What constitutes mis-selling of stock market investments to someone old and naive?

Mothman

I still think you are going to have a very hard job proving a case of mis-selling given that your friend is no longer around to fight her case and there is a degree of supersition on your part. You are obviously dissapointed in the performance of the investments and the level of fees that were being charged back then but as others have already pointed out that does not in itself constitue mis-seling. If she was short of income then I'm sure it will be questioned as to why she contniually tied up such a large amount of cash into 5yr fixed rate savings accounts where she couldn't access the money.

It is sad case and it does sound like your friend was financially niave and it's a real shame she did not seek your help much earlier, but I think it's going to be hard to prove there was actually any wrong doing on the IFA's part.

Thrugelmir

Dulce-ridentem said:

I have no paperwork (because of Covid I have only the will, since she lived in an area I cannot visit - and her house has now been cleared). 

On whose instructions was the house cleared. As executor of the estate you should have arranged for all the paperwork to be sent to you. Then reviewed it all prior to destruction. 

Alexland

I don't really see the problem here someone had need for financial help so engaged an IFA who put them into investments that look reasonably suitable with choices and charges that were prevalent at the time,

[Deleted User]

GeordieGeorge said:

ZingPowZing said:

When you say "no evidence" NeilCr, I have said upthread there will be no evidence of wrongdoing without resort to a Subject Access Request. 

The evidence of 2.2% compound over the last thirteen years on a mid-risk portfolio suggests either the IFA couldn't find the couch in your living room or doesn't give a fig.

What return would you expect given the pace of withdrawals and the client’s risk appetite?

The investment ran alongside QE, and given the clear and predictable effect of QE on markets for over a decade; double the return seems a reasonable expectation. Five year performance of VLS40 and VLS60 is 40% and 50%, and that seems a good benchmark.
For someone invested 100% in stocks over this period, where the winners have been front and centre of attention, you'd expect up to a million.

Dulce-ridentem

@dunstonh I really appreciate your continued comments. 

It was a GIA. Her ISA allowance was not fully used each year. Please could you explain more about RDR 2013 and its relevance here?There were sometimes visits - difficult as she was in hospital about half the time - and there was a brief annual portfolio report.

I agree diversification is ok, if the investor understands the risks. But why advise her to take her INCOME from the volatile, high-commission funds rather than from the cash? How is that appropriate advice in the circumstances? She only took 8K income pa, less than her cash investments were generating - but she was simply re-investing the proceeds of the cash investments without touching it.

You say it would have been normal at the time to start drawing down from an investment like this from the start but I don't see how that would ever have been a good idea for anybody- that's common sense; don't pay for something you don't need. I can't see MSE forum-ites thinking this was good advice. Why do you feel this was appropriate advice? Shouldn't the IFA be managing costs, rather than adding unnecessary cost? if the fees had gone on a GROWTH investment and it had performed poorly, I wouldn't have an issue with it. 

I do not agree that the fact someone died years later than expected proves  the advice did not need to take into account a short life expectancy. 

I am not saying for a moment that all deaf or elderly people cannot understand advice - just that this particular deaf, elderly, naive lady did not understand the risks of the fees.  I know she was stressed by her confusion about the investments from multiple discussions. This is someone who never used  a direct debit or standing order because she didn't trust them-  she did everything with cash and cheques. I was paying some of her regular bills myself following a muddle that led to her phone being cut off. 

The IFA knew following my meeting with him last year, when I became her attorney that
- the investor was confused and worried about the payments she received.
- I considered he ongoing annual fee of 2.9 per cent that he quoted was high - although in fact it looks as if it was lower than he quoted
- I was concerned tat the ISA allowance was not being used each year. He claimed there was no need as she didn't pay any tax. I'd have to do a lot more digging to understand that statement, which probably isn't worthwhile. My concern isn't her money; I can't change the stress she went through with the investment; all I might do is prevent someone else having this experience. 

You're right about the income payments to her of course, I am not confused about them but she was. As you say, they didn't ARISE in a random way, but their presentation APPEARED random to her as they came at irregular amounts and dates and they did NOT always have the same description on her bank statements. I could only tell they were the income payments after discussing it with the IFA, it wasn't clear from the payment descriptions. 

Re clearing the house which someone queried- the other executor handled it. Given lockdown there wasn't a lot of choice since we couldn't legally be there in person - one  family member did visit. No paperwork was found even though I gave instructions on where she told me important paperwork was supposed to be - an old briefcase. The will was found there. It's possible she didn't think the financial records needed to be kept. 

jimjames

Dulce-ridentem said:

But why advise her to take her INCOME from the volatile, high-commission funds rather than from the cash? How is that appropriate advice in the circumstances? She only took 8K income pa, less than her cash investments were generating - but she was simply re-investing the proceeds of the cash investments without touching it.

If you invest in income funds then they will naturally produce income so I don't understand what is the issue with that? Investments that generate income seem to be what she required, they generated income and she used it. If she invested and then immediately withdrew capital then that might be a different matter.

dunstonh

It was a GIA. Her ISA allowance was not fully used each year. Please could you explain more about RDR 2013 and its relevance here?There were sometimes visits - difficult as she was in hospital about half the time - and there was a brief annual portfolio report.

That is possible grounds for complaint.   Bed & ISA is a bedrock of financial planning when you are providing ongoing servicing to someone with a GIA.

The RDR was an upheaval in the advice market and investment fund market.  Relevant bits are that pre 2013, ongoing servicing was not required where there was ongoing commission being paid.  So, from 2007 to 2013, if no ongoing servicing was provided then there is nothing you can do about it.    Commission was banned on new business from 1st Jan 2013.

From 2013 on new business, ongoing remuneration had to mean the provision of ongoing services on a pro-active basis.  Not reactive.  For existing business, commission could continue to be paid until there was a disturbance event (such as a fund switch).  However, once a disturbance event occurred, it brought the investment into the post 2013 rules (ie. proactive servicing needed).

There was a further thing with investment platforms.  If the platform changed the funds to clean (non commission paying) share classes in 2013 this would turn off the adviser remuneration.   So, if left off, the adviser wasn't being paid and no servicing would be expected.   However, if the adviser put in place an ongoing fee to replace it, then that brought it into the post 2013 rules and a proactive service must be provided.  The frequency though could be 1, 2 or 3 years. It wasn't until 2018, when MIFIDII was introduced, that put in place the requirement to be "at least annually".    There was no requirement for a report pre 2018 although the adviser would be excepted to have some audit trail of activity.

I agree diversification is ok, if the investor understands the risks. But why advise her to take her INCOME from the volatile, high-commission funds rather than from the cash? How is that appropriate advice in the circumstances? She only took 8K income pa, less than her cash investments were generating - but she was simply re-investing the proceeds of the cash investments without touching it.

Transact was not high commission and neither would be the funds.   They are ballpark for the era.  

From what you have said, it appears the funds were income paying funds (the reference to random distributions to the bank account later on).   Transact, like most platforms, operates a cash account.  For example, we tend to hold 18-24 months in cash within the GIA to fund short term withdrawals with income units paying the distributions into the cash account which then extends the cash holding for longer.  Then you sell units in more positive periods to keep it floated and avoid selling in negative periods (a method that is successful for over 95% of the time).   Transact only pays from natural yield on the funds or cash held within the GIA.   So, was there a cash float at the time?

Taking income from investments but not touching cash is perfectly normal and acceptable. It's more obvious today than in the past but in most periods, investing provides better returns than cash.

You say it would have been normal at the time to start drawing down from an investment like this from the start but I don't see how that would ever have been a good idea for anybody- that's common sense; don't pay for something you don't need. I can't see MSE forum-ites thinking this was good advice. Why do you feel this was appropriate advice? Shouldn't the IFA be managing costs, rather than adding unnecessary cost? if the fees had gone on a GROWTH investment and it had performed poorly, I wouldn't have an issue with it. 

If there is a cash float then it's not involving a sale of investments.  If it's from natural yield, it's not involving a sale of investments.  

A lot of people, especially the elderly like the income to start earlier rather than later.   Its a personal choice. Some people have had a lifetime of regimented monthly pay and need it and cant handle having 12 months without it even if there is an equivalent of 12 months cash available to draw from.   Advice has to be tailored to the individual.  If that is what they want and need then there is no harm in it.

I do not agree that the fact someone died years later than expected proves  the advice did not need to take into account a short life expectancy. 

It should have taken it into account but in the end she didn't die in the short term.  So, the fact is she lived for at least 12 years after.     Any other scenario is hypothetical and complaints do not work on hypothetical scenarios.    if the adviser did wrong here then they got lucky that she didn't die earlier.  

 I am not saying for a moment that all deaf or elderly people cannot understand advice - just that this particular deaf, elderly, naive lady did not understand the risks of the fees.  I know she was stressed by her confusion about the investments from multiple discussions. This is someone who never used  a direct debit or standing order because she didn't trust them-  she did everything with cash and cheques. I was paying some of her regular bills myself following a muddle that led to her phone being cut off. 

A lot of people struggle with them.  Especially the pre-2013 methods where commissions were not explicit to the charges being paid.  It could be confusing.  However, any complaint now will not be able to raise that as an issue as she is not available to say that.    A complaint using that would reject that point and focus on suitability.

The IFA knew following my meeting with him last year, when I became her attorney that
- the investor was confused and worried about the payments she received.
- I considered he ongoing annual fee of 2.9 per cent that he quoted was high - although in fact it looks as if it was lower than he quoted
- I was concerned tat the ISA allowance was not being used each year. He claimed there was no need as she didn't pay any tax. I'd have to do a lot more digging to understand that statement, which probably isn't worthwhile. My concern isn't her money; I can't change the stress she went through with the investment; all I might do is prevent someone else having this experience.

2.9 is ridiculously high but the monetary amounts you mention don't match 2.9 and actually put it where the ballpark expectation would be.

As mentioned, the ISA allowance should still have been used but if she wasn't paying tax then the outcome is that she is not worse off.  Again, the adviser may well have got lucky here as no financial loss took place.  

I have seen firms not use annual ISAs before and its usually one of two scenarios.

1 - They have an initial charge for using bed & ISA

2 - The adviser is no longer an IFA and has gone to a tied company like SJP or similar.   So, they are no longer allowed to carry out transactions on the legacy investments unless it goes into their new tied company

If she was not paying tax via the investments then incurring charges to move it to an ISA would be considered suitable reasons to not bed & ISA.   Although most firms would do bed & ISA at no cost.

A complaint wont prevent anyone else having that experience.    The firm will deal with it in house and give their response. Even if you go to the FOS, the FOS does not regulate the firm.   The RDR, FAMR, MIFIDII have taken care of the concerns you have.  A complaint pretty much focuses on whether the advice led to an outcome that made the person worse off than leaving it in cash.  That is highly unlikely for a 12 year investment.

Complaints suffer from the four truths principle. What you said happened.  What the firm will say happened. What actually happened and how the available evidence indicates happened.   All four are likely to be different.

If we look at what you are saying, there is potentially poor communication but it didn't leave her worse off.

There wasn't the use of the ISA allowance but she didn't pay tax with the GIA so it didn't leave her worse off

Ongoing servicing may or may not have happened but it wasn't required until at least 2013 and an annual report would indicate it did happen.  Evidence may be internal files for pre 2018.

Communication may not have been as good as it could have been but there is no way to tell whether it was or not - its unprovable as an allegation.  

A complaint wont change the adviser as RDR, FAMR and MifIDII have done that.    If I was to measure what I did 20 years ago to today, it wouldn't meet modern standards but it met the standards of the time.  The due diligence and research levels today are far higher than 5 years ago let alone 10, 15 or 20.  

So, if you are not looking for a monetary outcome from the complaint, it won't result in a telling off either.  Although It may do if the adviser is an employee (I would not be kind on my advisers if there was a complaint).    

And I will end with the caveat that we only have what you have told us and the information is incomplete.  We can only interpret what you tell us.   So, we can never second guess the outcome of a complaint as there will be evidence or information we are not privy to.  How the four truths turn out is impossible for us to say.

Dulce-ridentem

@jimjames - she invested and immediately withdrew capital, three weeks later and then every month for two years.

The  cash float was insignificant - generally under 500. So every drawdown required an actual sale of an investment. I can see the sales made on the cash account I have. 

My point is that she didn't need to use this investment for income at all since she already had cash investments. I would expect the IFA to make it clear to her that it would be more cost-effective to leave the investment to grow and use the cash investments for income. 

Dulce-ridentem

@dunstonh
thanks, that's clear. 

re was she worse off - by my calcs, between seventy and a hundred thousand pounds. That's using NSI - variation is whether it is all in growth or half in growth and half income. 

The IFA acknowledges that she was worse off taking his advice than doing nothing, but says that it was an unusual period for investing - and I'm not trying to complain about the funds' performance anyway. 

The IFA is 37K better off. 

thanks again, it really has been useful. And I'm glad regulations have caught up with the industry. The IFA told me it is normal to drawdown immediately from an investment, even today, so perhaps he hasn't caught up with the trends... 

Thrugelmir

Dulce-ridentem said:

re was she worse off - by my calcs, between seventy and a hundred thousand pounds. That's using NSI - variation is whether it is all in growth or half in growth and half income. 

Using hindsight I'd be a multi millionaire now if I had done things differently over the years.