Financial advice firm to pay $133k for lost house deposit

A financial advice firm that advised a woman thinking about buying a house to invest her money in a growth fund has been told to pay $133,000 to cover money lost.

The woman complained about her experience to Financial Services Complaints (FSCL), an external disputes resolution service.

She had received $500,000 from her mother in 2021 to help buy a first home, and went to a financial advice firm to look after it in the meantime.

An adviser told her to put her money in a growth fund, which she did. Growth funds have more investments in things like shares, which tend to deliver better returns over the long-term but can be volatile.

The next month, she entered an agreement to buy a townhouse due to be completed in October 2022.

By March last year, markets were dropping and her fund balance also slipped. She was worried about having her money in the fund but was advised there would be a turnaround by the time she wanted to withdraw the money.

That did not happen and by the time she cashed out her investments she had lost $160,000. She complained but was not able to come to a resolution with the financial advice firm and went to FSCL.

She said the advisers should not have told her to put her money in such a high-risk investment knowing she wanted to buy a house soon. She said a term deposit would have been better.

The firm said she told the first advisers she spoke to that she wanted to buy a house at some stage, but not that she was actively looking. She did not tell the adviser who dealt with her most closely, even though she had just decided to buy the house when she took her advice.

The firm said the adviser who guided her thought she was investing for retirement.

FSCL said there was insufficient handover between the advisers. But it said the adviser who guided her in her investment should have asked about her plans for a house because the client was about 30. It said a “prudent adviser” would have explored the idea that she might want to use the money for a house before focusing on retirement.

There was no written evidence that the firm had discussed the woman’s tolerance for risk or that a growth fund would usually need a minimum investment of five or seven years.

“We could see from the correspondence that [the adviser] knew about the house purchase before she reassured [the client] about a market ‘turnaround’. We were concerned about this. We didn’t think any adviser should be trying to forecast with such certainty how the markets might perform over the next six months, particularly during times of market volatility.”

FSCL said a fair outcome would be for the firm to cover 80% of the loss, or $128,000. It said the client had some responsibility because she had some prior, limited experience of growth funds and did not point out that the firm’s statement of advice did not include the house purchase.

It said the firm should also pay $5000 for inconvenience.

Both parties accepted this outcome.

Financial adviser Christine Hay, who was unconnected to the case, said these situations would be very uncommon.

“I struggle to see how the adviser could get two key things wrong, one being the timeframe for investment and the second being the goal of the client.

“Of course, clients’ goals do change over time, but that is a big mistake and I agree they should compensate the client accordingly. However, those goals and timeframes would have been in the statement of advice in writing and signed off by the client, so I am also surprised it wasn’t picked up by the client and corrected at that point.

“The adviser cannot control, predict or time the market and investors often overlook this aspect. However we should be able to match the goals and timeframe with the right balance of investments.

“In this case, I agree the client should take a small amount of responsibility, but the adviser should take the bulk of it as knowing your client is key to getting the advice right.”