It is common knowledge that it is very important to save regularly and build investments to assist you when you are either unemployed or retired. Employees work for a very long time and through that, they hope that they will be in a position to retire comfortably and enjoy their so-called “golden years”.
There are many different ways to save money, for example, cash savings at a financial institution, property investments or equity investments like shares in different companies on different stock markets, either locally or abroad.
Having regard to the complexity of certain investments, it is important to obtain the right advice before entering into financial obligations which will have an effect on the long term growth of your investment.
But what if you do obtain and follow the advice and it all goes wrong? What if you invest a lot of money in a scheme or investment portfolio and you incur a huge financial loss as a result of the bad advice? Do you have any remedies against the Financial Advisor who gave you the advice?
In the Supreme Court of Appeal matter of Atwealth v Kernick1, Kernick was a client of Ms Moolman, a Financial Advisor in the employ of Atwealth. Moolman was claimed to be negligent in her duties as Financial Advisor based on her giving bad advice to Kernick which resulted in them losing their investment entirely.
Davis AJA found that the Plaintiffs (Kernick) failed to present the necessary evidence on i) what kind of research and due diligence a reasonably skilled Financial Advisor in her position should have done and ii) whether or not another Financial Advisor in the same scenario would come to the same conclusion and give the same investment recommendation. Given the fact that Kernick failed to produce such evidence, the Court held that they failed to establish liability on the part of Ms Moolman.
The second test of this case was quite subjective as it would be difficult to find two Financial Advisors who would come to the same investment recommendation when taking a lot of different factors into consideration. Different advisors would come to different opinions based on each party’s own experiences and reliance on different key figures.
Kernick’s expert should’ve assessed and i) taken Kernick’s risk threshold into consideration ii) the information publicly available to Kernick at the time of consideration iii) whether such information pointed out risks which exceeds their threshold and iv) whether a reasonable Financial Advisor in the same circumstances would come to the same or different recommendation.
The Supreme Court of Appeal matter of Durr v ABSA Bank2 provides a better scope for determining liability on the part of a Financial Advisor. Schutz JA considered two questions namely what level of skill and knowledge is required of a Financial Advisor? The Court held that the Financial Advisor is not expected to bring the highest level of skill and knowledge, only the same level as his/her colleagues in the same branch or level. The second question relates to whether the required advice is on the same knowledge and skill level of a normal Financial Advisor or a specialist.
It is quite notable that the Court steered away from the question of whether another Financial Advisor in the same position would’ve come to the same conclusion.
In this instance, the Court held that the level of knowledge and skill required was that of a specialist advisor and Schutz JA was of the opinion that the Financial Advisor did not satisfy himself that the investments were safe for the company; that he ventured into a field that required skills which he did not have; and that he should’ve obtained additional advice from a more experienced colleague before making recommendations to his client.
It was based on the aforesaid that the Court held that the Financial Advisor had been negligent in giving advice which he was not qualified to give.
It is thus quite evident which grounds a Plaintiff can rely on in order to prove that a Financial Advisor acted negligently when he/she gave investment recommendations.
By Werner Cilliers