FOS upholds £50k investment complaint against Philip J Milton

The Financial Ombudsman Service has upheld a complaint against Philip J Milton & Company after ruling that advice given in relation to a £50,000 investment portfolio was unsuitable.

A couple complained to the FOS after investing in May 2007 on a medium risk basis with the aim of providing an income of £2,000 per year.

The investments performed poorly and at the end of 2010 the couple transferred their portfolio to another firm.

The decision, published last week, rejected the couple’s claim that they were cautious, rather than medium risk, investors. But it found the portfolio was unsuitable as it contained excessive exposure to higher risk elements such as smaller companies, and insufficient exposure to lower risk elements.

The FOS said the couple should be compensated to put them back in the position they would have been had they not been given unsuitable advice.

It ruled Philip J Milton & Company should compare the performance of their investment with the return of the FTSE Apcims income index, adding 8 per cent interest for each year.

Philip J Milton & Company managing director Philip Milton says the compensation is “in the low thousands”.

He says: “The clients tried to portray themselves as unsophisticated but the FOS dismissed that and agreed with our risk rating.

“If the clients had not pulled out of the investments early they would have performed well by now.

“The FOS has selected an index arbitrarily and the addition of 8 per cent interest means consumers are able to profit rather than being put back into the position they would have been.”

Yellowtail Financial Planning managing director Dennis Hall says: “Risk is subjective and advisers must keep extremely good records to prove advice was appropriate. The addition of 8 per cent interest seems excessive given the low base rate.”

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. Incompetent Regulators 16th January 2014 at 3:23 pm

    Here we go again…………… Client taking small adviser to the cleaner for compo all aided with the FOS. Interestingly this client didn’t like the stock market crash in 1988 and liked to blame someone else for market conditions. What about looking at the FSA who didn’t monitor the banks which affected the markets?

    Even my old dead grandmother knows that the biggest rises in markets are after the crashes. FOS staff should be made accountable personally!

  2. Interesting to hear a case being judged on the basis of fund specifics/choices. I thought that many of the case officers at the FOS were not qualified to level 4 and yet they seem to be authorised to pass judgement on asset allocation and fund choices (with hindsight of course!).

    If this is the case, perhaps we should just refer all new business to them for prior approval and know that we will be OK on that score!

  3. I can’t believe what I am reading. Which “low risk” investments produced returns of 8% per annum? I know FOS hold themselves out to be unbiased, but this is a stark example that they randomly reward the general public.

    A quick look at the FOS twitter feed adds to this as well. The following tweets are encouraging the public to get in touch with them to make a complaint (despite the fact they could simply say “Get in touch with the firm involved”):
    https://twitter.com/Financialombuds/status/380274640599261186
    https://twitter.com/Financialombuds/status/385374502411988993
    https://twitter.com/Financialombuds/status/395854001243054080
    https://twitter.com/Financialombuds/status/395864312801030144

    And the following tweets show various “activity days” they have held, which seem superfluous to their core activities:
    https://twitter.com/Financialombuds/status/380654506658127872
    https://twitter.com/Financialombuds/status/382488805434863616
    https://twitter.com/Financialombuds/status/384235241210380288
    https://twitter.com/Financialombuds/status/384985170287157248
    https://twitter.com/Financialombuds/status/388970773882634240
    https://twitter.com/Financialombuds/status/390422675698368512
    https://twitter.com/Financialombuds/status/391199017675153408
    https://twitter.com/Financialombuds/status/392621552765648896

    Ultimately if someone wants to make a complaint they will Google it or they will just write a complaint letter. FOS does not need to hold events to make the public aware they can complain. They refuse to require adjudicators to reach minimum exam standards due to cost, but cutting their marketing budget and twitter feed will go some way towards this.

  4. In order to provide an income of about 4% per annum, the returns must be around 5% or more to cover the cost of advice and also protect the capital long term. To have all the investment in cautious funds would not satisfy both aims. The FOS do not ever take this fact into account when decisions are made against advisors. Talk about being on a hiding to nothing. If the markets had risen these investors would not have said a word.

  5. Without wishing to rush to judgement based on the limited scope of this report, smaller companies funds don’t seem suitable even for medium risk investors and they’re not notable for generating decent levels of income. My thinking for a medium risk, income-generating portfolio would be to steer clear of any funds further up the risk scale than UK Equity Income, probably mainly blue chips.

  6. headbelowthe parapet 16th January 2014 at 8:54 pm

    While I don’t know all the facts in this particular case, I refer you to my comments on 27 Sept to an attitude to risk article in MM:
    Unfortunately it seems that the FOS can’t get their head around this question of relative risk ratings – but more than this they don’t understand that they don’t understand it.

    Unless the FOS publish their interpretation of risk and their perception of the relationships between different asset classes and sectors within those asset classes how can we be free from castigation?

    Should we use standard deviation, downside deviation, range, or maximum drawdown (or some other measure) as our gauge?

    Nobody knows, and the FOS won’t tell us which particular paradigm they employ – but I suspect this is because they haven’t really thought about it that deeply, and each Ombudsman is free to make his or her own call; this approach (if it is indeed the one they employ) is fraught with danger and open to horrendous abuse – without guidance there is chaos, misinterpretation and bias.

    Each Ombudsman is human (one assumes) and without guidance or a proper framework their personal biases will prevail and blind them to reason.

    I imagine a bunch of Ombudsman coming up with the bright idea that everyone should be invested in a blend of 12 to 17 month building society savings bonds and an APCIMS index fund (?), then I imagine them telling all the other Ombudsmen around the water cooler – this then becomes the (bastardised) yardstick of risk that they all adopt.

    But if there is a benchmark they prefer, why don’t they tell us?

    I suspect it’s because if we do adopt their methodology and it turns out to be rubbish (which is likely) they’ll be forced to carry the can, or if it turns out to be the holy grail of asset risk relativity measurement (which is unlikely) then they won’t have a job anymore.

  7. @Richard.

    To be fair if the clients are requesting an unrealistic solution given their ATR/TTL should the ultimate advice have reflected their managed expectations plus a heavily caveated SR?

  8. I have it sorted.
    Any investor who comes to you (assuming you are an IFA) should be advised to go a bank, place their investments with them and if they do not produce 8% return compounded / annum (even if they are cautious) sue the bank and you will get your 8% return courtesy of the FOS.
    However I am not sure what the charging structure should be for my advice?
    Any pointers would be appreciated

  9. Incompetent Regulators 17th January 2014 at 9:10 am

    Tessa the first comment posted meant o say the year was 2008 and not 1988. Please amend accordingly!

  10. I believe that the 8% is the interest figure they would want to see added to any settlement, from the date of complaint until its resolution, in itself a nonsense I agree, but common practice I believe. Needs addressing for sure!

    As for the claim itself and the use of an index as a gauge as to suitable performance. Such a measure does not reflect performance of an investment ‘net of associated charges’ and thereby drives something of a coach and horses through the whole RIY/illustration FCA processes and the science therein.

    If an index shows, say 15% growth over a 3 year period, is this equivalent to say, 10% to 12% of expected performance net of a product’s management charges? As you can see, unless specific measures for redress are adopted, we are in danger of having something of a ‘back of a fag packet’ resolution process for claims.

    My personal view and of course, without being party to the full background! However, the principles of what I am saying are robust enough.

  11. @Sam
    I agree. The SR may have indeed included all the caveats but I doubt that the FOS would have bothered to even consider the warnings given. “How do you know the investors understood your report?” You can hear the ombudsman asking. I’m sorry, I still say the advisor is ultimately on a hiding to nothing.

  12. Generically speaking rather than specific to this case, I would say that IFAs are far too frequently fools to themselves. Many small retail investors want the lot, low risk (ie no risk) and high returns (ie improbably out from the market returns), and in my experience far too many IFAs are keener to make a buck arranging something that might someway meet those expectations, but will inevitably fall short, than tell the potential clients to go procreate with themselves. If you don’t do the latter, then you’ll never get the FOS off you back.

  13. FOS aren’t qualified enough, the redress isn’t fair, clients are too greedy, the banks are in the wrong. How about some accountability for the IFA who happily took his commission and allowed the investment to fall foul of the client’s unrealistic expectations?

    This IFA states that if they had left it invested they would be a lot better off, all very well and good to say with hindsight but perhaps if he had taken the time to truly explain how markets work to the clients BEFORE the investments were arranged?

  14. headbelowthe parapet 17th January 2014 at 5:22 pm

    There seems to be a theme arising in a significant number of cases that the FOS find against advisers – namely that the FOS like FTSE APCIMS indices, and that the FOS believe they are the answer to the question of perfect asset allocation.

    In this particular case the FOS seem to be saying that exposure to higher risk elements such as smaller companies is wrong because those assets must be allocated to lower risk elements (although we don’t know the precise allocations in this case). The APCIMS Income Index is made up of the following:

    • 37.5% FTSE All-Share Index – 642 UK Companies and Investment Trusts
    • 17.5% FTSE All World (ex UK) Index – 2758 Large & Mid-Cap in Developed and Emerging Markets
    • 32.5% FTSE Gilts All Stocks Index – 68 UK Conventional Gilts
    • 5% 7-Day Libor -1% – Libor minus 1%
    • 2.5% FTSE All UK Property Index – 45% Retail / 40% Office / 15% Industrial
    • 5% FTSE/APCIMS Hedge (IT) Index – Multi-Manger Hedge Funds (Investment Trusts)

    This is a balanced asset allocation (according to my criteria), but is an exposure to Emerging Markets and to Hedge Funds any worse, or indeed different, than exposure to UK Smaller Companies?

    It would be an interesting exercise to get hold of a portfolio x-ray of the APCIMS indices and the fund used in this case to see whether the relative risk is actually very far removed from the one that the adviser recommended – not that this will make the FOS reconsider its position.

    Another interesting exercise might be a FOI request to the FOS to see how often the asset allocation of the APCIMS indices are referred to by individual ombudsmen. If the answer is ‘always’ then perhaps we should only ever invest in proxies of these indices – because they’re tantamount to being the only measure of performance that matters.

    I suppose the bright side might be that cases like this one shine a light on the investment logic applied by the FOS, and that means we can finally know what the rules are; at least we can until they change their minds…

  15. Just for ‘Consumer’s’ sake… there were inches and inches of evidence about the advice, strategy, risks, how we manage risk etc and hours and hours of meetings. Caveat emptor doesn’t apply any longer it seems. The man had involved and indepth knowledge having been integrally involved int he winding-up of a sizeable occupational pension scheme too. But all that doesn’t matter, sadly…

    Whilst for interest only…

    My own pension fund is invested in similar/identical assets to those of our clients through the Transact platform and comparable to those held by the complainants and indeed some of which were lambasted by the Ombudsman. Hindsight is a wonderful thing when adjudging which investments might have been bad or ‘unsuitable’.

    However, for other clients and my own account, we kept the faith and patience of our strategies. Ignoring the regulatory disclaimers or whatever, here are the bare facts. A useful individual ‘performance’ comparative is provided by Transact on its website and whilst of course each client’s account will be slightly different according to additional contributions over the time or whatever, the simple and exceptional results for this Balanced, Medium Risk strategy to yesterday, net of costs, make interesting reading. These strategies are available to the clients of other advisory firms too.

    Since my own account began on 15 March 2000 £1000 has become £2134 (the previous high point was 1/7/07 at £1856)
    Since the trough on 1 April 2009, £1000 has become £2690

    Had these complainants maintained their strategies as the Firm did its utmost to encourage (they encashed just a couple of years into their investments and despite having considerable other cash reserves available to them – or/and agreeing the risk requirements at inception and the sensible term nature of such market investments), they would have enjoyed not only the desired monthly income levels throughout the period but their capital would have been likely to have recovered and advanced well beyond the starting levels, despite any damage caused by the collapse of world markets.

    The Firm’s hand-holding endeavours during the difficult period and agreement to the complainants’ demands to conserve and build cash balances was also used against it – holding cash meant that the recovery from the low did not happen to that element of their accounts and created even more compensation for the Firm as a consequence.

    The FOS also adjudged that interest at 8%pa gross was applied against the compensation since 2010, despite best rates elsewhere being 0.5%pa or so now and also Court cases being settled at much lower rates of interest. The Ombudsman failed to respond to the generic challenge on this matter despite evidence of such settlements being provided, simply citing current legal practice in the outcome. Our MP has written to the Treasury ion this matter generically, for other cases’ benefit I suppose. This gave the complainants a significant ‘profit’ over and above putting them in the position which the Ombudsman ruled and this encourages a dilatory approach for complainants and the Ombudsman in reviewing cases. On top of this, an index for comparative was judged as appropriate despite no fees being taken into account within the index and as a consequence, a further ‘profit’ of between 1.5-2.25%pa inclusive of VAT was enjoyed by these complainants and which would never have arisen in reality. This point was also ignored totally by the Ombudsman. The Ombudsman has capacity to award ‘distress’ sums against an adviser if there is poor behaviour attending to the complaint. This did not arise.

    In quoting the investment strategies, the Firm has always believed in a very wide range of component holdings for clients – including small clients and its systems are % based on costs so they are not disadvantaged. Its terms of business with clients explain this very clearly and how this means that very small exposures to more volatile holdings can also be pursued for low risk clients – £250 on a £50000 portfolio is not high risk, for example. These clients had copious discussions over some years before committing to any investment with the Firm.

    The Ombudsman also chose to compare the outcome against an indexed fund and not against cash. This means that technically the clients were rewarded by an under-performance in their assets over the very short time they were invested and not even simply put in the place in which they would have been at inception – cash plus basic interest as was the previous standard award. Does this open the floodgates for complaints of underperformance against a benchmark – as perhaps half of all investors achieve statistically and that is even before costs are taken into account?

    The true sadness is that had they been encouraged to stay the course, they would now be very happy.

  16. headbelowthe parapet 25th January 2014 at 4:34 pm

    Hi Philip

    I’ve seen a similar case where the ombudsman dismissed all aspects of the initial complaint but then attacked the asset allocation – he disregarded the full description of the complainant’s risk tolerance and objectives and decided to focus instead on a small fragment of the description which profoundly altered its meaning. This muddle-headedness meant there was a fundamental misunderstanding of the nature of the stated objectives with regard to investment risk.

    To have a system in place where important decisions are made by individuals whose judgement cannot be challenged further, particularly when those decisions have significant financial and reputational consequences is fundamentally flawed. It relies on the decisions being made to be fair, reasonable, clear and rational. Unfortunately, this doesn’t always appear to be true.

    The fact that a particular asset allocation has turned out, in an ombudsman’s opinion, to have been ‘wrong’, in the sense that – with the benefit of hindsight – a different course might have produced a different or better result, does not in itself prove negligence, nor does it prove that products or funds are unsuitable.

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com