Managed investment scheme fallout continuing for financial planning firms

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The fallout from a variety of managed investment schemes (MISs) that collapsed following the onset of the global financial crisis continues to play out through the Financial Ombudsman Service (FOS).

In 11 decisions announced by FOS in the past three months directly relating to MISs, FOS found in favour of the complainant on 10 occasions. In those cases, the financial services provider was ordered to reimburse the client for capital lost (capital invested less distributions received, if any) as well as interest compounded at 5 per cent per annum.

In some cases, other expenses including management costs were also ordered to be refunded, as well as loan costs in cases where the client was advised to borrow to invest in the MIS. In one case, although the financial services provider was directed to repay the client, the company was in liquidation and the liquidator was not deemed to be liable.

The cases involved both agribusiness and real estate MISs. Agribusiness projects that led to findings against financial services providers included projects from Great Southern, Timbercorp and ITC, as well as the Northern Rivers Coffee Project, Port Robe Estate Project and Tropical Forestry Services Indian Sandalwood Project.

Failed real estate MISs that led to findings against planning firms included the Domaine Land Fund Moss Vale Project; Kebbel Development Capital's Gilead Retirement Resort and Riverside Pier Trust hotel development; the Prime Retirement Aged Care Property Trust and PCG Capital Management's Nelson Bay Development Trust.

In all cases where FOS found in favour of the complainant it was deemed that the advice to invest in those schemes was inappropriate because the investments were too high risk for the client's situation.

In two cases, the long-term nature of the projects was also deemed to be unsuitable as the client was entering or already in retirement and would not be able to access the funds they needed to fund their retirement. In one case it was found that the client should not have been advised to borrow to invest in the MIS because they could not afford the loan repayments.

The investment amounts lost ranged from less than $20,000 to $150,000. In the most expensive case the clients, a retired couple, were advised to invest a total of $295,000 out of a $777,000 retirement portfolio, or 38 per cent of their portfolio, into five high-risk real estate MISs, resulting in losses of $247,000.

Financial Planning Association chief executive Mark Rantall said that a lot of the issues around MISs have been addressed on the advice side in the second tranche of Future of Financial Advice proposals through the banning of commissions and the best interest duty. However, he said it would be good to see similar responsibility placed on the product manufacturing side to close the protection loop around clients regarding these types of investments.

Rantall said MISs can be a legitimate form of investment, but it is important to have the necessary prudential management controls and reporting requirements to ensure maximum consumer protection. There remains a big question mark over the structure and viability of these sorts of investments going forward, and it could be some time before we see investors returning to these products, Rantall said.

Clarification: Although one of the FOS cases outlined in this story required the financial services provider to buy out a client's interest in the Tropical Forestry Services Indian Sandalwood Project due to inappropriate advice, the TFS Sandalwood project itself is still viable and paying distributions. Money Management apologises for any confusion caused.

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