Secondary

Perfect Vision in Hindsight?

Does the benefit of hindsight count against advisors in so far as the FAIS Ombud is concerned?

This is what went through my mind when I read the latest determination by the Ombud. Please click here to read the whole document – it is only 14 pages long.

In brief: an advisor placed the funds of two clients in the Dynamic Wealth MR Property Fund, from which they also drew an income. About six months after the investment, the clients noticed that their capital had decreased substantially. The complainants alleged that, contrary to their expectations, and requirements, their funds were placed in a high risk  investment.

The respondent, in his defence, quoted the following figures:

  • The MR Property had a mandate to yield a return of 15%
  • At the time, Sanlam’s Money Market Fund yielded 8.7% per annum
  • The MR Property Fund, in the preceding three years, delivered returns of 29.64%, 26.67% and 23.36%.

He contended that the fund was a low risk investment, whereas the Ombud was of the view that an investment, of which 80% of the asset allocation was in property, could not be viewed as such.

To try and get a balanced perspective, I reviewed the Moonstone rates for 2004 to 2006. Both guaranteed annuities and money market rates hovered around 7.5% during this time.

The average investor, given the choice between a 20% plus track record, versus a guarantee of around 8% going forward, would regard it as Hobson’s choice – a no-brainer.

Except that the two investors had a pension income of only R3000, and wanted to use an inheritance to supplement this to the best of their ability.

There are a number of issues at stake here:

  • In 2007, property was not a shabby investment, and appeared to confirm the age-old perception that it was “safe as houses”. We all know what happened since.
  • A client, given the choice of a guaranteed return, versus a much higher yielding one, with a proven track record, would be hard pushed to go the safe route.
  • Is it fair to assume that the advisor was justified in making his recommendation on an excellent track record over the preceding three years?

Apparently, no alternative recommendations were made to the client. In view of previous high returns of the MR Property Fund, it appears unnecessary. This was done in 2007, when FAIS was relatively new, and the property market booming. Can the advisor be faulted for recommending this fund?

Perhaps the answer lies in what the Ombud stated in her previous determination:

“ It must be said that the test for any FSP is not whether or not the investment is successful or proven, but whether or not the investment is suitable for a particular investor bearing in mind the latter’s needs, profile and tolerance for risk.”

I can imagine what happened in real life. If this advisor had not placed the investment, or insisted on the clients opting for a guaranteed annuity at say 8%, he would have lost the investment to somebody else who would go the higher income route.

Should mitigating circumstances (versagtende omstandighede) be taken into account?

Please share your views below.

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