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Case Study: Unclear and inappropriate financial advice

 

Esme was a very elderly war widow; she had exceeded the life expectancy of an Australian female. Her financial situation was uncomplicated. She received more than enough income from her pension and from a small annuity to meet her needs.

Esme received a significant legacy from her sister’s estate. This was the first time she had received a large sum of money. She had previously obtained financial advice about her annuity from a financial adviser, but she was otherwise inexperienced in financial matters.

Esme sought financial advice from her regular adviser. She told the adviser that she wanted to top up her annuity with $100,000 and sought her advice about how to invest the balance of the inheritance.

During her discussions with her adviser, Esme said she wanted to invest a small amount in her granddaughter’s name, but later she changed her mind because she was concerned about how other family members would view the investment when she passed away and they were dealing with her estate.

The adviser recommended that Esme invest the balance of the inheritance in a managed growth fund. The SOA prepared by the adviser stated the investment in the managed growth fund was “not capital guaranteed”, “the balance may fluctuate daily due to changes in unit prices” and there was a risk of capital loss if Esme withdrew from the investment early.

Esme accepted the advice and made the recommended investment. The investment performed badly and suffered significant losses. Esme lodged a dispute with FOS, claiming she did not understand the advice provided to her and the managed growth fund was not an appropriate investment in her circumstances.

We noted that an SOA is a disclosure document that is intended to help a retail client understand advice and decide whether to rely on it. Client understanding of the advice is a critical part of the advice process.

After investigating the case, we drew the following conclusions:

  • Esme was inexperienced in financial matters and had very limited knowledge of financial markets and products (as shown by her uncomplicated financial arrangements prior to receiving the inheritance).

  • Esme’s primary objective was to leave a legacy for her sons and grandchildren and therefore she wanted to place the money into a secure, capital-protected investment (as shown by her concern about how a proposed investment in a granddaughter’s name would be perceived).

  • The information in the SOA about capital volatility associated with the managed growth fund was generic in nature and was not likely to alert Esme to the potential for capital loss. It would have been prudent to put these warnings in language Esme was likely to understand.

We found that if the SOA had been expressed in language Esme was likely to understand, she would not have made the investment. We ordered the adviser to pay compensation to her.

Read the full article: 'Statements of Advice must be clear, concise and effective'