Bad advice? Yes ? you can sue!

PORTFOLIO POINT: Investors unhappy with poor financial advice are chalking up some wins in the courts.

Suing your financial planner on the basis of bad advice has long been considered a grey area by the justice system. It’s hard to prove, the amounts lost are always heavily disputed and investors can easily be dissuaded by thinking about the legal costs involved.

But investors are starting to score some runs against unscrupulous planners in the courts, and lawyers are optimistic that more will follow.

Earlier this week, poor financial planning suffered another embarrassing payout when the investment fund connected with a technology company, Ceramic Fuel Cells, reached a $7 million settlement with Oakvale Capital after pursuing the company following losses on its investments.

The win against Oakvale Capital, though relating to a company rather than an individual, will no doubt encourage an unprecedented string of legal actions that have recently hit the court.

Among the most interesting of the new claims are:

• The Queensland-based celebrity hairdresser Steve “Stefan” Ackerie, who is suing global investment bank UBS for $4 million, alleging that his adviser turned over $38 million of stock in 15 months losing $3.7 million.

In the statement of claim lodged in the Queensland Supreme Court, Ackerie says the lawsuit is not about the lost money, but the fact that he was not properly informed about which companies he was investing in.

• A 60-year-old Melbourne woman, who claims she was advised to buy $2.5 million worth of CDOs by an adviser from Commonwealth Bank Financial Planning, which are now worth close to nothing.

She is alleging that her planner’s advice to take up the CDOs was misleading, as he informed her they were as secure as bank bills, when CDOs are a high-risk product.

• A group of investors and financial advisers affected by the Trio Capital scandal, where $123 million remains “missing”, is preparing a class action against several parties including directors, lawyers and advisers associated with the Albury-Wodonga based company.

The action is being run by MacPherson Kelley Lawyers.

• A $16 million class action against ratings agency Standard & Poor’s lodged by 12 local councils who allege being misled by the AAA rating of a complex security, known as Rembrandt and sold by ABN-Amro.

The councils claim there were flaws in S&P’s rating method and the product – which is now worthless – did not exhibit the characteristics of an AAA-rated security.

So do these investors – individual, company or council – have any hope of getting their money back?

Mark Walter, a lawyer with Slater & Gordon, says: “There is an assumption out there among investors that nothing can be done and it was their fault for making the bad investment decision in the first place. And that is simply not true.”

He says there a growing number of investors are prepared to take legal action against their former advisers. More importantly, some of them are winning.

He refers to the landmark Ali v Hartley Poynton case from 2002 as a precedent, where the plaintiff was awarded $1 million in damages from the stockbroking firm over the loss of $300,000 invested between 1997 and 1999.

Often likened to a David and Goliath battle, Rahmat Ali, a Perth taxi driver, mounted a case against the now-defunct stockbroking company Hartley Poynton claiming the broker had promised low-risk products with a 15–20% return per month. The judge who heard the case ruled these representations were “false, misleading and recklessly made”.

This week’s Ceramic Fuels Cells victory differs from the earlier win by Rahmat Ali in that it was a company rather than an individual that won funds back in the courts, however the principle is broadly the same.

On August 17 the technology company secured a key victory against poor financial advice when it won almost $7 million in a settlement against Oakvale Capital, a Perth-based advisory firm which had steered the company’s investment funds into CDOs and other risky debt instruments.

In reviewing the Hartley Poynton case, Mark Walter says: “The prospects of taking legal action against a negligent planner are generally good but, of course it has to be assessed on a case-by-case basis '¦ there is always something that can be done.”

He points to the Financial Ombudsman Service, which handles dispute resolution between clients and their advisers for claims under $150,000, as another viable alternative outside the courts system.

Walter believes the GFC was a real watershed moment for the financial planning industry.

One of the silver linings from the market collapse was that shoddy financial planning practices were exposed, forcing the industry to confront endemic problems. “During the boom there was an influx of advisers, lured by the promise of easy money and hidden commissions,” Walter says. “But now that allure has disappeared.”

The boom time saw a relaxation of industry standards, which allowed some planners to eke out half-decent returns for their clients while simultaneously lining their own pockets by recommending dubious investments that paid big commissions.

With the writing on the wall, the industry now claims to be working towards more stringent education standards for planners. In fact, it has been reported in recent weeks that the attendance levels at financial planning courses linked with the peak body, the Financial Planners Association (FPA), are up by 20% on last year, while enrolments for audit courses have almost doubled.

Maurice Blackburn financial services lawyer Briohny Coglin welcomes the new concerns about education standards in financial planning with open arms.

“People have said the relationship between a client and their financial planner is a lot like the doctor/patient relationship; except, unlike your GP, you can’t be certain the person giving you financial advice has undertaken the same level of training as a doctor,” she says.

Coglin points to the fact that the very minimum qualification to give financial advice, known as RG 146, can be attained in as little as eight days of training. This “bare minimum” education standard has caused some headaches for the financial planning industry and may have indirectly led to questionable investment advice.

But she says the “vast majority” of cases against financial planners have centred on the recommendation of margin loans for unsuitable clients.

“Certainly before the GFC, financial planners encouraged many clients to gear-up against their investment portfolio, but it was not always the best strategy. It is essentially a high-risk strategy. Many investors are unaware that when markets retreat; margin loans will magnify your losses.

“A lot of our clients don’t even know what a margin call is. This is showing that advisers are not fulfilling their obligation to keep their clients fully informed,” she says.

“I had a woman come to me who was a single mother with three kids under six years old. She was only working three days a week and earning $20 per hour '¦ she was convinced by her adviser to take out a margin loan of $800,000, so go figure.”

Walter, too, has seen some real horror stories. “There have been instances where advisers have purported to be investing clients’ funds in the money market when in fact they’ve moved the money to property investments in Vanuatu, which then flopped. And I’m talking millions of dollars.”

He is currently representing about 100 clients who invested the failed Basis Yield hedge fund on the advice of financial advisers.

The Basis Yield fund collapsed in 2007, affecting more than 700 investors with a combined loss of capital estimated to exceed $300 million, and was marketed as a low-risk product by financial planners. “It was an inappropriate recommendation,” Walter says.

“Most advisers took the fact that this product [Basis] was on a recommended product list and was labelled a low-risk investment by all the ratings agencies, but failed to read the PDS to realise that it was essentially a risky product that invested in exotic CFDs and derivatives.”

In most cases, the Basis product was taken up by conservative investors, many of whom were already in retirement, and were unaware what they were investing in.

Walter says investors should not have to “bear the brunt” of such investment decisions where planners failed to do adequate research into Basis before recommending it. And so far the results are encouraging, although he explains that the majority of settlements never make it into the public arena and are bound by terms of confidentiality.

Some claims have already been resolved in court, while others have opted to settle through mediation.

Coglin, too, has witnessed a rise in legal action against financial planners and the outlook for her clients is looking bright. “The vast majority are winning their cases. Put it this way: I haven’t lost one case yet.”

Do you want to sue your planner? Be sure to check the checklist

For some investors, the grounds for legal action against a financial planner can be uncertain. A financial services lawyer with Maurice Blackburn, Briohny Coglin, sets out a compliance checklist that financial planners must as when providing advice to clients.

• Did you undergo a detailed Risk Profile (aka Fact Finder or Financial Needs Analysis) initially and again in the event that your circumstances changed?
• Did you complete your own-risk profile questionnaire, without being influenced by your adviser?
• Did you receive a Financial Services Guide?
• Did you receive a Statement of Advice (and, if your circumstances changed, a Statement of Additional Advice)?
• Were the risks explained to you in such a way that you fully understood the strategy and the risks involved?
• Did your portfolio contain a spread across different asset classes?
• Did your portfolio contain a spread across different sectors and industries?
• Did you have the financial means to make repayments on loans you were advised to take out for investing?

If the answer to any of the above questions is “no” and you have suffered a financial loss, you may have basis for legal action.