Adviser flees, licensee penalised by FOS
A financial adviser who double-geared a risk-averse client into shares has relocated to Europe, while his licensee — which only grudgingly acknowledged a possible breach of obligation — has been ordered to pay $110,00 in compensation.
A recent determination by the Financial Ombudsman Service (FOS) revealed how a woman with two dependant children, a $100,000 mortgage and an income of less than $62,000 was advised to use the equity in her home to gear into share market investments — a scenario that left her servicing loans totalling $240,000 and more than $144,000 in the red.
The Statement of Advice created by the adviser stated that one of the client’s goals was to “expand friendships and be more outgoing”.
While the client told the FOS she had had little investment experience and had been “too afraid to invest” before meeting the adviser, he classified her as a “high growth investor type”. The FOS found this assessment “had no basis in fact and was merely calculated to enable [the adviser] to place her in this high-risk strategy she could not afford”.
The adviser recommended that the client invest $140,000 into a ‘portfolio service account,’ using $60,000 of available funds from an ‘executive choice loan’, and gear it with an $80,000 margin loan. The adviser then recommended the client invest $100,000 into another investment fund using a 100 per cent loan.
The adviser indicated any deficit resulting from the strategy would be financed from an annual surplus in household income of $4,891. The adviser also omitted one of the woman’s loans in his reviews, giving her “a false sense of security and the impression that she was in a better financial position than she actually was”.
According to the FOS, the client complained to the licensee about the advice given to her in July 2008 — and while the licensee said it would investigate the matter, no response ever came. The FOS said it appeared the adviser had relocated permanently to Austria some time in 2008.
Commenting on the actions of the licensee, the FOS said the licensee had “not responded to this complaint appropriately” and that “there have been unnecessary delays and the member has not met its undertaking to attempt to resolve the complaint”.
It said while the licensee had acknowledged in July 2009 that “it was possible” the adviser had “breached certain obligations to the complainant”, there had been no further communication from the licensee since that time.
The determination, finalised in December last year, found in favour of the client with the licensee ordered to pay $110,000 in compensation.
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