Photo: RNZ
A fund manager has been told to pay an investor $1000 after he lost $2800 in a week in the wrong type of investment fund.
The case has prompted a warning that in a falling interest rate environment, people currently in conservative investments could similarly chase higher returns with higher-risk investments, and be caught out.
The man had $77,000 to invest in June last year, after a relationship property settlement.
He contacted a fund manager and put the money into its growth fund. In his application, he said it was for retirement and his investment goal was to buy a property.
But a week later, he withdrew the money because his investment had dropped in value by $2800.
He wanted compensation, which the fund manager refused, so he complained to Financial Services Complaints Ltd (FSCL), a complaint resolution service that deals with complaints that cannot be resolved directly between the provider and the customer.
It did not identify the fund manager or the investor involved.
The man told FSCL he did not receive enough financial advice. He felt the information he had offered in his first phone call should have warned the fund manager that a growth fund might not have been suitable.
While investigating, a FSCL staff member listened to his phone calls with the fund manager. The man said he wanted to put the money towards an investment property at some stage, but he was not sure when.
He said he had looked at term deposits, because they would allow him to lock the money in for a short term, but then said he might not need it for five years.
Over the course of about a month as he prepared to invest the money, he was told a growth investment strategy would aim to grow investments over the long term, but an investor should be able to tolerate volatility. It was suggested he should have a minimum timeframe of seven years.
But FSCL said it could have been the case that managed funds in general were not suitable for the investor's goals.
"This was because even the conservative fund had a minimum investment timeframe of three years and there was a chance that [he] would need to have the funds available at short notice to buy an investment property if one became available.
"We thought that more could have been done by the staff member ... to outline the risk of investment in a managed fund where even the most conservative investment option had a suggested investment timeframe of three years.
"However, at the same time, we said that the biggest contributor to [his] loss of $2800 was that he had decided, within a week, to withdraw his funds, having received warnings about the minimum timeframe for investing in a growth fund, as part of the online application process."
FSCL said the fund manager had been clear that the investor should leave his money and not make a snap decision.
"We thought it was fair that the fund manager should pay [him] $1000 compensation. This was just over a third of his total loss, recognising that it was [his] swift withdrawal of the investment, without giving it time to recovering value, which had been the major contributing factor in his loss."
FSCL said the case was a reminder of the importance of not making snap decisions to sell out of investments and lock in losses.
"It also highlights to fund managers that they need to be alive to any information they're provided by clients about their investment goals, and to explain the risks of investing in a managed fund generally, and more particularly, the risks of investing in a higher risk fund like a growth fund."
Kernel Wealth founder Dean Anderson said people needed to understand there was no "free lunch" in financial markets.
"Think of it as a spectrum: shares typically offer higher long-term returns but with bigger ups and downs, while cash provides stability but lower returns. When we talk about risk in diversified funds, we're really talking about these market movements, not necessarily losing everything.
"Here's the challenge: investors often overestimate their risk tolerance when markets are calm. It's easy to say you're comfortable with a 20 percent drop in theory, but when it actually happens, emotions can take over. We saw this during Covid when many investors switched from growth to cash funds - locking in losses despite having long-term goals.
"Risk isn't just a future concept - it can materialise immediately. A new investor might experience negative returns in their first month, triggering buyer's remorse and emotional decision-making."
He said there was currently $142 billion invested in term deposits, and with interest rates falling, people might be tempted to chase higher returns in riskier investments.
They might choose those that seemed "safe" like wholesale funds promising fixed returns set at 8 percent or 10 percent paid quarterly, he said.
"In face, these funds are very different to a term deposit. They may for example be lending on property mortgages."
He said it was particularly concerning because many of these investors could be older people who could not afford to recover from big losses.
"Unlike younger investors in diversified growth funds who have time to recover from market dips, retirees seeking income might be tempted by seemingly stable high-yield investments without fully understanding the risks. When these investments go wrong - through lockups or losses - the impact on retirement savings can be devastating. And what is worse, is we tend to hear of investors in this spectrum putting a large portion or all of their savings in these funds, often I think believing they are close in risk to a term deposit.
"As term deposit rates decline, we need to ensure investors understand that higher comparable yields also can come with higher risks - even if those risks aren't immediately visible."
