In three more cases, financial advice ombud Noluntu Bam has ordered brokers who advised pensioners with limited means to invest in high-risk property syndications to compensate them for their losses. In all three cases, the ombud found the advisers had contravened the Financial Advisory and Intermediary Services Act by failing to determine the financial needs of the pensioners or to point out the risks.
CASE ONE
Pretoria broker Marthinus Ras recommended that IC, a recently bereaved widow from the Western Cape, invest R800 000 in Sharemax’s The Villa property syndication despite the fact that The Villa had no track record of producing rental income, a financial advice ombud ruling reveals.
IC invested in June 2009 and apparently received R92 000 in interest up until May 2010, but thereafter received no income and was unable to retrieve her capital.
In ordering Ras, a director of Prefecsure Lewens, to repay the widow her money, Noluntu Bam, the Ombud for Financial Services Providers, describes the investment in The Villa as one in risky, illiquid and unsecured shares. She says The Villa differed from the usual property syndication scenario, which involves the purchase of an existing building with existing rental income.
The Villa was devoid of meaningful assets and had no track record and no income, so returns that should have come from rental income ultimately came out of investors’ capital.
Bam says she would have expected any adviser who is required by the Financial Advisory and Intermediary Services (FAIS) Act to exercise due care and diligence, and to have questioned the viability of a scheme such as The Villa, given that commission of 10 percent of the share price was also being paid to those selling The Villa.
IC’s financial situation showed she could not take risks in what amounted to a venture capital investment, Bam says. Ras provided no record of advice and no record of other products that were considered as suitable for IC.
Ras did not respond to questions put to him by the ombud’s office, the ruling says, but correspondence supplied by Sharemax revealed that Ras gave IC a prospectus for The Villa and explained that she could earn interest of 11.5 percent a year.
According to the correspondence, Ras told IC that returns on guaranteed or interest-bearing investments were unlikely to beat inflation.
Bam says the FAIS Act’s code of conduct requires advisers to make disclosures to enable you to make an informed decision about a financial product. This requires the adviser to conduct a due diligence (thorough analysis) of the product and to convey the outcome of that to you, she says. Proper disclosure includes outlining the risks of the product, restrictions on early termination and whether the product is suitable for you.
Bam says it was meaningless giving IC the lengthy, highly technical prospectus. She needed someone to convey the essence of it to her in a simple and meaningful way.
The ombud says she found no evidence that any of the material issues were highlighted, specifically that IC was committing a large portion of her retirement funds to a high-risk investment. There was also no disclosure of fees or commissions or how to terminate the investment.
Financial advisers should determine your appetite for risk before recommending a financial product, but Bam found Ras completed a risk-profile questionnaire for IC only when she signed the forms to invest.
In light of all this, Bam found Ras responsible for IC’s loss.
CASE TWO
AM, a Nelspruit widow of limited means, invested R320 000 in three property syndication schemes with no track record in Kimberley and Pretoria, because her adviser assured her the investments were safe and that he himself had invested R1 million in the schemes.
Johan van Zyl, a representative of Propsec Investments, recommended the investments to AM – who depended on the income from her investments to fund her living expenses – despite the fact that they had no operating history and there was no established market for the sale of the units, financial advice ombud Noluntu Bam says in her ruling.
She says Van Zyl provided no evidence that he had done a risk profile and a financial needs analysis for AM, nor could he produce a record of the advice he had given her.
This is despite the fact that the code of conduct under the Financial Advisory and Intermediary Services (FAIS) Act requires advisers to obtain appropriate and available information from you regarding your financial situation, experience of financial products and your objectives, so you receive appropriate advice.
Bam says Propsec provided her office with a pre-printed form entitled “Client mandate and record of advice” which allegedly showed that AM had requested Propsec to advise her on the property syndication to fulfil a single investment need and that a full financial needs analysis was not required.
However, the ombud says there was no indication of any urgency on AM’s part to invest and no indication that she did not provide information she was requested to provide. The document Propsec asked AM to sign stating she had a single need “is clearly an attempt to evade a proper analysis as required by the FAIS Act”, the ombud says.
The client mandate form Propsec sent to the ombud’s office contains a warning in small print that the investment is not guaranteed, that unlisted shares are not readily marketable and that AM could lose the money she invested, Bam says.
But there is no indication that AM’s attention was drawn to what she was signing or that the documentation was explained to her so she could understand it, Bam says.
Van Zyl claimed six percent in commission for the three investments which was disclosed but not as a rand amount, as required by the code of conduct under the FAIS Act, the ombud says.
Bam ordered four key people at Propsec Investments – Van Zyl, Salmon Viljoen, Gerhardus Erasmus and Johan Jankowitz, all of Bloemfontein – to repay AM the R320 000 she had invested.
CASE THREE
Petrus Fourie, of Pretoria East, advised Germiston pensioner MS to invest in PropDotCom, part of the Blue Pointer Group, because she wanted a better return on her investment than a bank could provide.
MS, who had never invested before, wanted to invest the proceeds from the sale of her house in 2006, when she was 77 years old.
The proceeds of R400 000 represented 90 percent of MS’s total capital, and she wanted a risk-free, income-producing investment with the “highest monthly interest” rate, according to the ruling by financial advice ombud Noluntu Bam.
Fourie told the ombud that he showed MS an “investment income plan with insurers”, a money market-linked plan, and the prospectuses of property syndication schemes PropDotCom and Sharemax.
But, Bam says, Fourie’s record of advice indicated that he had advised her only about the property syndications, and MS told the ombud that Fourie informed her there were no risks to investing in PropDotCom.
Fourie says he explained the contents of the prospectuses to MS, who had more than a week to scrutinise them, after which she instructed him to invest R195 000 in PropDotCom.
Bam says nothing that Fourie produced “assists me to understand why an unregistered and high-risk scheme such as PropDotCom was recommended” to MS.
To say simply that MS’s income needs could not be met by the low returns paid by the banks did not justify the recommendation, she says.
Bam says she could not find any evidence that Fourie had explained to MS that she may not be able to sell her shares in PropDotCom, substantially increasing the risk.
She could also not find any evidence that Fourie had disclosed to MS that unlisted shares are not subject to the same degree of public scrutiny as listed shares, Bam says.
Fourie earned commission of five percent of the R195 000 that MS invested, but he failed to disclose this to MS, which was a violation of the code of conduct under the Financial Advisory and Intermediary Services Act, the ombud says.
Bam ordered Fourie to repay MS the R195 000 she had invested.
ADVISERS NOT LICENSED TO SELL UNLISTED SHARES
Two of the advisers ordered by the ombud to repay their pensioner clients for investing in property syndication schemes were not licensed to sell unlisted shares.
According to financial advice ombud Noluntu Bam’s ruling in the IC case, Marthinus Ras sold shares in The Villa to IC as a representative of Unlisted Securities of South Africa (USSA), which had a financial services provider (FSP) licence to sell unlisted shares.
But Ras signed the forms for the investment not as a representative of USSA but on behalf of Perfecsure Lewens, which is not licensed by the Financial Services Board to sell shares, Bam says.
USSA sent confirmation to Sharemax that advisers such as Ras were their representatives, but Sharemax entered agreements with every adviser and dealt directly with them, the ombud says.
“This is nothing short of the hiring out of a licence for a small monthly fee,” Bam says, as USSA did nothing more than allow its licence to be used.
In addition, the ombud says, Ras admitted to USSA that he had no experience in selling property syndications and unlisted shares. But days later, Bam says, Ras advised IC “to invest almost half of her investable funds into an investment he really knew nothing about”.
In the case of MS, Bam found that Petrus Fourie was not licensed to sell unlisted shares. Fourie argued that he sold the investment under the licence of Blue Pointer, but Bam says Blue Pointer was never licensed as an FSP and this information was available to Fourie.