The complainant, the Trustees of the Johnnie Pringle Investment Trust (customer), invested money upon the advice of the financial advisor into the now obsolete Relative Value Arbitrage Fund (RVAF).
The RVAF is in liquidation and initial reports indicate that most, if not all, investments will be lost. This complaint is based on the claim that the advisor did not disclose the risks of the investment or advise the customer appropriately.
The first respondent is an authorised financial services provider (FSP) in terms of the FAIS Act and the second respondent is Andrea Moolman, a key individual of the FSP. She was the financial advisor to the customer and provided financial advice at all material times.
As an advisor, proper due skill, care and diligence must be exercised in terms of Section 2 of the General Code of Conduct and customers should be able to rely on sound financial advice from an authorised advisor.
The Ombud has received a number of complaints about the RVAF against the respondents, all of which are similar in nature. The advisor was given the opportunity to respond to the complaints.
Some of her responses included:
- She said that the customer was a successful business owner with a diversified portfolio and that this investment made up just under 5% of his total portfolio.
- She believed that the risks were explained to the customer in plain language and that all documents were completed before the customer had signed.
- The due diligence conducted by the advisor included visiting the premises of Abante Capital (Abante) where the deceased, Herman Pretorius, explained the strategies to her. She also established that Abante was registered with the FSB.
- She also established that mostly top 40 JSE companies invested in this fund and the way the fund was managed kept the risks relatively low.
- Because Abante had won a hedge fund award in 2008 she had deemed the RVAF to be a suitable investment for her customer’s needs.
The Ombud found a number of contraventions of FAIS legislation which included:
- Neither Pretorius nor the RVAF was licenced. The advisor made no enquiry with the Regulator about the licence status of RVAF. This in itself should have alerted the advisor to do a further due diligence.
- There was insufficient disclosure about who or what the customer was dealing with. The application form provided to the customer did not reflect a name or telephone number.
- There was no reference made to Abante Capital (Pty) Ltd nor that the customer was investing as a limited partner in the RVAF or what this meant.
- The advisor’s reply was very vague about the connection between Abante and RVAF. She did not explain why she advised the customer to invest in RVAF, but then would conduct a due diligence on another entity, Abante. There was no email or other written enquiries to verify documentation. There was also a lack of a set of financials – not even a fund fact sheet.
- Of additional concern was the banking details of the ‘RVAF Trust’ as a trust is a completely different legal entity from a partnership, yet the customer’s proof of payment reflects payment into a Trust’s bank account.
It was found reasonable to conclude that the respondents were ignorant of the legal implications and financial repercussions for the customer.
The complaint was upheld and the respondents were ordered to pay, jointly and severally, to complainant the amount of R285,006.00 together with an interest of 9% per annum from the date of the Order.
What is most evident from the findings is that the financial advisor had not taken enough time to investigate and understand the structure of the scheme into which she advised the customer to invest. The Ombud highlighted the advisor’s qualifications as being just above matric, yet she saw herself as fit to both conduct a due diligence and then render advice in an area that was demonstrably way out of her reach.
Due diligence is part of an advisor’s everyday role, but only provides protection if the products applied to customers’ needs are suitable for their circumstances. Some simple rules of thumb that should help advisors’ meet their due diligence requirements and manage the risk in your business:
- Don’t take things at face value. Do not blindly accept what you are told or what you read about a company or product.
- The further you move from mainstream regulated providers, the deeper your due diligence investigations need to be.
- Keep an audit trail of what you did to understand the provider and the product.
- Understand your own limitations and obtain expert advice if needed.
- Stay away from what you don’t understand.