News
Blue Chip verdict highlights age-old problem
Tuesday 22nd of September 2009
Widow Beryl Breeze is unlikely to see any of the $259,000 in costs and damages awarded by Justice Simon France after VPFS was put into liquidation and had not operated for nearly two years. Institute of Finance Advisers President Lyn McMorran said the case highlights a continuing problem for investors across all sectors.
"A client can go through the whole process and still come away with nothing," said McMorran. "It's not just limited to financial advisers, it's a problem for anybody with an investment."
Government regulation introducing dispute resolution services are unlikely to avoid these kinds of problems, as "people have assets in different entities." Ultimately, it is up to individual advisers who have to sign up to, and pay to be a part of, the services, McMorran said.
"It's hard to see how clients are going to avoid these issues with or without regulation," she said.
McMorran said it would be too difficult and costly to force indemnity insurance coverage on advisers, and policy makers need to take a balanced approach.
VPFS director Ven Plummer chose not to defend the claim after his indemnity insurer QBE had withdrawn his cover before the case went to trial, and had stopped dealing with Blue Chip five months before its collapse in February last year.
Justice France ruled VPFS was negligent in its dealings with Breeze due to her age and the amount of risk involved in the investment.
Comments (5)
Clayton Coplestone
In my opinion this is the wrong perspective for this article to review this case.
Whilst the fact that the cupboard was bare by time the complainant had won her case is important, the critical issue here is that the Financial Planner was found to be negligent - probably doing what they have has always been doing.
This case is an important milestone for those financial advisers who don't know what they don't know, or who have been lead to believe that the "old way is the only way".
Unfortunately when an industry surrounds itself with ignorance or greed, then all those within the industry become exposed to its failings.
My advice to the advisory industry following the outcome of VPFS v Breeze: either find a better mousetrap or start protecting your assets.
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15 years ago
Michael Donovan
Well, does this case against VPFS now possibly set a precedent, so that the door may open to others to use good old 'case history'?
Let's sit quietly on our own (not in a distracting cafe) and take ourselves back just a few years, say only five would do.
Most Kiwis would have to admit (in this 'flashback in time)that when things are going well, we have a tendency to accept the 'going-well' investments to be a perceived lower risk.
Most of us 'mature' one's in the 'industry' can recall those 'magic' days just over two decades ago, where local sharemarket investors virtually tossed their money over their shoulders into the NZ sharemarket almost without the need to actually even select which shares were bought, and wowzer....up went your investment...! Just like magic it was, remember? Life was just a big party, and Financial Planning had only just been born, and I began as one of the first in NZ, so i saw this phenomenon taking hold of NZ investors.
So, let's look at a point in question.
Why do people invest into 'anything'?
Of course, they want to build their capital against the on-going ravages of what is termed 'inflation.'
ie; over time we experience a nasty result in that our money buys less.
The word 'inflation' is actually wrong because the event does not actually exist as 'they' try to lead most people to believe.
Let's relate that to the Blue Chip 'thingy' and therefore to the advice given by VPFS and ultimate acceptance of it by the 'poor' (now) widow.
If 'inflation' as such existed, then all we would need to accept is that if we bought a house for say $300,000, then we could expect it to double within approximately each decade, so then we could sell it for $600,000 and pop out and buy two houses in the street....!
Of course, we all know this is a whole lot of 'poppycock & balderdash.'
The truth is, that it is not 'inflation' at work, but 'DEVALUATION' of our money.
As i have reminded readers before, Rob Muldoon went down in history for DEVALUING our NZ money by 1%pa, or what 'they' would refer to as 12% pa 'inflation'.....!
So, if we can now realise and accept what happens with the purchasing-power of our money ( ie;losing it's buying -power in varying degrees every year), then enter the financial planner.
However, because most financial planners are also brainwashed into the same accepting mode of what they are told, they tend to accept 'inflation' as being the beast to try and beat, and therefore the financial planners generally tend to try and help their investor clients by applying the 'normal' so-called solutions that their investors tend to be familiar with.
eg; if I suggest that the widow-client is a non-sophisticated investor, she would have typically lived to this point with thefollowing scenario...
They would have bought a farm under the rehab scheme for 5,000 (quid)lived a nice life, and worked steady and hard and sold the property for over a million dollars and then retired and visited a financial planner. They would not have been much into shares (because they heard that someone had lost some money there once...when the market 'crashed'). Unfortunately, husband had passed on, so she accepted the suggestion of making money from property, because that is how they had done it over the years, so, being alone now, she opted for the familiar.
She was not alone with the choice of Blue Chip, and the biggest mistake she made (with the help of her adviser) was in the choice of Blue Chip, who (with the luxury of hindsight)we all now can see that the head of the company was actually 'milking the cow' to his own advantage, sort of like he replaced them as the 'farmer..!'
What the widow did was just normal, with a wee bit of un-sophisticated choice and a bit of greed thrown in no doubt, with the carrot hung up by the adviser and Blue Chip.
What the adviser did wrong, was that he fell for the old trap of not reading the TRENDS.
He thought that things like this just kept going up.....just like the Blue Chip people told him at the seminars.
I know what they told people because I went to one in the earlier times when they were called ARPT (Auckland Residential Property Trust).
So, if only the advisers could learn to do the relatively easy one (pick TRENDS...not markets) then both parties would be better off...!
eg; would you accept that the choice (by TREND) to invest into residential property be considered safer now, than it was say just 5 years ago?
This is not to suggest that a house investment is going to necessarily rise steeply like in the past, because we know should all remember that it is not 'inflation' at work, but the DEVALUATION of our money...!
Really quite simple when you are given the facts to help you make up your own mind isn't it?
Now, all the 'clever' people (including the short-of-work lawyers)will condemn 'investments' like Blue Chip with all the perky luxury of hindsight, and they will all come out now with such knowledgeable statements as 'I told you so.'
As you sit with the last bit of your cuppa, just be honest with yourself, as you drift back to those 'heady' days when the things that were in vogue at the time, were the very things that virtually most invested into...!
Learning how to pick TRENDS has proven to help diminish or at least reduce losses.
Losses are harder to accept than trying to work out where to spend big gains, and when you are older, the TREND-picking needs to be taken into consideration even more accurately, because you have less time to recoup any losses.
The TREND of DEVALUATION of our money is a big one to remember too.
When my Money Managers franchise was sold nearly a decade ago, I had already picked a TREND for many of my clients (including my parents and myself) and withdrew from the now ill-fated First Step funds.
It has been suggested that the head of that company (Money Managers)has now been exposed as having some rather close similarities to the head of Blue Chip (as has been quite public via various media with both)in that they both appear to have somehow enjoyed (internally in their business) 'milking the cow' and now there is a campaign to tell the world how the advisers allowed it to happen.
However, in the example of both companies, it appears most likely that only the top management would have known what was going on, and only a small handfull of the advisers would have any such knowledge.
I summarise by suggesting that ALL take a genuine look at why we do things (related to investing)and if we quietly look back and be honest with ourselves, maybe we can just say that we didn't apply the best TREND-picking, and in fact we succumbed to the age-old reason of a wee bit of greed taking over, fueled in part by the herd mentality, that it must be ok if we are told everyone else is doing it.
No-one can get it right all the time.
Equally however, diversification over a spread of houses (Blue Chip) or a spread of mortgage loans (First Step) is definitely not going to produce risk-free investments as diversification is supposed to do, and especially if your money is being milked by the relative heirarchy..!
Anyway, there now appears to be a first precedent to what we may see as a future raft of claims.
A point to remember however, is to ask why you went into the 'investment' in the first place, and stand up if you did not do a good job of TREND picking, and only lay part of the blame (but some) on your adviser.
The courts will no doubt be able to learn how to deal with the other issues of why people lost money, and it can only be hoped that they keep it all in perspective, and that they do get those who need to be got.
The investors now have the perk of another big 'downturn' to help remind themselves on what and what not to do, AND hopefully the investors AND their advisers can maybe see some merits in becoming a better TREND-picker as a result.
I say, "watch this space" because time heals all, and in our liftimes, we will no doubt see more investors being 'caught out' as the memories of 'bad' times diminish...?
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15 years ago
Clayton Coplestone
Apologies Michael - I had a few attempts at reading your comments, but got bored.
Besides - this is not the point that is being raised. The point is that the complainant successfully demonstrated that the financial adviser (who is probably not a bad one) provided sub-standard advice. To my knowledge, there was no mention of market trends etc in the Court's findings.
I bet if a survey was conducted amongst NZ's financial advisers (both young and old), many would struggle to identify what exactly VPFS did wrong (as noted by the Courts)- and would most likely have limited resources to ensure that they don't fall into the same trap.
Complacency & rhetoric around these issues will be the forces that see many more financial advisers going down the same path as VPFS.
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15 years ago
Michael Donovan
No 'apologies' necessary "Independent Observer", you would have thought that I would have got bored writing it when I look back to how long it was huh?
My reference to TRENDS was not to suggest that the court made reference to such a thing, and I would not know anyway, because I was merely responding with views related to the article itself, not court records.
I disagree with your analogy that a survey of financial advisers would reveal that most would struggle to identify what VPFS did wrong.....unless they simply got too bored to read what I had written??
Further, there would appear to be a requirement for only very limited amounts of required resources, because the luxury of hindsight should provide a very clear answer as to where VPFS went wrong...or,... what part of my prose is not understood?
Again, I clearly see it as a form of complacency by an adviser to not have researched the BC company fully enough,(although it appears to be coming out in the wash that the various ones at the top have an ability to hide what they do in the engine-room) and who simply got caught up in the hype of the "flavour of the period" as they say.
Investing all of the available equity of one asset into some more of the same asset (class), and at the clearly warned height of the relevant bubble to boot, and for an investor who appears to be at a later stage of life, as I said , and with clearly not enough time to recoup losses.
Maybe summed up as a bit of greed from the side of the investor, stirred in with an adviser without enough practical knowledge on how to best assess trends (and their relevant heights and lows)?
Did you have to be an 'agent' of Blue Chip in order to be able to promote their products/services?
First Step was only able to be promoted by Money Managers agents.
Michael
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15 years ago
Michael Donovan
I wrote a response yesterday but it has not lodged?
Pity that it bored you Independent Observer? Quite long but lots to say, PLUS, in re-reading the longish story (which is the shortened version)the content appeared relevant to the issues, & I am one who is happy to attach my name.
I have not read the court findings, however, there is often a distinct difference between justice and the law.eg David Bain is not guilty in law, but is he innocent in justice? (& i am not taking a stance on either, just an example).
It would be relevant and interesting to know whether "sub-standard advice" was the wording of the outcome verdict.
The point there is that the adviser may have simply offered what was considered to be a viable investment in the heady days of the time, and as a typical "buy-at-the-top" pattern which is what lots of investors do anyway? It seems to offer some comfort to do what the 'herd' does?
Alongside that factor of course, would be the probability that the investor applied the normal greed that many apply anyway, and if the 'boom' had continued, I suggest there would have been no likelihood of a different type of complaint, such as the big tax bill applied to the assumed big profits..!
So yes, I do tend to agree in part to your suggestion that a survey of advisers may only reveal a blank stare when asked "what did VPFS do wrong?"
However, unless we have ALL the facts about this case (& such 'facts' will naturally only be totally known by the two parties involved)no-one will know whether there was legitimate guilt applicable more to the adviser....or the investor?
I suggest a bit applies to both.
There are other cases pending at this very time regarding advisers having advised clients into investments such as ING, or First Step (Money Managers) or the number of NZ Finance companies as a few examples of where investors have lost literally MILLIONS of dollars.
It remains to be seen as to whether this case against VPFS is going to be what many have suggested.....a precedent to many more?
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15 years ago
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