Can I sue a broker for poor management of funds?

You would need to be able to prove they had breached their fiduciary duties.

I have a retirement policy and a savings account with a large brokerage service (managed through a broker). The recent uncertainty on the stock market has created havoc with both. To add insult to injury the brokerage continues to levy huge service and bonus fees against the investment.

As an amateur forex trader, I know you place stop losses in choppy markets. Why is this broker so negligent? Can I sue for poor management?

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It depends. It depends on the definition of ‘poor management of funds’. It also depends on how the relationship is between the broker and the client, and the circumstances surrounding the alleged mismanagement.

To be able to sue the broker for poor management an investor would have to prove breach of fiduciary duties according to the Investment Adviser’s Code of Conduct and Investment Advisers Act of 1940. One of the provisions states that “an authorised financial service provider must at all times render financial services honestly, fairly, with due skill, care, diligence and in the interests of clients and the integrity of the financial services industry”.

Examples of financial advisors’ conduct that may amount to professional negligence include:

  1. Failure to assess the client’s needs and financial situations;
  2. Failure to establish whether the client can afford the investment;
  3. Advising investment in products unsuited to the needs of the client; or
  4. Failure to warn of the risks of the proposed investments.

A complaint brought against a financial advisor can be resolved by the Financial Advisory and Intermediary Services Act (Fais) Ombudsman. The ombud can only award “fair compensation for the financial prejudice or damage suffered” up to its jurisdictional limit of R800 000. Any complaint exceeding this limit needs to be heard within a high court.

To successfully sue your advisor, you would have to prove that you suffered the loss as a consequence of following your advisor’s negligent advice.

Two recent cases tackle this issue.

Case 1: R2.5 million claim (successful)

A widow, still reeling from her husband’s death and unversed in financial products, invested R2 million in Sharemax on the advice of her trusted financial advisor, an authorised financial services provider (FSP).

She made it clear that she needed a safe, low-risk investment “that she could not risk losing even two cents as the money was earmarked for her son’s upbringing”.

The advisor did not explain any other investment products and emphasised that “it was so good that he did not even want to introduce other financial instruments and/or investments to her”.

Sharemax of course collapsed, and the investor duly sued the advisor for her R2 million plus interest – a total of almost R2.5 million by the time this case found its way through a high court and an appeal to the Supreme Court of Appeal (SCA).

The advisor was found liable based on having been negligent “and even dishonest” and to have “failed to exercise the degree of skill, care and diligence which one is entitled to expect from an FSP”.

Case 2: R11 million claim (failed)

A UK couple temporarily in South Africa sought a local financial advisor’s advice on how best to invest some “spare cash”. They ended up putting £565 000 and R700 000 (approximately R11 million in total) into investment products offered by UK-based investment companies. The companies failed and the investments were rendered worthless.

The investors successfully sued the advisor in a high court for R11 million in damages, but on appeal to the SCA, their claim was dismissed. The investors, said the court, had failed on the evidence to “identify what a reasonably skilled financial service would know about products in the marketplace; what due diligence they would have done before making a presentation to a prospective client and what sources of information they would have consulted”.

They had failed to prove that any negligence on the advisor’s part in “making a presentation without adequate knowledge of the proposed investments, resulted in advice materially different from that which a reasonably competent advisor would have given”.

Result – the investors lost their R11 million and face a (doubtless substantial) legal bill.

Disclaimer: Global & Local is a registered Financial Services Provider (FSP) and we must adhere to the regulatory codes of conduct. We are not legal experts therefore our advice does not constitute legal advice. Please contact your legal advisor for legal advice.

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Are there any fund managers that don’t charge fees if they loose you money?

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