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Taking a significant beating with legislative Act

19 May

Author: Myra Rego

Publications: FANEWS

Date Published: 19 May 2015

Intermediaries are governed by the Financial Advisory and Intermediary Services (FAIS) Act which governs their actions and regulates the way in which advice is given to a client. While this act has been a welcome addition to the industry, some intermediaries have been taking a significant beating by the Act.

This was yet again, the issue in the recent determination by the FAIS Ombudsman (FAIS Ombud). The case was between Daphne Auret Foster (hereafter referred to as the complainant), Vaidro Investments (hereafter referred to as the first respondent) and Andrea Moolman (hereafter referred to as the second respondent).

Facing stumbling blocks

In 2011, the complainant invested a combined total of R800 000 in a Relative Value Arbitrage Fund (RVAF). To make up R800 000, the first payment of R150 000 was made in February, followed by a payment of R550 000 in June and lastly, R100 000 in November.

The fund was managed and operated as a hedge fund – by one Herman Pretorius, (now deceased) – with no license of its own.

The investments were made in consequence of the recommendation and advice of the second respondent, who acted as the complainant’s financial adviser. The complainant states that the purpose of the investment was two-fold, namely capital growth for an imminent retirement, as well as the access to additional cash in the event of Mr Foster’s passing.

The complainant was advised that the RVAF would be less risky than investing in the JSE, in that the risks were better managed. In this regard, the complainant was advised that whilst the returns in good time would be less, conversely the returns during a downturn would not be as bad. In this respect, the complainant was advised and shown records indicating not only that the fund had shown good performance over a long period but that it even showed a positive return over the stock exchange crash of 2008.

Accordingly, the complainant, when asked by the Office what needs analysis was conducted by the respondent, replied that this was not necessary as the couple had other investments for their pension. Furthermore, the complainant advised that she was also offered another hedge fund; however, the respondent advised her that the RVAF was more secure and suitable to her requirements. The investment comprised all of complainant’s investable capital but constituted 15% of the couples total retirement savings.

The complainant blames the respondent for poor advice and the loss of her investment of R800 000. It was expected that the funds were to be invested and trade in the top 40 companies on the JSE and that certain measures would be in place to manage risk. Accordingly, the complainant states that the investment was misrepresented being in fact a Ponzi or fraudulent scheme and the complainant holds the respondents accountable.

A painted canvas

The FAIS Ombud invited the respondent to respond to the complaint. The respondent stated that the complainant’s husband wanted to invest in the RVAF, but wanted to do so in his wife’s name (the complainant) for tax purposes. The husband wished to meet with Herman Pretorius in order to ask several questions.

According to the respondent, the husband advised that he is well informed and knowledgeable regarding trading shares and that he himself in his own capacity trades Satrix top 402 and hence understood that the investment made use of a partnership agreement. No Financial Needs Analysis (FNA) was conducted as this was treated as a single need. The complainant required nothing more as he is already well invested for retirement.

The record of advice evidences that the complainant was warned by the respondent about the high risks of the product.

The respondent only provided factual information on hedge funds and did not provide advice. The respondent advised that Herman Pretorius explained the strategies and how the risk was managed. She stated that by having reasonable knowledge of Hedge Funds, she concluded that the strategy, as explained to her, was a suitable investment for the client. The respondent contended that she was satisfied that persons investing in the fund were fully appreciative and aware of the risks involved.

What is not in dispute, is that the complainant sought guidance from a licensed financial adviser; namely the respondent. In so doing, the respondent had a duty to ensure that the advice that was provided was correct and appropriate for the complainant’s circumstances. Other than taking an interest in his own financial affairs, there is no evidence that the complainant’s husband possessed any particular investment knowledge or experience. Had the complainant’s husband been the experienced investor the respondent makes him out to be, he would have certainly steered clear of RVAF.

Immeasurable accountability

The inescapable conclusion is that the respondent knew nothing about the fund or its underlying investment and was in no position to advise her clients to invest in it.

No sensible person having been given the correct material information or advice would have invested in RVAF. Nothing in the records explains why it was necessary to take such a risk with a substantial portion of the complainant’s capital.

The issue determined is that the respondent failed to act honestly, with care and diligence. The complaint is upheld and the respondents are ordered, jointly and severally, the one paying the other to be absolved, to pay to complainant the amount of R800 000.

Editor’s Thoughts:
We need to be honest and also admit that poor advice is also a major contributor in some of the FAIS determinations – it is such a pity that some “bad apples” give the industry a bad name and thus give professional advisers a harder time with selling and compliance with regulation. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts