and specific duties set out in the General Code of Conduct was the direct cause of the woman’s financial loss. The advisor was ordered to repay the capital amount of R500 000 plus interest of 9% pa.
The complainant is a 58 year old, unemployed woman (“client”) who sold her house in 2011 and received R500 000 from the proceeds of the sale.
The respondents are Investiplan (Pty) Ltd, a registered financial services provider (FSP), and the financial advisor who is the Key Individual of the FSP.
The client approached the advisor to seek advice on how to invest the proceeds of the sale of her house in the amount of R500 000. She told the advisor that she no longer had full time employment and therefore needed a monthly income to cover her living expenses.
The advisor advised her to invest the full amount into the Investiplan Private Equity Fund which he promised would pay her interest of more than R4000 per month. She furthermore told the advisor that she only required R4000 per month and that the balance of interest should be reinvested. The client knew nothing about this investment but trusted her advisor to act in her interests and therefore did not query which funds were involved in her investment.
There was no evidence that a needs analysis and/or risk analysis or assessment had been conducted by the advisor. The financial product itself was not explained to the client nor was she informed of any risks associated with the chosen product. No other financial products were offered to the client as alternative options and the client was, therefore, not placed into a position where an informed decision could be made. The advisor had also promised the client quarterly statements which would reflect the true value of her investment. Unfortunately none of the advisor’s promised returns materialised and the client’s capital was lost.
The Ombud found that the advisor had rendered financial services negligently, had not complied with the requirements of the FAIS Act or the General Code of Conduct and was the direct cause of the client’s loss. The respondents were ordered to re-pay the capital of R500, 000 to the client together with interest of 9% pa.
Key learnings that every FSP can take from this determination
This case reiterates the importance of financial advisors complying with the requirements of the Act and the Code when providing financial advice to clients. Even though this case relates to an investment into an unregulated product which seems to have been set up by the FSP itself, there are still learnings which all advisors can take out of this Determination.
Act, at all times, in the interests of your clients. As an authorised professional this means that it is your duty to understand both the circumstances, needs and objectives of your client and the financial products, including any associated risks, which you are able to offer as possible solutions to your clients. A greater level of due care and diligence should be exercised where products are not regulated, as these often carry a greater degree of risk than products which are regulated.
Keep a record of all your interactions with your client. Documenting the information that you gathered from your client and assessing and analysing this information will allow you to not only comply with legislation but also to substantiate the reasons for your recommendation. Keeping a detailed account of all the discussions and decisions made together with your client will reduce any misunderstanding in the future. In our experience, this is one of the areas where advisors fall short. It is not enough to say that this was done if you cannot prove it to be so from your client records.
If one product option is proposed, provide the client with a clear reason. In this Ombud Determination the advisor had not presented the client with a choice of products and the client was therefore not able to make an informed decision. It is important that when only one product option is proposed as a solution to the need of your client, a reason for this is made clear to your client. Clients should be given the opportunity to consider the choice available to them even if they rely on your guidance as their trusted advisor in the final selection.
Although record keeping can be tedious and time consuming, the value of maintaining meticulous records will not only become evident in the event of a client complaint, but also when conducting a review of your client’s financial plan or demonstrating to your client the value which you add as financial advisor.