Financial advisor should have investigated plaintiff’s future needs4 June 2019 | Financial Professionals' Negligence
After being injured in a motor vehicle accident in 1997, and successfully recovering nearly $2 million in damages at trial, the plaintiff engaged the services of the defendant, a financial planner. After a series of investments and withdrawals, the value of the plaintiff’s portfolio was significantly reduced and the plaintiff brought successful claims in negligence against her financial adviser for negligence and breach of the Corporations Act 2001 (Cth).
- Whether the defendant should have warned the plaintiff against certain investments and business ventures;
- Whether the defendant should have ensured that enough capital remained to fund the plaintiff’s future medical expenses;
- Whether the plaintiff’s cause of action was outside of the applicable limitation period and therefore statute-barred.
After being awarded almost $2 million in damages from a personal injury proceeding, the plaintiff retained the defendant for financial advice. On the advice of the defendant, the plaintiff invested $1,132,109 of that award. The money was predominately used to pursue ventures including photography and agribusiness. As a result of those unsuccessful ventures, the value of the plaintiff’s portfolio declined from $1,565,200 in June 2006 to about $700,000 in December 2008.
The Decision at Trial
The plaintiff brought claims in negligence and under section 945B of the Corporations Act 2001 (Cth). She contended that the defendant should have warned her about three matters:
- Spending money in excess of her living expenses;
- Borrowing money for investments; and
- Starting a business in 2007.
The court found that the defendant knew that the plaintiff had limited exposure to financial dealings and that the almost $2 million damages award had to satisfy her financial needs for the rest of her life in circumstances where her injuries limited her capacity to earn. The court held that the defendant failed to ensure that the plaintiff knew the full consequences of any spending or investment, and the effect that would have on her ability to meet her expenses.
The court held that the defendant had not properly investigated the plaintiff’s personal circumstances and so he was not aware of the extent of her future medical needs. Justice Martin was of the view that the defendant should have made further enquires about her future needs, including reading the judgment in the personal injuries proceeding and seeking further advice if necessary. Pursuant to section 945B of the Corporations Act, the defendant had an obligation to warn the plaintiff that his financial advice was given without this knowledge and information. Accordingly, the plaintiff was able to recover any damage suffered as a result of the contravention of the Corporations Act.
The court briefly considered whether the defence under section 22 of the Civil Liability Act 2003 applied to the defendant. Martin J ultimately held that it did, as a financial advisor was a vocation in which professed knowledge is applied to the affairs of others. However, the expert evidence delivered did not support a finding that the defendant acted in a way that was widely accepted by peer professional opinion as competent professional practice.
Justice Martin held that the plaintiff’s claim was not statute barred as her loss only crystallised when her investments (ie. the $1,132,109) were ‘realised’ (that is, sold) and this occurred within the applicable six year limitation period.
The court was satisfied that the defendant breached the duty owed to the plaintiff and as a result of that breach, she wasted money which she could have otherwise maintained in investments. The amount of judgment is still to be determined.
Implications for you
Financial advisers should be acutely aware of their client’s individual circumstances, including any significant future expenses they are likely to incur, before providing investment advice. This decision highlights that a plaintiff who has an inaccurate understanding of their financial position, and makes significant investments as a result, may be able to claim against their adviser for a failure to warn of the risks of such investments.