This is a collection of case studies that have appeared elsewhere in this edition of the Circular. It includes the two case studies from the FOS approach document that demonstrate the types of guarantor disputes we can consider, and the types of things we take into account when we look at whether a financial services provider fulfilled its obligations when it accepted a guarantee. You can read more about our approach to this and other issues by visiting www.fos.org.au/approach. More case studies are available on our website at www.fos.org.au/casestudies.
Loss calculation in financial advice
Mr & Mrs Smith were both in their early 60s and had received an inheritance of $1,000,000. In early 2006 they sought advice from a financial services provider (FSP) about how to invest this money. The FSP recommended Mr & Mrs Smith each invest $500,000 in allocated pension accounts and advised them to invest 90% in growth investments and 10% in defensive investments.
The allocated pensions initially performed well, but the global financial crisis caused capital losses. Concerned about the poor performance of their investments, in October 2008 Mr & Mrs Smith withdrew $340,000 and $315,000 respectively, incurring capital losses of $160,000 and $185,000. Mr & Mrs Smith complained about the FSP’s advice. They said that they believed they had invested 40% in growth investments and 60% in defensive investments, and were shocked to learn they had in fact been invested 90% in growth investments and 10% in defensive investments.
Mr and Mrs Smith lodged a dispute with FOS. We considered that the FSP’s advice was inappropriate because it exposed Mr & Mrs Smith to a greater level of investment risk than they were prepared to take on. We said that the amount of the loss suffered should be measured by comparing Mr & Mrs Smith’s actual net position as at October 2008 (when they withdrew the money) with the net position they would have been in as at October 2008 if they had received appropriate advice.
Based on all the information, we considered Mr & Mrs Smith would have invested in a moderately conservative allocated pension accounts with 40% growth 60% defensive investments. So we compared the difference between the inappropriate 90% growth, 10% defensive investments and the appropriate 40% growth, 60% defensive investments as at October 2008. The comparison showed that Mr Smith had lost $35,500 and Mrs Smith had lost $45,000, and we determined that the FSP should pay this amount of compensation.