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FOS Basis Capital Determination


FOS Basis Capital Determination

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									                                                                                  Client suffers loss as value of fund plummets
                                                                                  Client argues that Adviser shouldn't have
                    Facts       Adviser recommended to invest in Basis            recommended the investment
                                Yield Fund in 2005 and 2006
                                                                                  Client sought $103k compensation

                                                                         advisers should have explained the
                                                                         research reports to the client
                                             provided to the client
                    research reports
                                              were inadequate in                   that the risk of the funds had changed
                                              communicating to the client
                                                                                                                                                            This diagram is subject to a Creative
                                                                                   of the client from                                                                         Commons Licence -
                                                                                   Balanced to                                            To attribute the
                                                                                   Moderately                 Explained, but                                                author, please link to
                    SOA                                                            Aggressive                 not clear enough.
                                                                                                                                         This diagram
                               was ambiguous as to the changed risk level                                                                                does not constitute legal advice, and is
                                                                                                                                                  current as at October 2009. This is a summary
                                                                                                                                                                 of the main elements of the FOS
                                     Didn't communicate research rating                                                                           Determination. It does not purport to cover all
                    Licensee         changes to Advisers                                                                                                                         of the elements.

                                                                      The client was the superannuation fund, which had different needs
                                                                      to the client in his capacity as a director/member of the SMSF

                                                              Advice didn't meet client's needs (didn't address the SMSF needs)
                                                              Entered into a services              Adviser claimed that day-to-day monitoring would be provided
                                                              agreement with the client            Day-to-day monitoring requires a daily review mechanism of
                                                                                                   all products that the client has invested in
                                  Breached Duty of Care
                                                              Mere research reports were inadequate communication
                                                              It was a breach of duty to recommend a change from balanced
                                                              to moderately aggressive, when the markets had been buoyant
                                                              for 2 years already
                                                              Foreseeability, Causation and Quantum
                                                              were all established

                                                                                  deviated from the recommendations of the
                                                                                  original risk profile but didn't explain why
                                                                                  client's risk was assessed as an individual - not as a trustee (trustee's investment
                                                                                  strategy must take into account the objectives and obligations of the fund - SIS Act)
                                                          Didn't properly
FOS Basis Capital                                         do risk profiling                                                        Later change to "moderately aggressive"
                                                                                                                                   didn't have any attached file notes to support
 Determination                                                                                                                     discussion (other than sentence in SOAA)
                                                                                  client was "balanced" according to
                                                                                  initial risk profile                             No further risk profile questionnaire
                                                                                                                                   completed at the time

                                                                                          Product managers discretions and their
                                                                                          potential outcomes on the fund                         Ability to gear to 300%

                                                                                                                                              It yielded 20% in 2006 - far above
                                                                                                                                              expected defensive asset return, (e.g.
                                                                                                                                              bank bill rate + 2.5%)
                    Adviser                               Didn't understand the           Product was incorrectly treated as a
                                   Breached                                                                                                   adviser should have explained to the
                                                          product, namely:                defensive asset                                     client that Fixed Interest investments can
                                   Corporations Act
                                   obligations                                                                                                lose all of their value if investment is
                                                                                          Asset allocation was not tied to the
                                                                                          client's risk profile report

                                                                                  To see what actual gearing level was
                                                          investigate the                                                                 "adviser must go beyond this to
                                                          product                                                                         demonstrate care and a detailed
                                                                                  relying on the research alone does not                  understanding of the product before he
                                                                                  satisfy s945A obligations.                              can assume it suitable"

                                                                                                                did not explain the departure from the client's risk profile
                                                          Didn't act efficiently, honestly and fairly           not enough to state in SOA "if the above shown intentions are
                                                                                                                not consistent with your current position, please advice us, etc"

                                                                                                                                               created expectations about the level of
                                                                                                                                               service that went beyond just reviewing
                                                                                                              described the adviser            the portfolio initially and quarterly
                                                                                                              and staff as skilled             ongoing.
                                                                          The services agreement              and superior                     when this expectation is set, the adviser
                                  Breached contractual obligations                                                                             must complete daily reviews

                                                                          normal obligations of professional
                                                                          conduct and duty of care prevail.

                                                                        Plus 5% interest from the approximate
                                                                        date the issues with the fund arose
                                  Liable for $103k compensation         $103k = investment less returns earned

                                                                                                    So was not liable for any part of the loss
                                                                                                    as "contributory negligence"
                    Client      Was not told about the change in risk of the investments

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