In a landmark case not so long ago in Hong Kong a lady took
a firm of financial advisers to court after she had lost over
two thirds of her quite substantial life savings as a result
of placing an investment with the firm. It transpired that
she was a very inexperienced investor who expressed a wish
to invest conservatively in order to protect her capital.
The person she dealt with however placed her in a high risk
fund and without her knowledge or understanding arranged leverage,
or borrowing, to increase the amount invested – and
of course the level of commission it would have generated
for him. Unfortunately the fund fell heavily so the lady not
only incurred a loss on the fund but also had to repay the
capital and interest on the loan. She won her case, the firm
was fined and had to pay damages to the extent that it was
forced out of business.
Would it have been different had she lived in Bali?
Almost certainly yes, since such cases would probably face
great difficulties in a local court in the absence of the
type of regulatory framework that exists in Hong Kong and
other well-established jurisdictions. Expats in Bali should
be aware that they do not enjoy the kind of legal protection
that they would expect in their home countries or highly regulated
regimes such as Hong Kong or Singapore. Whether the transaction
involves financial investments, property or business deals
a much higher level of care is advisable. Nevertheless the
case referred to above was a wakeup call for the financial
services industry. As a result the leading firms are introducing
much stricter controls and companies that cannot meet the
higher compliance standards are falling by the wayside. The
cost for the industry is substantial but at the end of the
day the consumer should get a better deal and better service.
Is it always the adviser’s fault when people lose money?
It should not be if the adviser has fully explained the risks
involved in investing. The fact is, if you are not happy to
see your money languish and lose its purchasing power in a
bank account and want a significantly higher return you have
to accept the possibility that you may also lose money. In
the case of stock markets you are virtually certain to have
losing years although in the long term the markets have always
proved very profitable. However, when markets fall, the adviser
will often be blamed. Strangely, when people buy property
and the property market subsequently falls they do not blame
the real estate agent who sold it! But undoubtedly our industry
has a history of raising people’s expectations, no surprise
perhaps after all the boom years. Today we are being encouraged
to give people realistic expectations. Investing in a wide
range of assets is still a key way to build up long term wealth,
but anyone expecting to get rich overnight will be sorely
disappointed. When someone comes along and offers a product
with an exceptionally high return, you must also be prepared
to take an exceptionally heavy loss. You may even lose all
your money. A case in point recently was Mutual Benefits.
This company sold traded life policies and is now in receivership
with allegations of fraud. Who was to blame? It appears everyone
from patients who obtained life cover without fully declaring
their conditions, doctors who certified the patients had very
little time to live (apparently many had AIDS and are now
surviving many years), to the financial services industry
for selling such a product and investors themselves for seeking
a quick profit on the basis of the early death of the policyholders!
Other high profile cases
The past few years have seen a number of scandals that have
rocked the financial world. One of the first was the fall
of Barings Bank, brought down by a single rogue trader, Nick
Leeson. But was he the only one to blame? If Barings had proper
controls in place he would not have been able to put the whole
of the bank’s wealth at risk. Those with deposits in
the bank stood to lose all their money (except in jurisdictions
with depositor protection laws) but they were fortunately
saved as the bankrupt bank was taken over by ING. Then there
was the case of Enron, a massive conglomerate brought down
by fraud. The big losers there were the shareholders, employees
and pensioners who lost virtually everything. At fault no
doubt were the perpetrators of the fraud. The lesson for investors
generally is not to put all your money into one company’s
shares, no matter how profitable they appear to be. For employees
of the company whose pensions consisted of company shares
all is lost but others should take heed; you cannot rely on
retirement income from a single source.
So who is to blame when things go wrong?
As you can see from the above, the blame can be laid at many
doors. The financial industry can take its share but it is
undergoing considerable and welcome reforms to raise its standards.
At the end of the day however, the individual investor must
take a degree of responsibility for his or her decisions.
It may mean spending more time to learn more about financial
matters. If property or private businesses are involved then
much homework should be done before making any financial commitment.
Don’t let fear deter you, but be prepared and proceed
with caution!
Colin Bloodworth is a senior adviser with Financial Partners
International. The views expressed are his own. No investment
decisions should be taken without proper advice. If you have
any questions you may contact the writer at 021 520 8099 or
colin.bloodworth@financial-partners.biz
