Distinguishing personal from general advice –
The applicant opened a full service stockbroking account with the financial services provider (FSP) in 2008. He says between January and June 2008, the FSP provided inappropriate personal advice to him to purchase three resources stocks using his existing margin loan, which caused him loss.
Was it personal advice?
The FSP says that at all times, the recommendations were subject to general advice only. It did not record any of the applicant’s objectives, risk profile or financial circumstances.
The Panel found the advisor’s recommendations to diversify the applicant’s existing share portfolio with the three stocks was personal advice, even though no Statement of Advice was provided. However, while the Panel considered the advice to purchase the stocks was appropriate, the advice to increase the margin loan to purchase these stocks was not.
FOS will look at all of the circumstances to assess whether it was more likely than not that the FSP provided personal advice. In this dispute, some of the relevant information that FOS took into account included:
- the failure by the advisor to provide a general advice warning to the applicant
- that it was reasonable for the applicant to expect he was receiving personal advice when the advisor recommended diversification of his portfolio, financed by his margin loan. The Panel considered that such a recommendation could only be made having regard to the applicant’s personal financial situation.
Was the advice appropriate?
At the time the applicant opened his trading account, his margin loan had a balance of approximately $30,000. The recommended purchase of the three stocks meant the margin loan increased to $205,000 (this included an additional stock purchase of $18,000 that was subject to execution-only service). The Panel considered the increase in the applicant’s margin loan was a significant departure from his previously conservative position. However, there was no evidence that the advisor:
- made any enquiries to ensure the applicant would be able to afford a loan of this size
- considered whether the applicant had the capacity to absorb losses that may have arisen from the increased financial exposure.
The three recommended stocks were not high yield and would not be able to support the increased interest payments on the loan.
How was loss calculated?
The Panel was satisfied the applicant would not have purchased the three stocks if the advisor had not recommended them. The total amount of loss the applicant suffered on his entire portfolio was $218,145. If the applicant did not purchase these three stocks, the applicant’s portfolio would have still suffered a loss of $144,582, given market conditions at the time the loss was crystallised. The Panel found the FSP caused the applicant loss of $73,563. However, the Panel also found that the applicant’s conduct contributed to his loss and the amount of compensation was reduced by 50%.
FOS tip for financial advisors: maintaining and retaining file records
As a guide, FOS relies on the available documentary evidence provided by both parties to a dispute. For an FSP, this usually includes (but is not limited to) file records, advice documents, order records, advisor file notes and correspondence between the parties.
FOS often deals with disputes about events that occurred many years ago. Proper file and record management is a crucial risk management tool for FSPs when providing any service to clients, whether its execution only, general or personal advice.
FOS also frequently requests FSPs to obtain a statement from the relevant advisor in addition to contemporaneous advice documents. We recommend FSPs gather this evidence at an early stage. Our experience is this can assist with the resolution of the dispute.
See FOS's Top 10 Tips for Getting Financial Advice Right (PDF 90KB).