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Investment – level of return misrepresented – calculation of compensation
Following the sale of their business Mr and Mrs G had $300,000 to invest. They met with an investment adviser from their bank, who suggested an investment portfolio with a 30/70 split between growth and income assets. A few months later, Mr and Mrs G added a further $500,000 from the sale of an investment property to their investment. Mr and Mrs G were novice investors in managed funds, and relied heavily on the investment adviser for advice.
Mr and Mrs G said that they made it clear to the investment adviser that their principal need was an income from their investment portfolio, as they no longer earned any income from their business or investment property. According to them, the investment adviser said that they would earn a return of between 9 and 10% per annum after fees and tax on an investment portfolio with a 30/70 split.
The investment returned about 6.76% after fees and tax. The monthly distribution made to Mr and Mrs G fell far short of what they were expecting. Mr and Mrs G complained to the bank, and sought compensation of approximately $32,000.
The bank did not accept that it was responsible for the failure of Mr and Mrs G’s investment portfolio to perform to expectation. However, it accepted that Mr and Mrs G had suffered some inconvenience, as the portfolio had failed to deliver a regular cash income from the outset, and offered to pay compensation of $2,000 for this.
After investigation, including interviews of Mr and Mrs G, their current financial adviser and the bank’s investment adviser, I found that the bank’s investment adviser had misrepresented the level of return that Mr and Mrs G could expect to receive from their investment. In particular, I noted that the investment adviser had handwritten a note of “9-10%” on the investment proposal, and that he had failed to explain in plain and simple terms that, because an investment had performed well in the past, it would not necessarily continue to do so in the future.
In assessing the compensation to be paid by the bank, I rejected Mr and Mrs G’s claim that they should be paid the difference between what they had actually earned on their investment and the amount they had been promised in return. This was because the investment portfolio, as structured, would never have produced returns of 9 to 10% per annum after fees and tax for the period in question, and an investment that could produce such a return would have carried an unacceptable level of risk.
Under my Terms of Reference I may award compensation only for direct loss or damage, and am accordingly unable to award damages for misrepresentation and/or breach of contract. Therefore I looked at the returns that Mr and Mrs G would have earned had their money been invested on term deposit, which would have been a more suitable investment for them, given their fairly conservative investment profile. The best term deposit rate available from the bank for the relevant period would have returned about $3,450 more than Mr and Mrs G received from their investment.
I also recommended that the bank refund the implementation fee of $1,000 paid by Mr and Mrs G when first investing with the bank. In addition, the bank had already made what I considered to be a fair offer of a sum of $2,000 as compensation for inconvenience, and subsequently agreed to pay the $1,350 fee for Mr and Mrs G’s current financial adviser. It was not unreasonable for Mr and Mrs G to have sought advice from an independent adviser, whose input had been of assistance to my investigation. This amounted to total compensation of approximately $8,800. Mr and Mrs G and the bank accepted my recommend