A recent Financial Ombudsman Service (FOS) determination has revealed the risks facing financial planners considering lifting their involvement in residential property investment. In the case in question, a client purchased a property for more than NZ$305,000 which was passed in at auction four years later for a little over half that amount.
The client made a complaint to the FOS in September 2007 against the financial advisory business, claiming it had recommended he invest in an off-plan residential unit in New Zealand. He claimed that while the financial advice business had facilitated the purchase of the property, it did not follow through with any further service, and following the purchase he discovered that the property was overvalued and that the rental returns did not cover the loan repayments.
In its determination, FOS stated that an employee of the advice business — Mr S — recommended in a Statement of Advice (SoA) that the complainant purchase an investment property as part of a gearing strategy. The SoA also stated that the advice business would refer the complainant to its realty entity “to source an appropriate investment property”. However, the advice business claimed it was not responsible for advice given by the realty entity, notwithstanding the fact the complainant claimed he had only ever met with Mr S, who gave him a ‘property information pack’.
The complainant paid the member a $1,000 ‘preparation fee’ and a $7,500 ‘implementation fee’, following which he purchased the New Zealand property for NZ$305,000. However, a subsequent valuation of the property revealed that the rental return was around $1,400 a month less than expected. The complainant asserted that in August 2009 the property had gone to auction but was passed in at NZ$165,000.
The complainant asserted that he tried to contact Mr S four times without success and had not received any communication from the advice firm since his initial investment in the property.
The FOS noted that the complainant was therefore seeking a refund of the ‘preparation fee’ and ‘implementation fee’, as well as the difference between the original purchase price of the property and the property sale price.
Defending its position, the advice firm claimed that a recommendation in a SoA to purchase an investment property did not constitute ‘advice’ and it therefore could not be held accountable. The FOS agreed, but found that “the member failed to undertake a detailed review of that particular investment and to provide the complainant with any specific explanation of risks associated with entering into that investment and, in particular, how the complainant is to manage the investment by way of a particular gearing strategy and structure of debt reduction”.
The FOS determination stated that the loss in real estate values and rental returns were not issues that could “reasonably be foreseen” and determined that the advice firm refund the client his $7,500 implementation fee, with interest calculated annually.