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Adviser case ruling controversial

The Institute of Financial Advisers Disciplinary Committee has heard another compliant over how one of its former members invested client funds into finance companies and has ruled that the adviser can keep practicing, albeit it under certain conditions.

Friday, April 24th 2009, 9:34AM

The case, against the unnamed adviser, was that he had put several hundred thousand dollars of a conservative, 64-year old investor’s money into various Bridgecorp and Capital + Merchant securities.

Initially the sum invested was $375,000, but that reduced to $270,000 when the client withdrew funds in 2005 to buy a house.

The adviser acknowledged these facts, plus that the client wanted to “preserve all the investment funds available for investment for future income.”

The adviser pleaded not guilty to the charges and denied he had not provided recommendations that were appropriate to the client’s needs and circumstances after taking account of her wishes; and/or ensure that his advice was appropriate and in the best interests of the client.

During the hearing the adviser claimed that the IFA had no jurisdiction to hear charges against him on the grounds that by reason of his non-payment of his subscriptions he was deemed to be non-financial and therefore his membership of IFA had ceased.

The committee has dealt with this argument previously and ruled that the hearing would continue on the basis that the committee’s written determination would give reasons on the jurisdictional determination and the member would be given time to make application to take the decision on review to the High Court.

The key points the prosecution argued were that all bar one of the investments offered to the client were finance companies and at times around 50% of total investments was invested in just one company; the adviser didn’t explain that high rates of return go with high risk, nor explained that it was prudent to diversify risk.

The client was never presented with an investment plan. Also the adviser “relied on investment grade ratings, audited financial statements, adviser information releases and in the case of Bridgecorp, the presumed loan loss cover available through Lloyds of London.”

It was submitted that although the loss has yet to be quantified as Bridgecorp and Capital + Merchant were still being wound up that the client had suffered significant financial loss and emotional pain and stress.

The prosecution argued that the adviser had failed to observe the standards set by his professional body.

In his defence the adviser said he had been an IFA member for eight years and this is the first complaint against him. Also he said he no longer provides investment advice.

He also disputed the factual accuracy of some of the complainant’s assertions, but he did not present evidence to support his position. 

The committee acknowledged the stress, pressure and emotional pain the client suffered from the adviser’s actions.

It said there were differences in the factual assertions made by both parties and it preferred the representations of the complainant in most instances where facts were in dispute.

“Generally, (the adviser) has not been able to refute the representations of the complainant.”

The adviser argued that he made it clear to the complainant that “he was not a financial planner and that a financial plan was not requested as the complainant’s requirement was for fixed interest investments that would provide a regular flow of income over and above what the banks were paying to top up her NZ Super”.

He told the committee: "I made it clear that I was not a financial planner and that our services were limited to presenting her with investment options that were based on her description of her needs".

The committee said that a member cannot escape membership obligations by saying “I was providing advice in a different manner.”

It found the member guilty.

The committee had taken into account the adviser’s representation that he is financially impecunious, his marriage had failed, his house had been sold by mortgagee sale and he had been forced to sell his advisory business. He is currently working for wages with a company and the committee saw “no sound reason for levying a fine”.

It also declined to publish his name: “In the circumstances of this case the committee considers the member should be appropriately penalised but not to the extent that his livelihood will be impaired. Publication of the member’s name was likely to do that.”

It said the adviser should be entitled to earn a living working for another industry participant, but he should be required to be supervised.

It ordered the member; be censured, pay costs of $25,575 and is supervised.

It also ruled he is not to “provide financial planning or investment advice unless he has obtained and proves to the Institute the relevant qualification as per the Institute’s or statutory requirements”.

 

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