Secondary

Ombud View on Risk Analysis and Asset allocation

The latest FAIS Ombud determination should be regarded as compulsory reading for intermediaries in the investment business.

The investments occurred around the time of the world economy meltdown. The determination discusses the needs of the clients to maintain their income in a poor preforming investment market.

Summary of the complaint:

  • Complainants claim they were invested in interest bearing investments to fund their retirement income needs. Realising they required more income, the complainants sought advice on how they could improve their position.
  • They spoke to respondents who advised them to place their funds in high risk investments with the promise of a better return.
  • They state that the risk implications were never explained to them.
  • Complainants would never have invested in such aggressive funds had they understood the volatility to which they were exposed
  • Aligned thereto, complainants point out that there was no provision for short or medium term financial needs; in other words no provision for the deleterious impact on capital, which income withdrawals had during a market downturn.
  • The investments were switched around by respondents with some switches being made at the height of a global financial markets downturn.
  • Their fears were ignored by respondents who carried on switching their investments until their investments were essentially equity based, this whilst withdrawing income, with no allowance being made for this.
  • As the value of the underlying units decreased, complainants had to sell more units to fund their income.
  • Driven by the need to save their investments, complainants, on their own instincts, initially decided to reduce their withdrawals and later stopped withdrawing.
  • Complainants make it clear that they kept the money in the high risk funds on the advice of the respondents.
  • They claim they would never have invested in high risk funds had they known the full implications.
  • Having failed to successfully resolve their complaint with the respondents, complainants filed the present complaint.

I found the calculations to determine the quantum of the loss of the clients very interesting. Please click here to read the full determination.

You are welcome to send your views on the matter to me at pkruger@moonstoneinfo.com.

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