Russell v GWM Adviser Services Ltd
[2010] VCC 1619
•7 December 2010
| IN THE COUNTY COURT OF VICTORIA | Revised |
(Not) Restricted
AT MELBOURNE
COMMERCIAL LIST
GENERAL DIVISION
Case No. CI-07-01029
| CHRISTOPHER RUSSELL | Plaintiff |
| v | |
| GWM ADVISER SERVICES LTD | Defendant |
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| JUDGE: | HIS HONOUR JUDGE ANDERSON |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 1, 3-5 November 2010 |
| DATE OF JUDGMENT: | 7 December 2010 |
| CASE MAY BE CITED AS: | Russell v GWM Adviser Services Ltd |
| MEDIUM NEUTRAL CITATION: | [2010] VCC 1619 |
REASONS FOR JUDGMENT
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| Catchwords: | Negligence – Financial advice – Whether appropriate for Government Superannuation Office lifetime pension to be commuted to a lump sum and invested in market securities – Damages – Whether cost of purchase of annuity equivalent to GSO pension appropriate – Allowances for withdrawals made to fund the litigation. |
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C R Hanson | Wisewould Mahony |
| For the Defendant | Mr D A Klempfner | Monahan & Rowell |
| HIS HONOUR: |
1 In 1991, Christopher Russell retired from primary teaching due to ill-health. He then became entitled to be paid a Government Superannuation Office (GSO) pension for the rest of his life, adjusted according to the consumer price index.
2 In 2001, when Mr Russell was 47, his annual pension was $29,685. In early 2001, he received an offer that he could commute his pension either as to 50 per cent or 100 per cent and, in the latter case, receive a lump sum of approximately $452,000. Mr Russell sought advice from Michael Guthrie and Grant Taylor of Taylor Financial Group. The Group was part of the defendant company which provided financial planning and investment advice under the name “Garvan Financial Planning” (Garvan).
3 After an initial interview between Guthrie, Taylor and Russell in February or March 2001, written advice was provided on 23 March 2001 that Mr Russell should accept a 100 per cent lump sum in lieu of his pension. After further consultation, a second written advice was given on 27 June 2001 that Mr Russell should invest the entire lump sum in the “MLC MasterKey Allocated Pension Product”.
4 Mr Russell accepted the advice. The lump sum was placed in nominated MLC funds which predominantly invested in shares. The income was tax free provided Mr Russell took part of the income as a pension. The balance of income was re-invested in the funds. Mr Russell initially nominated a pension rate of $2,100 per month ($25,200 per annum) which was more than the minimum that he was required to withdraw but was less than the amount he had been receiving under the GSO pension.
5 Whilst the long-term historical returns from investments in shares has averaged about 10 per cent per annum, the MLC investments were adversely affected by the events of 11 September 2001, which triggered a significant fall in share prices. The value of the investments supporting Mr Russell’s pension fund decreased.
6 In June 2004, Mr Russell sought financial advice from Garvan about paying for the cost of dental treatment. Mr Russell then obtained a second opinion from Ms Lyn Jenkin of the Victorian Teachers Credit Union. In a letter dated 21 June 2004, Ms Jenkin referred to the advice Mr Russell had received in 2001 to commute his GSO pension and noted that, “It appears that the advice you have received may be inappropriate and imprudent, given your circumstances and state of health”. Ms Jenkin recommended that Mr Russell “commence a grievance procedure”. As a consequence, Mr Russell initiated a complaint to Garvan.
7 In June 2006, Mr Russell nominated Ms Jenkin as his financial adviser and, on 21 February 2007, Ms Jenkin organised a “switch” of the investments to other MLC funds which included a broader range of investments including property funds. The investments were adversely affected by the global financial crisis. After 2004, Mr Russell continued drawing down a regular pension. He also made a capital withdrawal for his dental treatment, and over the last two years has withdrawn substantial sums to meet his legal costs of the present proceeding.
8 Adjunct Professor Wesley McMaster of the School of Economics, Finance & Marketing at RMIT University, prepared an expert opinion for Mr Russell. His conclusion was that “a reasonably competent financial adviser would have advised
Mr Russell to retain his full pension”. He considered that the only way in which Mr Russell’s position could be restored would be if he purchased an annuity which gave the same return as the GSO pension. In addition, there would need to be an accounting of the money Mr Russell had received as pension payments and the further capital withdrawals from the MLC allocated pension fund.
9 Mr Russell and Professor McMaster gave evidence at the trial. No oral evidence was led on behalf of the defendant although the parties agreed to the tender of contemporaneous documentation included in the court book.
10 The issues raised for determination in the proceeding are as follows:
1.
Was the financial advice given by Garvan in the letters dated 23 March 2001 and 27 June 2001 given negligently or alternatively did the advice constitute actionable representations pursuant to the Fair Trading Act 1999?
2.
If the defendant were liable for damages, was the chain of causation broken by the “switch” of investments made by Ms Jenkin on behalf of Mr Russell on 21 February 2007?
3.
Is Mr Russell entitled to damages equivalent to the current cost of purchasing an annuity which would return to him the same income as he would have been entitled to receive under the GSO pension?
4. What allowances should be made in respect of:
a.
the amount standing to the credit of Mr Russell in the MLC allocated pension account;
b.
the amounts withdrawn from the account in excess of sums he would have received had he remained in receipt of the GSO pension;
c. any contributory negligence on the part of Mr Russell?
Initial meeting in March 2001
11 At university, Mr Russell obtained a Master of Arts degree in philosophy and for two years studied towards his PhD. He then decided to become a teacher and completed a Diploma of Education. He later suffered from severe depression which forced him to retire from teaching. He was granted a disability pension which he received for a number of years until early 2001 when he was offered the option of commuting the pension to a lump sum. At that time, it was made clear that if he did not accept the lump sum, there was no question that his GSO pension would not continue. It was accepted that Mr Russell would be unable to be gainfully employed for the rest of his life.
12 There are notes in evidence which came from the defendant’s discovered documents. The notes are headed, “Christopher Russell 22/03/2001 joint appointment with G Taylor”. The relevant part of the document reads as follows:
“Referred by Mike Brown.
On disablement benefit from the Ed. Dept. since 1991.
Offered the lump sum option and wanted advice as what to do.
Single with no dependants.
Assets.
Home $180,000.
Mortgage $30,000. $150 per fortnight with CBA.No other assets to speak of.
Investment attitude. he understood this issue.
We discuss asset allocation and his feelings about shares.
He indicated that he had previously invested in shares and understood
volatility and is happy to have exposure in this area.Action steps. fide disablement benefit so that it can go into an AP (under 55)”.
Do spreadsheet analysis.
Make recs [recommendations] for AP [allocated pension].
Retain $30K after tax to pay out mortgage – calculated tax on this
withdrawal.
Show income stream and capital growth.
13 evidence of the process undertaken by Mr Guthrie and Mr Taylor before they gave
advice to Mr Russell. Although Mr Russell said, in relation to the events in 2001, “I
can’t remember a lot of detail”, in fact he was able to. His evidence was, in my view,
honestly given. He made appropriate concessions and his evidence was confirmed
by the contemporaneous documents. In the absence of any evidence from MrThis is a useful document as, apart from the evidence of Mr Russell, there is no other Taylor was present in Court for a substantial part of the trial and there was no evidence or explanation as to whether he or Mr Guthrie would have been unavailable to give evidence.
14 Mr Russell said in evidence that he first met Guthrie and Taylor in March 2001 at the defendant’s offices in Doncaster. The initial meeting lasted perhaps one and a half hours. At the time he first sought advice from Garvan, Mr Russell said that he was “not particularly well” and had little interest researching the issues upon which he was seeking advice. He had received the offer to commute his GSO pension. The offer was enticing, but he realised he needed to be clear-headed. Mr Russell said that he was undecided about whether to take the lump sum. He wanted to receive objective advice from someone who knew more than him.
15 Mr Russell said that he asked Guthrie and Taylor for advice as to what he should do; whether to take the lump sum offered or to stay with the GSO pension. Mr Russell said he was asked about his background. He was asked questions about whether he was married and had children and about the disablement benefit. Mr Russell told Guthrie and Taylor that he received a pension because he had been unable to continue working as a teacher. He did not go into much detail but did indicate that he suffered from depression. Mr Russell told them how much his pension was. He said he was not saving any money from it.
16 Mr Russell said that he was paying off the mortgage on his home at the rate of $150 per week and that there was about $31,000 owing. He told Mr Guthrie and Mr Taylor that he considered it desirable for him to pay off his mortgage in “one hit” from the
lump sum, rather than over a number of years. Mr Russell said that he had no other property, no shares and no significant savings. He was not married at that time and had no family. At the start of 2001, Mr Russell had commenced living with Ms
Elizabeth McGrath, a former teacher who commenced studying that year. She later also went to Garvan’s for financial advice. At meetings in March and April, Mr Russell said that it was not a consideration that Ms McGrath may become a beneficiary upon his death, although he later nominated her as his beneficiary when he completed the relevant forms.
17 Mr Russell told Guthrie and Taylor that he had previously invested in shares although he did not go into details about the shares. Mr Russell considered that from what he told Guthrie and Taylor, it would be unlikely that they would have assumed he had more experience of shares than he had. Nothing further was asked about this by Guthrie and Taylor. The investment had been of a few thousand dollars in 1983 when he started teaching and he had sold the shares not long afterwards. Since that time, he had not purchased any further shares.
18 During the meeting, Mr Russell said that there had been discussion about the three options of, keeping the pension or accepting either 100 per cent or 50 per cent of the lump sum. Mr Russell was told about the potential to withdraw capital. At that time, however, the ability to access capital was not necessarily an attractive feature. Mr Russell said he was advised that it was only possible to have capital growth if the fund was not drawn down and he would be advised not to.
19 advice that would be given but said that he and Mr Guthrie would do some research,
carry out investigations and make some calculations of likely projected figures. Mr
Russell said that he was told at the meeting that the share market would go up and
down. He told Mr Taylor and Mr Guthrie that he knew that. He said that heMr Taylor conducted the initial meeting and he gave a general indication of the were offered by long-term investment in shares were not available from bank interest. He was aware of the Great Depression in the 1930s and that the possibility such an event recurring could not be ruled out. Mr Russell said that at the initial meeting he considered that there would be some risk but he understood that, for his situation, it would not be unreasonable.
Written advice dated 23 March 2001
20 Mr Russell was sent written advice with a letter dated 23 March 2001 signed by both Mr Taylor and Mr Guthrie. The letter noted that: “As our recommendations are based
on the information collected by us during our appointment, we would ask you to take
time to read the plan carefully to be certain that we have met your specific
requirements. If you have any queries regarding the accuracy or content of the
information or discover any errors or omissions, please advise us immediately and
discuss these with us before implementation. This will enable us to modify the plan to
reflect your current position. The advice and recommendations contained in thisreport are based on information provided by you to us and our analysis of your
circumstances. The advice and recommendations will remain current for a period of
30 days providing that your circumstances do not materially change during thatperiod’”.
21 The report contained information under five headings and included two tables headed “Macquarie Superannuation Allocated Pension” showing projections if 100 per cent or 50 per cent of the lump sum were commuted and Mr Russell’s home loan mortgage
of about $30,000 were paid off. The five headings of the report were “Risk Profile”,
“Income/Liability/Expenditure”, “Our Recommendations”, “Disclosure” and
“Disclaimer”.22 The Risk Profile read as follows: “During our interview you indicated that you are an
investor who seeks a medium to long-term investment strategy that will facilitate
growth of your portfolio’s ‘real’ net worth. You may require a more active involvement
in your portfolio and are prepared to accept a higher level of capital volatility in order
to obtain potentially higher rates of return. You are primarily concerned with yourportfolio’s capital gain as well as some tax effective income”. In his evidence, Mr Russell said that he agreed with the “risk profile” contained in the report. He was prepared to be exposed to share market movement and understood that there were a
number of different funds in which it was possible to invest with different risk profiles
and varying returns.23 Under the heading “Income/Liability/Expenditure”, the report read: “You are currently
meeting your expenditure needs with the income being paid from your super pension
that has been payable since 1991. Your entitlements will be $1,141.72 per fortnight
as at 1 July 2001, that is $29,685 pa before tax. You presently have a mortgage over
your home of $30,000. If you proceed with the lump sum offer, you indicated that you
wished to pay out this amount. Please note that upon the implementation of our
recommendations your weekly income will be more than adequate to meet yourongoing expenses”.
24 Under the heading “Our Recommendations”, each of the options of retaining the current pension or taking 50 per cent or 100 per cent of the offered lump sum was discussed with the advantages and disadvantages of each course of action being set out. For example, the current pension had, as one of the disadvantages: “You have no access to any capital under this option”. One of the advantages of accepting a lump sum was stated to be, “access to capital sums whenever required”. The retention of the current pension was said to have the advantage that it “is payable for life [and] will be indexed annually”. A disadvantage of the acceptance of a lump sum was noted as: “The allocated pension capital may run out due to either adverse
investment circumstances or alternatively, you chose to make lump sum withdrawals
(although clearly this flexibility is a benefit to you)”.
25 A table compared the three options with alternative projections being offered for the lump sum option on the basis of either 8 per cent or 10 per cent earnings. The recommendation was that, Mr Russell “take the 100% lump sum options”. It was stated that: “Total income and capital under the 100 per cent option (assuming a 10
per cent return) is $1,900,816. This amount exceeds the option 1 full pension [the
existing GSO pension] by approximately $585,434 (assuming a four per cent indexed
rate in the pension payments). You will also be in the position of having fully paid out
your mortgage. This option also gives you access to a large capital base that can beaccessed at any time”.
26 The report then made recommendations as to how the balance of the lump sum might be invested with five different companies, one of which was MLC. The “past performance” of each of the proposed investments was analysed. The report recommended investment as to “approx 80 per cent in growth assets while the remainder is invested within low risk areas such as cash and fixed interest”.
27 The “Disclosure” section set out the relevant fees, commissions and brokerage that would be payable. The “Disclaimer” section generally repeated in more detail the matters I have referred to in the covering letter and noted: “Your adviser is
responsible for ensuring recommendations in this report are reasonably based and
made with regard to your stated investment objectives, financial situation andparticular needs”. The report also stated that the projections given “are purely
estimates and may vary with change in circumstances” and the projections of income
and growth “have only been used to indicate a return that might be achieved over themedium to long-term of the investment. Assessments of the economic trends, as
carried out by our economic analysts, are subject to the volatility and vagaries of thepolitical and economic climate”.
28 The projections for the allocated pension were given over a period of 34 years, assuming a gross earning rate of 10 per cent per annum. The figures showed substantial growth in the “actual pension” to be taken each year and in the fund itself until the capital started to decline after age 80.
29 Mr Russell said that he read the advice and paid particular attention to the through his seventies and into his eighties. Mr Russell said the advice was “clear cut” and that he telephoned Mr Guthrie or Mr Taylor and told them he would go ahead. He said he thought that not long afterwards he went back to Garvan and signed papers.
Written advice dated 27 June 2001
30 The lump sum was to be available on 1 July 2001. Shortly before that date, Mr Russell received a letter from Garvan dated 27 June 2001. The letter noted that: “During previous conversations we have explained MLC’s portfolio management
process. Instead of managing funds, MLC manage other fund managers…Due to
some recent enhancements to this system, instead of investing your funds across the
three or four products we had previously recommended to you, we are now
recommending that you take full advantage of the benefits offered by the MLCMasterKey system”.
31 Mr Russell said that his view was that if Guthrie and Taylor thought it was better to invest in these funds he was happy with that and telephoned and said that he would do so. Although it was suggested to Mr Russell that he had been given an MLC customer information brochure, he said he did not recall seeing the document at that time.
32 Despite what had previously been discussed about Mr Russell’s mortgage, the whole of the lump sum was invested without the mortgage being paid off. Later, the home loan was re-financed with a Homeside Loan from the National Australia Bank, which loan also secured a line of credit. Mr Russell said that he signed the relevant documents and knew that his mortgage loan was being transferred and not paid off. He said he “went along” with this and did not insist that his mortgage be paid out and had agreed that all the pension funds be invested. Later, Mr Russell had complained that the mortgage on his house had not been paid off. The MasterKey investments, into which the lump sum was put were chosen by Mr Taylor and Mr Guthrie. Mr Russell said that he was not aware of the reasons for choosing particular funds, although he did not know that there was a capacity to switch funds.
33 Subsequently in 2002, upon advice from Mr Guthrie and Mr Taylor, Mr Russell drew down on the line of credit and invested a substantial sum in geared investments. The advice given in 2002 to proceed with geared investments was the subject of a second proceeding which has been compromised between the parties.
34 Mr Russell said he established a personal friendship with Mr Guthrie and saw him socially on occasions. They remained in contact although Mr Russell had not seen him since 2004, when he first made a complaint to Garvan. In August 2002, there had been a portfolio review which indicated that, from the initial investment of
$452,917, the capital had reduced to a current balance of $378,389. Although Mr
Russell said he was concerned at the reduction, he knew that the markets were likely
to fluctuate. Mr Russell met Mr Guthrie regularly and expressed his concerns. Mr
Russell was told that in the long term, if he stayed put, the fund would “bounce back”.35 In July 2003, Mr Russell had a meeting with Mr Guthrie. He was given a series of graphs, one of which showed a decline in the value of the allocated pension and indicating that, if the decline continued, the pension would expire by the time Mr Russell reached age 64. This possibility had not been mentioned as a “realistic” possibility but only as a “theoretical” one. Mr Guthrie told Mr Russell that it was “something to bear in mind” but Mr Russell said that he was reassured by the fact
that he still had the geared investment and had discussed that fact with Mr Guthrie.
36 Mr Russell was aware that there was an exit fee if he withdrew from the allocated pension within the first few years. Apparently there was a switch of funds recommended by Michael Guthrie which took place on 27 May 2003, although Mr Russell said he did not know anything about it. The switch may have been into a less risky fund. In 2004, Mr Russell became aware that his dental problems would require expensive treatment. He needed $20,000. Mr Taylor advised him to borrow the money rather than taking it out of the allocated pension fund. In June 2004, Mr Russell sought a second opinion from Ms Jenkin at the Victorian Teachers’ Credit Union.
37 Ms Jenkin asked Mr Russell about his situation and suggested that in his circumstances, the investment in the allocated pension was not a good idea. This was the first time that the advice of Mr Guthrie and Mr Taylor had been questioned. Ms Jenkin recommended that Mr Russell make a complaint to Garvan. Mr Russell followed this advice. The letter of complaint dated 28 June 2004 noted that Garvan’s “authority to implement recommendations inconsistent with your advice [dated] 27
March 2001 was obtained without my informed consent and with your full knowledge of my mental impairment at the time. In particular, I did not consent knowingly to your intended placement of the sum of $31,941 in MLC products rather than to its
allocation to the mortgage”.
38 Ms Jenkin’s advised Mr Russell to take the $20,000 for his dental expenses out of the allocated pension. Mr Russell followed this advice although he stopped regular withdrawals because he said he thought at the time that this would impact on long- term capital growth. Later, from time to time, Mr Russell took out lump sum payments of $5,000 for his living expenses and about $4,000 to pay for a white noise generator to deal with his tinnitus. The withdrawals from the allocated pension are more in total than Mr Russell would have received from the GSO pension.
39 From 2004, Mr Russell earned small sums from tutoring work at Latrobe University. In June 2006, Mr Russell signed an authority for Ms Jenkin to become his financial adviser. In February 2007, Mr Russell, upon the advice of Ms Jenkin, switched to
other funds in the MasterKey product range which had broader and more
conservative investments. These alternative investments have also not been
successful.
Defendant’s submissions
40 It was suggested in final submissions by Garvan’s counsel, Mr Klempfner, that Mr Russell was a very intelligent man who understood the issues involved in the decision to take a lump sum and invest in the share market and must therefore accept responsibility for the consequences of the decisions he made.
41 It was also submitted that:
a.
Effectively after June 2004, Garvan did not exercise any decision making in relation to Mr Russell’s investments because he had sought advice from Ms Jenkin, although he did not formally execute an authority for her to become his financial adviser until June 2006. When, upon her advice, he switched
investments in February 2007, the allocated pension fund was invested in
different securities. These investments had declined significantly as a result ofthe global financial crisis.
b. Mr Russell had drawn down substantial sums from the allocated pension fund, particularly to meet his costs of the present proceeding. 42 Had Mr Russell continued to receive a sum equivalent to the GSO pension and not made further withdrawals of capital, then, it was suggested, the capital of the allocated pension fund would not have been significantly less than the sum of $450,000 originally invested. On 21 February 2007, when the funds were switched, the value of the MLC portfolio was $433,397.
43 The volatility of the MLC investments was indicated by the balance of the allocated funds as at various dates. In the six months following the investment, the balances as at 10 September 2001 was $430,294.85; at 20 September 2001, $409,594.62; at 10 October 2001, $422,410.43; 22 October 2001, $422,797.38; 21 November 2001, $435,922.00; 3 December 2001, $438,195.00.
Obligations of a financial adviser
44 Financial advisers operate in a regulated environment. In early 2001, the Corporations Act 1989 governed the activities of a “securities adviser”, including the defendant, at the time it gave advice to Mr Russell. Section 851(1) of the Corporations Act 1989 provided that a securities adviser making a securities recommendation to a person who may reasonably be expected to rely on it must have a reasonable basis for making the recommendation. Section 851(2)(a) provided that: “In order to ascertain that the recommendation is appropriate having regard to
the information the securities adviser has about the person’s investment objectives,
financial situation and particular needs, the securities adviser [must have] given such
consideration to, and conducted such investigation of, the subject matter of therecommendation as it reasonable in all the circumstances”.
45 On 3 March 1997, the Australian Securities & Investments Commission issued policy statement 122 setting out: “ASIC policies and guidelines on how persons making
securities recommendations to investors (clients) can meet the Conduct of Business
Rules in the Law”, noting that one of two key obligations was the requirement to
“have a reasonable basis for any recommendations made under s.851”.46 Part IV of the policy statement dealt with, “Know your client obligation under s.851”. In order for a security adviser to have a reasonable basis for making a securities recommendation to a client, the adviser must:
“(a) have regard to the information the securities adviser has about the
client’s investment objectives, financial situation and particular
needs;(b) conduct reasonable investigations about the securities recommended”.
47 Paragraph 122.101 provided that in order to ascertain a client’s investment objectives, financial situation and particular needs, the securities adviser “must carry out a full needs analysis” and to do so the adviser must either: “have in their
possession adequate information about the client’s individual needs and
circumstances or make reasonable enquiries to obtain that information from theclient”.
48 Paragraph 122.103 noted that: “The level of personal information needed from each
client for making a personal securities recommendation of the kind expected by that
client varies from one client to another”.
49 Paragraph 122.104 suggested that the following information would generally be needed:
“(a) the client’s needs and objectives for income, capital growth,
security, retirement income, liquidity and the time period the client
is planning for;(b) the client’s personal financial circumstances such as liabilities and potential liabilities, the nature of any assets held and any retirement benefits expected (including that of a partner when relevant); (c) the client’s individual investment preferences and aversion or tolerance to risk; and (d) any other client information such as employment security, family commitments and expected retirement age”.
50 In Part V “Record Keeping Standards”, the policy statement suggested that records be kept “of client profiles and product research”. It is provided that the record keeping may be appropriate so that “a securities adviser can also use their records to defend a claim by a client that the adviser…made inappropriate recommendations”. Paragraph 122.145(a) provided that: “It is prudent to keep comprehensive records at least for a reasonable length of time”.
51 In paragraph 122.102 it was noted that: “Section 851 does not expressly require
reasonable enquiries to be made of the client’s needs and circumstances. However ASIC considers that this is implicit in the underlying purpose of the s.851 obligation
and the general law obligations of the securities adviser as a fiduciary”.
52 The statutory provisions of the Corporations Law and the ASIC policy statement are not referred to by the plaintiff in his Statement of Claim. Nevertheless, the provisions appear to be an important part of the basis upon which Professor McMaster has
expressed his expert opinion. I consider that the common law requirements upon an
investment adviser, such as the defendant giving advice to Mr Russell in the
circumstances of the present case, would oblige a reasonable and prudent adviser
exercising an appropriate standard of care to have complied with the requirements of
both the legislation and the policy statement to which I have referred. No submission
to the contrary was made by Mr Klempfner.53 Professor McMaster noted in his report that: “Generally investors are identified as having one of the following standard risk profiles…”. These were described as conservative, moderate, balanced, growth and high growth. The categories are defined by the “typical equity/bond investment portfolios that are applied to clients with these risk profiles”. A “conservative” risk profile should involve an investment portfolio of 20 per cent equity and 80 per cent bonds, whereas a “growth” description for a client would justify investment of 80 per cent in equities and 20 per cent in bonds. The MLC investment portfolio which Mr Russell was advised to enter, came within the “growth” risk profile.
54 Professor McMaster said that tolerance to risk was measured by some advisers by conducting psychometric testing. Tolerance to risk could also be ascertained through asking questions and discussion and by explaining how markets work and the factors which affected the return to investors.
55 Generally, the opinion of Professor McMaster was that the advice given by Mr Taylor and Mr Guthrie to Mr Russell was inadequate for a number of reasons:
a.
the performance of the proposed investment fund was shown in tables indicating capital growth of eight to 10 per cent. This was more than the historical performance of those products, which was 5.06 per cent per annum;
b.
Mr Russell’s profile was not “of a person who could afford to take high risk” but was “the profile of a person who should take low risk”. Professor McMaster formed this view on the basis that “Mr Russell did not have the capacity to replace any capital if losses occurred”;
c. “The recommended investment portfolio on page 3 of the letter dated 27.6.01 has approximately 85 per cent in equities and 15 per cent in bonds. This is a
typical asset allocation for a person with a ‘growth’ risk profile”;
d. ordinarily persons “with access to lifetime guaranteed indexed pensions will consider commutation options [because] it provides access to capital and the
capital remains in the estate after death”. Commutation of a life time
guaranteed indexed pension is “rare” as “generally, the amount of capitalavailable from commutation cannot be invested to deliver the equivalent
income of a lifetime guaranteed indexed pension”.
e.
“Making a commutation decision, a person is choosing a lower income and higher risk”. The financial advice to commute the GSO pension failed to properly investigate Mr Russell’s needs, to identify his risk profile and to correlate with his financial needs and appropriate investment objectives.
Whether Garvan’s advice was negligent
56 The critical issue is whether Mr Taylor and Mr Guthrie should have advised Mr Russell to commute his GSO pension and invest in an allocated pension with the likelihood of capital growth. In determining this question I must have regard to the documents in evidence and essentially the uncontradicted evidence of Mr Russell and Professor McMaster. It is clear from the reports containing the advice that the advisers were aware of the process they should follow. There is, however, little evidence that they made appropriate enquiries about Mr Russell’s personal circumstances and his tolerance to risk.
57 Although it is some considerable time since the advice was given, there was no evidence at the trial concerning the record keeping or information gathering by Mr Taylor and Mr Guthrie apart from what was included in the first report and in the document headed “Christopher Russell 22/03/2001 joint Appointment with G Taylor”. Specifically:
a.
there was nothing in this material which would indicate that Mr Taylor and Mr Guthrie had investigated Mr Russell’s previous investments in shares. If they had, they would have discovered that the investment was limited to a modest sum which had been realised after a very short period many years previously;
b.
although there was stated to be an understanding by Mr Russell of “volatility” and his preparedness to accept “exposure in this area”, there was nothing in the evidence which would justify this conclusion as more than a theoretical
knowledge rather than an informed understanding after adequate explanation effectively prevent him from working for the rest of his life;
and discussion. Undoubtedly, Mr Russell is a very intelligent person.
c. Mr Russell said that he had no need for capital as such, except to pay off the mortgage on his home to reduce his weekly commitments. He had no family and therefore the stated benefits of the allocated pension for him were not obvious. There was no discussion of these matters in the report save that the advantage of commuting the government pension included “access to capital sums whenever required” and “if tragedy arises you will not lose the capital”, without noting any particular advantage to Mr Russell or reason why the
acceptance of that option would be appropriate to him.
d. there did not appear to be a detailed consideration of Mr Russell’s weekly commitments apart from the mortgage payment of $150 per fortnight or other investigations to ensure that Mr Russell’s particular needs and objectives would be met by the financial advice. The March advice noted “that upon the implementation of our recommendations your weekly income will be more
than adequate to meet your ongoing expenses”. This, however, was never to
be the case, even with the larger sum invested, as the mortgage was not
repaid. Mr Russell accepted a considerably lower weekly pension because he
understood the fact that, for the capital fund to grow, the least amount
possible should be withdrawn. Later, it was necessary for him to increase the
sum taken as a pension and occasionally to withdraw lump sum amounts.
58 In the circumstances, I agree with Professor McMasters’ opinion expressed in his report as follows: “A lifetime guaranteed index pension is a risk free source of income
and cannot be replaced through commutation. Given Mr Russell’s position at the time
of the original advice, it is my opinion that a reasonably competent financial adviserwould have advised Mr Russell to retain his full pension.”
Calculation of loss
59 Mr Hanson, on behalf of Mr Russell, submitted that in order for Mr Russell to be put entitled to an award of damages equivalent to the cost of purchasing a pension giving a return equivalent to that of the GSO pension with CPI adjustments.
60 It would be appropriate, however, that this amount be reduced by:
a. the amount standing to the credit of the allocated pension account; b. the amounts withdrawn from that account in excess of the sum that Mr Russell would have received had he remained on the GSO pension. 61 Mr Klempfner, on behalf of the defendant, submitted that:
a. after the switch of investments on 21 February 2007 the defendant ceased to have control over the investments; b. Mr Russell had drawn down the allocated pension to pay for his dental treatment, a white noise generator and to pay the legal costs of the present proceeding. These withdrawals had reduced the allocated pension fund and the potential for capital growth. 62 In my view, the following factors should apply in the assessment of Mr Russell’s damages:
a.
Mr Russell did not at any time have the financial means to retrieve the situation by purchasing an annuity equivalent to his GSO pension. He was not capable financially of mitigating his loss in this way and I do not consider that his inability to do so should bar the remedy he seeks;
b.
although there was a “switch” of funds, there is no evidence that this had any financial effect on the capital of the allocated pension compared to the position, if the switch had not occurred. The investments to which Mr Russell switched, on advice from Ms Jenkin, were slightly more conservative investments, although capital losses were also experienced;
c.
substantial capital sums were withdrawn by Mr Russell. Modest withdrawals were made for the dental treatment and the white noise generator. As for the withdrawals for the legal costs of the present proceedings, it is appropriate for these amounts to be taken into account, as the submissions by plaintiff’s
counsel conceded. It is my view that Mr Russell had no option other than to take those steps in order to be able to proceed with his action. The result of this proceeding demonstrates that he was justified in doing so.
63 There is no basis for reducing the damages by reason of the contributory negligence alleged on the part of Mr Russell. The negligence alleged was that he “failed to
carefully consider the subject matter of the First Advice and the Second Advice … Failing to advise the Defendant after the redemption of the GSO Pension that the investment mix in the MLC AP was insufficient to provide the Plaintiff with adequate
income so as to allow the Defendant to alter the mix of investments such as to
provide the Plaintiff with adequate income [and], Failing to request the Defendant to
alter the mix of investments so as to provide the Plaintiff with adequate income”.
There was no evidence to support these allegations.64 Professor McMaster had obtained a quotation from CommInsure to purchase a replacement annuity for the sum of $1 million. The defendant submitted in evidence a document from Challenger indicating that a similar product could be purchase for $850,000. It was not clear whether the products were comparable. Both counsel conceded in final submissions that in the circumstances it would be appropriate, if the Court determined that the plaintiff were to be entitled to damages calculated on the basis of a replacement annuity, that the parties explore the options available for purchasing such a product, and if no agreement could be reached, further evidence would be put before the court for decision on the matter.
65 In the circumstances, my conclusions at the present time are as follows:
a. by reason of the defendant’s actions, Mr Russell is entitled to receive damages calculated by reference to the cost of obtaining an annuity which would give him a benefit equivalent to the GSO pension if it had not been commuted. b. From that sum must be deducted the balance standing to his credit in the allocated pension fund and an amount equivalent to the withdrawals made from the allocated pension fund in excess of the payments he would have received under the Government Superannuation Office pension. 66 I will hear further submissions from the parties after they have had time to investigate the cost of a replacement annuity.
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Certificate
I certify that these 20 pages are a true copy of the reasons for decision of His Honour
Judge Anderson delivered on 7 December 2010.
Dated: 7 December 2010.
Hannah Christensen
Associate to His Honour Judge Anderson
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