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Investment – no misrepresentation of risk – shares fund unsuitable for risk portfolio
In 1999 Mr and Mrs J invested $300,000 into a bank’s balanced retirement fund. They were both in their mid 70s, owed no debts and were financially comfortable.
They had earlier phoned their bank to enquire about low risk and low maintenance investments. An investment adviser from the local branch came to their home and gave them information on the bank’s investment plans. Mr J told her about his and his wife’s situation, and said that he “just needed something to do with the money”. Their key investment objectives were to invest for capital growth; to minimise the impact of inflation; and to have the flexibility to alter their portfolio should their circumstances change. They did not require an income from their investment, and had a moderate risk profile. The adviser told Mr J about various managed funds investing in multiple companies. According to Mr J, she advised him that the return on the investment would never go below 10% per annum.
After discussions about their personal objectives, a finance plan was prepared for Mr and Mrs J. They were given time to consider the plan and were asked to review its contents. As Mr J held the bank in high regard and trusted the adviser, he proceeded to invest $300,000 in the recommended balanced fund. He did not read the small print of the documents.
In May 2000, Mr and Mrs J invested a further $100,000 into a higher risk fund including a large shares component.
In June 2000, Mr and Mrs J invested a further $240,000 into another shares fund offered by the bank.
Following their investments, the market took a turn for the worse. The managed funds did not perform well, and they suffered a loss of approximately $25,000 on their investments from the balanced and high risk funds. They decided to switch their investment in the high risk fund to a low risk cash fund. Two months later they decided to close the managed funds account altogether, with a total loss of approximately $50,000. They retained their investment in the shares fund.
In late 2004, Mr and Mrs J complained to the bank, claiming that it had not provided sufficient advice about the risk associated with their investments. The bank maintained that it had followed its proper investment process, and that its investment adviser had provided appropriate investment recommendations.
Mr and Mrs J subsequently lodged a complaint with my office. During my investigation Mr and Mrs J closed their shares fund investment, with a further loss of $46,286. Mr J claimed that the investments were not appropriate for their needs or their risk profile, and that as the bank knew of the risk involved and the age of Mr and Mrs J, it should not have recommended the investment. He said he was not advised that their investment could lose value to the extent that it did.
After a lengthy investigation, which included interviews of Mr J and the investment adviser, I concluded that Mr J did not have a good understanding of the investment plan when it was sold to him. He had relied heavily on his view of the bank as a reputable organisation in which he had great faith. There was clear evidence that the couple did not want an investment involving shares, but it was not clear whether this point was made to the investment adviser. As they appeared to be relatively sophisticated investors, it would have been reasonable for the adviser to expect Mr and Mrs J to ask questions if they were uncertain about any details of the investment plan.
I found that the adviser probably focussed Mr J’s attention on the possible benefits of the investment plan, highlighting the good returns that the funds had been receiving at the time of the investment, without giving sufficient emphasis to the risks involved in the investments, including, in particular, the risk that Mr and Mrs J could lose a portion of their original capital sum if there was a reasonably lengthy period of negative returns. However, the evidence was insufficient to support an overall finding that the bank had misrepresented the level of risk in a manner that would breach its obligations under the Fair Trading Act 1986 and/or the Code of Banking Practice.
I was also unable to find that the bank’s recommendation to invest in a balanced fund had been unsuitable for Mr and Mrs J’s needs or requirements at the time.
However, the same could not be said for Mr and Mrs J’s subsequent investments in the high risk and shares funds. I was particularly concerned that there had not been any reassessment of Mr and Mrs J’s risk profiles or investment goals when they decided to invest in the high risk fund in May 2000 and in the shares fund in June 2000. In promoting and “selling” an investment in the high risk fund to Mr and Mrs J, the investment adviser gave insufficient weight to their personal attitude to risk and to their risk profile. In particular, in selling an investment which had a large proportion of its assets in shares, when Mr and Mrs J had indicated some hesitancy about investing in shares, I found that Mr and Mrs J had been sold a product that was very arguably unsuitable for their needs and risk profile. The same could be said for their subsequent investment in the shares fund.
After weighing all factors, I found that a fair resolution to the case was for the bank to pay compensation to Mr and Mrs J in the sum of $50,000 towards the direct loss they had suffered and a further sum of $2,000 for inconvenience for the considerable stress, embarrassment and anxiety they had experienced as a result of their unsuccessful investments.
Mr J was not satisfied that I had paid sufficient consideration to the lost opportunity to earn interest or a return on the funds, had they been invested more conservatively. I discussed the matter with both parties, and the bank subsequently offered a settlement of $70,000. Mr and Mrs J accepted this, and the case was closed.