Late last month the first High Court decision on a defended claim for financial adviser liability was issued.
Perhaps surprisingly, there have been few claims against financial advisers that have progressed to trial and judgment since the global financial crisis and finance company crash in New Zealand. This may be because most professional indemnity insurers have declined to indemnify financial advisers for losses in connection with diminution or depreciation in value of investments. The absence of insurance cover may be dissuading would be plaintiffs.
In this case, Neil Armitage and his family trust were successful in their claim against their financial adviser Carey Church and her company Moneyworks NZ Limited. Justice Dobson found that both Mrs Church and Moneyworks breached their duty to provide competent financial advice in recommending an imprudent concentration of investments in finance companies and in failing to offer any alternatives or to have created options for "less risky" fixed interest investments. This latter finding has created much dialogue. His Honour suggested that corporate bonds and notes would have been more secure than the finance company secured debentures and other fixed interest investments recommended. Many dispute that bonds are not subject to capital fluctuation, particularly if redeemed before maturity.
Neil Armitage and the Neil Armitage Family Trust issued proceedings against their financial adviser Carey Church and her company Moneyworks NZ Limited for losses resulting from financial advice provided between 2005 and 2007. They claimed lost capital of almost $200,000 plus interest.
Mr Armitage initially completed a written risk profile questionnaire in December 2005 which identified a "conservative" risk profile: At this time he and the Trust owned a number of investment properties. Mrs Church responded with proposals for investment of up to $370,000 recommending "more diversified" investments for Mr Armitage to reduce his exposure to the property sector. Investments recommended included debenture stock in four finance companies: Bridgecorp Holdings Limited, MFS Finance Pacific, Strategic Finance Limited and North South Finance Limited.
Mr Armitage and Mrs Church met on 15 November 2006 and Mr Armitage completed a second risk profile questionnaire. He was personally rated as "balanced/growth".
Mr Armitage also completed two risk profiles on behalf of the Trust. One suggested the Trust had a moderately aggressive risk profile and the second was treated by Mrs Church "at the high end of balanced".
On 28 November 2006, Mrs Church provided investment recommendations to Mr Armitage that allocated 53% of the funds available to fixed interest investments. The majority of the recommended investments for the Trust were ING products.
Bridgecorp was placed in receivership on 2 July 2007. Mr Armitage then found the ING investments were not producing the levels of income that had been represented by Mrs Church.
Duty of Care
Without referring to any specific New Zealand case law, Dobson J accepted that financial advisers owe a duty of care to their clients. The nature and extent of the duty of care owed will be a reflection of the factual circumstances of the investor, but the industry body rules governing a financial adviser's professional obligations reinforce the scope of the duty: para .
Scope of the Duty
Mr Armitage claimed that Mrs Church and Moneyworks owed him a duty to educate him on the relationship between risk and reward. The qualities and attributes of the client are relevant. As Mr Armitage was an apparently sophisticated individual, His Honour noted:
"it would be unusual and relatively unexpected for a person in the position of Mr Armitage, as he presented himself to her, not to be aware of the risk/reward relationship reflected in different interest rates".
His Honour found that there was no relevant lack of care on Mrs Church's part in not checking Mr Armitage's state of knowledge on the risk/reward relationship: para. .
Satisfying the Duty
His Honour found that risk profile questionnaire results are a useful tool for discussion but are not enough to remove Mrs Church's obligation to identify risks involved with particular investments and ensuring there is no mismatch between the client's investment priorities and the range of investments recommended: para. 
Competent financial advisers have an obligation to positively assess the risks arising in relation to an investment such as the finance company debentures and form an independent view about them. It is inadequate to rely on statutory responsibilities placed on directors, auditors and the trustee for debenture holders to disclose the health of the finance company: para. 
In finding that Bridgecorp had no listing agreement with the New Zealand Stock Exchange, it therefore owed no continuous disclosure obligation: para. . His Honour found that while the existence of a continuous disclosure obligation could heighten the justification for assessing a prospective investment solely on the basis of information distributed by the investee company, except in unusual situations, competent financial advisers must assess the relative merits and risks of a potential fixed interest investment by research with sources other than the investee company: para. 
It's noteworthy there seems to be some acceptance of the plaintiff's expert's criticism of Rapid Ratings as a reliable rating agency: paras. [100-102]
In reviewing Mrs Church's investigation into Bridgecorp, His Honour found that:
"Evaluating all aspects of her assessment in the context at the time, I am not satisfied that her assessment of investments in Bridgecorp per se, relative to investments in other finance companies, was less than competent": para.
Referring to corporate bonds and notes which are readily tradeable through the NZ Stock Exchange, His Honour found that it was negligent of Mrs Church not to identify the much wider range of options for fixed interest investments that were available to Mr Armitage and the Trust: para . He prescribes that a competent financial adviser in late 2005 and in November 2006 ought to have identified different options to fixed interest investments in finance companies: para. 
In his four paragraphs paras. [187-190] His Honour found that Mrs Church's comprehensive disclaimer did not assist her in avoiding liability.
Personal Liability of Mrs Church
As Mrs Church was the principal point of contact and there was a personal relationship between adviser and client, His Honour found it appropriate to attribute personal liability to Mrs Church: paras. [203-206].
His Honour using a broad brush assessment of Mr Armitage's partial responsibility for the losses claimed, assessed that Mr Armitage was 25% contributarily negligent for the decision to invest in the finance companies that had caused the losses.
Mrs Church argued that Mr Armitage would have opted for the higher returns offered by finance companies, even if he had been alerted to the wider range of options available. His Honour found that there was no higher than a 40% chance that Mr Armitage would have followed "competent advice" resulting in investment in less risky fixed interest investments.
Ultimately, of the $200,000.00 claimed, Mr Armitage and the trustees were awarded a total sum of just $59,564.16.
The plaintiffs' lawyers are hailing the judgment as a great victory: The Press Saturday 4 June and Monday 6 June 2011. However, on analysis, it does seem that there are a number of internal inconsistencies within the Judge's reasoning and the findings made. On my reading there is an an apparent lack of understanding of advice processes, investments (especially bonds), and how risk profile questionnaires work. Further, the absence of authority cited not only in relation to the primary tortious claim, but also in respect of the loss of opportunity discount of 40% and the cursory analysis of the effect of the disclaimer may be criticised. The defendants' lawyer has confirmed that he expects there will be an appeal.
This is still an important decision, one that will be read by all parties to non and under performing investments, investors, advisers, their professional bodies, and their liability insurers. Whilst on one hand, advisors can be pleased with His Honour's findings that recommending investments in Bridgecorp and Strategic Finance in 2005 and 2006 were not, of themselves, negligent if proper assessment of those assessments can be shown, investors may be gratified by the finding that bonds should be recommended to a conservative investor for diversification purposes and the fact that disclaimers may provide little, if any, protection the financial advisers may give them heart to issue.