Ask the right questions and demand answers when your financial adviser advises you to part with your hard-earned money. 123RF/SEBNEM RAGIBOGLU
Ask the right questions and demand answers when your financial adviser advises you to part with your hard-earned money. 123RF/SEBNEM RAGIBOGLU

Amanda Karvelas, whose husband was killed in a home invasion, invested what was left of his estate in order to make provision for her child's university education. Initially it seemed to be a good investment until the income stopped and she appeared to have lost everything.

The story is tragic but not unique in the ongoing cases involving the failed Zambezi property syndication promoted by Sharemax

In this instance the Ombud for Financial Services Providers, or Fais Ombud, ruled that the adviser — Johannes Hendrik Conradi van Zyl of Hendrik van Zyl Finansiële Dienste — reimburse her full capital investment.

When her husband died, Karvelas used his one life policy to settle debt and had R400,000 left. She approached her late husband's financial adviser, Van Zyl, and informed him that she could not afford to lose one cent of the money as she was a teacher and the sole breadwinner who needed to invest the money to fund her child's education.

Van Zyl advised her to invest in the Zambezi Retail Park scheme that Sharemax promoted, saying her capital would be guaranteed and she would earn 10% a year on the capital amount. She invested in January 2008 and initially received her returns as expected. Then the "unexpected" happened in 2010 and the company was prevented from trading.

She tried, to no avail, to resolve the matter, but despite the investment having reached its term, she had not received any of it back. She approached the Fais ombud who ruled that the adviser was liable to pay her back her investment.

The Fais Ombud says in the ruling that the adviser's "negligent and inappropriate advice caused the complainant’s loss". 

Before reaching this determination, the ombud put a series of questions to Van Zyl to determine whether he had, as required under the Financial Advisory and Intermediary Services (Fais) Act, practised due care and conducted due diligence before advising the woman to invest.

These questions, which were specific to unearthing what went wrong in this particular case, provide a useful blueprint for the types of questions and accountability you should demand from your financial adviser when you are advised to part with your hard-earned money.

Did you explain that property syndications are high-risk investments for a number of reasons, among which are the complicated structure and the nature of the investment (being unlisted securities)?

Being unlisted means that there is a lack of regulatory oversight. Investors are at risk as unlisted shares and debentures are not readily marketable and the value is also not ascertainable. Should the company fail, this may result in the loss of the investor’s entire investment.

The basis upon which syndicated properties are valued is never fully disclosed.

Did you confirm the valuation figures shown in the prospectus with the cited property valuer?

The prospectus of Zambezi Retail Park makes it plain that Sharemax was the promoter, the company secretary and property manager and makes no mention of an independent fund manager.

Given the overwhelming conflict of interests, what steps did you take to ensure that your client would not be short-changed by the directors of the syndication?

The prospectus further informs potential investors that, essentially, no independent board of directors exists. There is a clause stipulating that a new board will be elected on the first meeting of shareholders; however, there is no evidence that the election occurred.

Given that there was no independent board of directors (as provided for in the King reports), what steps did you take to satisfy yourself that your clients would be protected against director misconduct? Given the absence of an independent board, how were you going to ensure that investor funds would be used for what they were meant for and within proper governance prescripts?

You should be aware that the oversight of a board includes the appointment of an audit committee whose function, among other things, is to receive assurance from an independent audit firm. An audit committee’s oversight includes satisfying itself that the entity has proper controls, and that the information contained in the financial statements of the entity can be relied on.

Given the fact that there was no audit committee and no audited financial statements, what information did you take into account to conclude that the investment was viable?

Government Notice 459 of Gazette 28690 mandates that investor funds are to be kept in a trust account until registration of transfer into the name of the syndication vehicle or upon agreement with an underwriter, whose name must be made public.

Given that the prospectus makes it clear that investors’ funds will be withdrawn to fund various activities, what made you recommend the product to your client, in the face of this high risk?

What information did you rely on to conclude that this investment was appropriate to your client’s risk profile and financial needs as required in terms of the code of conduct under the Fais Act? 

The above questions were sent to Van Zyl in November 2017, to which - according to the Fais ombud's recommendation - there was no response to the notice. In March 2019, the ombud published its determination which read:

"I conclude that the respondent could not lawfully render advice on Sharemax products. As a result, his negligent and inappropriate advice caused the complainant’s loss.

"In the result, I make the following order:

  1. The complaint is upheld.
  2. The respondents are ordered to pay the complainant, jointly and severally, the one paying the other to be absolved the amount of R400,000.
  3. Interest on this amount at a rate of 10% per annum from the date of determination to date of final payment.
  4. The complainant is to cede her rights in respect of any further claims to this investment to the respondent."

The ombud, in this determination and earlier recommendation, has spelled out that the due diligence required by a financial adviser in carrying out his or her functions in the best interests of your unique circumstances and context. Empower yourself by holding anyone who advises you on how to spend your money to the level of accountability they, by virtue of being a registered financial services provider, are obliged to adhere to.

Always check the credentials of anyone before parting with your hard-earned money.