June 17, 2011 by
Filed under Finance
A financial planner gave bad advice by recommending her clientput a large chunk of cash into finance companies, but not becauseshe recommended investing in them individually.
In the High Court in Wellington, Judge Robert Dobson foundformer Turangi adviser Carey Church didn’t give competent advice toconcentrate investments in finance companies such as Bridgecorp,MFS Pacific Finance, Strategic Finance and North South Finance, andshouldn’t have recommended a particular ING fund as part of theportfolio.
Church, and her company Moneyworks NZ, were taken to court byinvestor Neil Armitage, a retired government vet, whose familytrust and own investments lost about $200,000 in failed financecompanies.
In his May 27 judgement, released earlier this week, JudgeDobson said Church didn’t “acknowledge the extent of risk of lossesarising from the concentration of investments and the sector sherecommended.”
Judge Dobson criticised Church’s exclusion of corporate bondinvestments in her client’s portfolio.
“If Mrs Church was not prepared to evaluate and recommend somefixed interest investments offered by listed entities, thencompetent advice ought to at least have explicitly noted that shehad not canvassed any options in that larger and more widelyanalysed sector of the New Zealand fixed interest investmentmarket,” he said.
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Judge Dobson didn’t find the adviser’s recommendations onindividual investments lacking, rejecting Armitage’s claim that sheshouldn’t have included Bridgecorp’s debentures.
“I am not satisfied that there were any matters that ought toreasonably have been identified by Mrs Church, on a specificcompany basis, that should have caused her not to recommend any ofthe particular companies, as against other finance companies,” thejudge said.
Tim Williams, a securities law specialist at Chapman Tripp, saidthe decision offers some helpful guidance for advisers andinvestors over where legal responsibility lies when advice wasgiven to invest in failed finance companies.
“While each situation will differ, this case reminds advisers toexplain any limitations on the scope of their advice,” Williamssaid. “Code Standard 10, which now applies to authorised advisers,requires disclosure of any limits on the possible investmentsrecommended.”
“In this case, the adviser was held to have negligentlyrecommended an imprudent concentration of investments in financecompanies,” he said. “She was held to have failed to offer thechoice of less risky alternatives, included listed corporatebonds.”
Judge Dobson threw out Armitage’s bid to blame Church forcausing a cash-flow crisis, and took a dim view of the retiredvet’s own investment behaviour.
Armitage’s desired return on investment was “unrealisticallyhigh” and couldn’t be generated on relatively safe fixed interestinvestments, Judge Dobson said.
The former vet wanted a 9% annual return on his investment,though Church managed to convince him to scale back thatexpectation to 8.5%. Armitage had poured all of the proceeds of aproperty sale into his investment portfolio, ignoring Church’sadvice to repay the mortgage on the apartment.
“I am not satisfied Mr Armitage would have followed competentadvice to spread his fixed interest investments into other types ofinstruments, and to opt for investing in less risky investments,”he said.
“Mr Armitage maintained an appetite for finance companyinvestments, even after he had experienced the loss of hisinvestment in Bridgecorp, and the general market commentary onfinance companies was more acutely focused on the risk of defaultthan it had been,” he said.
“I consider the preferable approach is to acknowledge that whatMr Armitage was deprived of here was the loss of the chance for himand the trust to make prudent fixed interest investments,” hesaid.
The judge decided Church was liable for three-quarters of thefinance company losses, and that was diluted by the likelihoodArmitage would have ignored better advice.
“I consider that there was no higher than a 40% chance that hewould have followed competent advice which would have resulted inless risky fixed interest investments that did not cause a capitalloss,” he said.
Church was ordered to pay nearly $60,000 to compensate Armitageand his family trust’s loss on finance company investments, andsome $8,500 plus interest on losses in an ING fund.
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