By Jean-Paul Rudd
Thousands of South Africans trust financial advisers to professionally manage their money and their future. Unfortunately, many of these investors lose their money, but it is not always due to professional negligence on the part of financial advisers.
Investors should clearly distinguish between losses resulting from market risks or other risks and losses resulting from professional negligence.
A key consideration for financial advisers is the level of risk their clients are willing to take into account when making investment decisions. There are tradeoffs to be made between the level of risk and the return one receives and it is important that this is communicated to you in such a way that you understand and accept the implications of the decisions made.
Risk means the possibility of a loss in the investment, not an actual loss, which is a deviation from your expected return.
There are different types of risks:
• Systematic or market risk is the risk affecting all stocks, usually arising from national or global economic conditions.
• Unsystematic risk is usually an event risk affecting a single action, such as a change of management, damage to reputation or fraud.
• Interest rate risk this is where a change in interest rate affects value. Bond prices and their yields are inversely related. So, if the interest rate rises, the price of the bond falls or falls at a discount, and if the interest rate falls, the price of the bond rises or is considered to have a premium.
• Inflation risk results from inflation affecting the prices, value and purchasing power of money. For example, if you buy a bond with an interest rate of 3%, that would be the nominal return on your investment. However, if the inflation rate is 2%, your purchasing power only really increases by 1%.
• Commercial or financial risk is the risk of deteriorating business conditions due to consumer demand, competition or industry disruption due to, for example, new business models.
• Political or social risk is a government policy affecting investments, or a complete political or security upheaval such as war or revolution. Investors in Egypt would have faced this risk in 2012/2013.
• Risk of change results from changes in the exchange rate against currencies that adversely affect the value of the investment. For example, suppose a US-based investor buys German stock for $ 100. By holding this title, the euro exchange rate goes from 1.5 to 1.3 euros per dollar. If the investor sells the stock for 100 euros, he will realize a loss on converting profits from euros to dollars.
• Credit risk It is when the credit given to a borrower or to a bank can be totally or partially lost.
• Concentration risk occurs when investment or business is stuck in a region or industry where the decline of the region or industry will affect value. For example, the price of airline stocks can be influenced by the cost of oil.
A financial advisor has a legal duty to exercise reasonable skill and diligence, and his liability may arise from a breach of duty of care or a breach of contract.
Most clients of financial advisers have little knowledge of financial and investment related issues and rely heavily on their financial advisor.
In order to establish liability for the professional negligence of a financial advisor, it is necessary to show that you actually relied on the advice given. Where there is advice but you have not relied on that advice in making an investment decision, no liability is incurred if a loss results from the investment.
A financial advisor presents himself as an expert or a specialist. In cases of allegations of professional negligence where the suitability and competence of the adviser is in doubt, it is necessary to show that the financial adviser does not have the level of skill and care ordinarily exercised by a professional adviser reasonably. competent.
Conduct of financial advisers that may constitute professional negligence includes:
• Failure to assess your needs and financial situation;
• Failure to establish if you can afford the investment;
• Inform you that you are investing in products that are unsuitable for your needs; and
• Do not warn you of the risks of the proposed investments.
Investors can claim damages in court or apply to the office of the “FAIS Ombud” (ombudsman for financial service providers), which can award compensation for financial loss or damage suffered within the limit of its 800 jurisdiction. 000 A. The choice of which forum to use depends entirely on the facts of each case.
The right investments can help people reach their financial goals and create long-term stability for themselves and their families. Yet, there is always some risk when people invest their money. The market fluctuates and high returns on investments cannot be guaranteed.
But not all losses are normal or are just the risk of doing business. Unfortunately, sometimes losses can be the result of professional negligence on the part of a financial advisor. If the cause of your loss is not clear, it is advisable to seek legal advice promptly.
Jean-Paul Rudd is a partner at the law firm Adams and Adams.
This article appears in the October 2021 edition of our free monthly digital magazine IOL MONEY. To access the magazine, go to issuu site.