Robert Morfee has over 40 years' experience in dispute resolution and has specialised for the last 15 years almost exclusively in financial services and investments for small businesses and individuals. Read his article on fund management claims below:
Discretionary fund management is very common. It starts with an individual, a trust or pension fund, placing money with a professional manager to manage his portfolio at his discretion. Very often, the person instructing the fund manager, is not the owner of the funds, they are either a charity, a individual who lacks mental capacity (e.g. suffered a head injury) or a child.
There is however a problem with discretionary fund managers, which is made clear in the FSA’s “Dear CEO” letter of 14 June 2011. Out of a sample of 16 fund managers examined, the FSA found a significant proportion (well over half) of the portfolios contained investments which were unsuitable for the owner of the funds.
Yet there has been very little litigation, or at least very few reported cases. This may be due to the fact that far too many people simply swallow their losses and do nothing or, that there are many settlements out of court.
Broadly speaking, the basic problem appears to be that those who go in for discretionary fund management (often stockbrokers) have a much higher appetite for risk than the owners of the funds. To some extent there is a “dialogue of the deaf” between them. What is regarded by the fund manager as a conservative and stable portfolio, often represents a buried risk that the client would find unacceptable, if they understood it.
In my experience, fund managers, are very bad at the mandatory process of getting to know their clients and their understanding of the risks of the funds. The clients themselves, if trustees or pension trustees, have statutory obligations which a fund manager needs to take into account. Far too often you see a “tick box” approach such as forms being completed over the phone in a matter of a few minutes. This perfunctory compliance with basic requirements is inadequate to secure the result the client wants. The fund managers often neglect to inform their clients of the precise risks and details of the fund.
Examples that I have seen include the following:
- • A defined benefit pension fund invested exclusively in a single Equitable life (with profits) insurance policy.
- • A private trust supposedly invested 50% in equities and 50% in fixed interest, when in fact they invested in over 90% equities about half of which were shares in a single bank (which of course bombed in 2008).
- • A small self-administered pension scheme (called a SSAS) with excessive funds invested in the sponsoring of their own company’s business.
- • A stockbroker who was managing funds on a discretionary mandate confined to matched trades in bonds issued by Western European banks, turned out to be in fact using the funds to buy a share in a portfolio of American life insurance policies.
These are a number of fund management cases that I have seen.
These claims are not always easy. Sometimes there is a degree of acquiescence by the client. It is not fatal for a claim that the claimant contributed to his own losses. In such a case, his damages may be reduced by a percentage to reflect that contributory negligence, but the claimant is not shut out from making a claim altogether.
The standards to be observed by fund managers are in part imposed by the FSA’s rules and in part by the mandate set out in the contact for the fund management services. It is a requirement of the FSA that there should be a written contract. So each case largely turns upon its own contract and its own facts.
Where money is simply misappropriated (sadly, this is distressingly common) the claim is relatively straightforward. However, where the claim involves unsuitable investments, the issues may be more nuanced and may call for expert evidence from a good quality professional fund manager.
But it starts with the client being willing to seek advice and talk to someone about the problem. Often the first step is to have a conversation with an expert to see if there is anything to be done.
But remember there are limitation periods. These are the permissible periods of delay between the loss and the commencement of proceedings. In fund management cases, these are sometimes quite difficult to calculate. The rules are more complex than usual. So it is important to take advice as soon as it becomes clear that a significant loss has been suffered.
About the Author
Robert has over 40 years' experience in dispute resolution and has specialised for the last 15 years almost exclusively in financial services, pensions, investments for small businesses and private clients.