Advice led to portfolio imbalance

Categories:
Investing
Summary:
Kiri, who was in her 80s, met with one of her bank’s financial advisers to simplify her affairs. She wanted a low-risk, accessible investment that offered returns competitive with equivalent term deposits in order to supplement her superannuation. She also wanted to invest for less than three years, and for the bank to manage the investment.

The adviser recommended she consolidate her term deposits as they matured and add the principal on maturity to a New Zealand-based low-risk managed mortgage trust. For the next four months, Kiri invested her matured term deposits in the mortgage fund.

Two years later, she discovered she was receiving a rate of return of 2 per cent a year. She complained to the bank that she would have been better off keeping her term deposits. She sought the difference in returns between the mortgage trust and term deposits. 

Our investigation

We considered whether the mortgage trust was an appropriate product and concluded it broadly met her brief to the bank. However, we considered the mortgage trust was right for only 20 per cent of her portfolio, in what was an otherwise well-diversified portfolio. We also considered the mortgage trust should have been regularly monitored.

We considered the bank should not have recommended Kiri move all of her money from term deposits into the mortgage trust because:

  • term deposits are stable investments, and she had no previous experience of investments where the value could fluctuate
  • she was a relatively unsophisticated investor and relied heavily on advice
  • the extra risks were not clearly explained
  • the mortgage trust investment was sold without any regular monitoring process, meaning she wouldn’t know of any decline in its value and return until it affected her standard of living.

Outcome

We recommended the bank compensate Kiri for the difference between what she would have received from a 20 per cent investment in the trust and what she actually received.  Kiri took the compensation. She later sold her investment in the mortgage trust and reinvested the proceeds in term deposits.

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