New South African case deals with whether you can take your financial advisor to court for a failed investment

While most people will receive ‘poor’ or incorrect financial advice at some point, can you take your investment broker to court?

This was a case that was recently dealt with by the High Court of KwaZulu-Natal, according to Roxanne Webster, a senior associate at law firm Cliffe Dekker Hofmeyr. 

“In the Symons case, the plaintiff invested R5 million into a property syndication with Sharemax Investments based on the advice of the defendant – the plaintiffs’ former investment broker and financial advisor,” said Webster.

“The defendant, a registered financial service provider, had previously advised the plaintiffs on various investment opportunities and had also personally invested R600,000 into the Sharemax property syndication.”

While the investment initially yielded returns, the South African Reserve Bank stepped in and instructed Sharemax to change its funding model as it was deemed to be unlawfully taking deposits from the public.

Sharemax was unable to do so and the property syndication scheme subsequently collapsed, with the plaintiff losing his entire investment.

Following this, the plaintiff sought damages against the defendant for the failed investment.

What the court said

The plaintiff was an experienced businessman in dealing with property syndication and therefore was deemed by the court to be adequately versed in the risks involved, Cliffe Dekker Hofmeyr said.

The court said that he went into the investment with open eyes due to his experience as a businessman, his interactions with similar schemes and the fact that the defendant had given the plaintiff adequate documentation on the investment.

The court also noted that the plaintiff took two weeks to make a final decision on whether to invest and that this was – a sign that the plaintiff gave due consideration to the investment.

“The court highlighted that the defendant took advice on the investment structure from an accountant as well as a compliance officer and could not have reasonably foreseen the reason for the collapse of the investment,” said Webster.

“Ultimately, the court handed judgment down against the plaintiff and dismissed the action with costs.”

However, Webster warned that this decision does not mean that your investment broker is completely safeguarded from any and all wrongdoing.

The legal expert said that the court has previously held a financial advisor liable for the failed investments of the plaintiff due to the fact that the financial advisor led the plaintiff to invest under the impression that the investment was a low-risk investment, when in actual fact if the risk was properly explained to the plaintiff she would never have invested in the first place.

“The courts are yet to develop a hard and fast test for such matters and rather deal with such on a case by case basis having regard to, among other factors, the investor’s emotional state, the actual risk of the investment compared to the risk the investment was sold to be as well as the reason for the investment’s failure,” Webster said.

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New South African case deals with whether you can take your financial advisor to court for a failed investment