Fund Management Claims

Discretionary fund management is very common. The arrangement is that an individual, a trust or pension fund, places money with a professional manager to manage at his discretion. Very often the person instructing the fund manager is not the owner of the funds, who may be a child, or lacking in full mental capacity, e.g. after a head injury, or a charity.

That there is a problem with discretionary fund managers is clear from the FSA’s “Dear CEO” letter of 14 June 2011.  Out of sample of 16 fund managers examined, the FSA found a significant proportion (well over half) of the portfolios contained investments which were unsuitable for the owner of the funds.

Yet there has been very little litigation, or at least very few reported cases.  This may be because there are many settlements out of court or it may be because far too many people simply swallow their losses and do nothing.

I have seen a fair number of these cases.  Broadly speaking the basic problem seems to me to be that those who go in for discretionary fund management (often stockbrokers) have a much higher appetite for risk than the owners of the funds they manage.  To some extent there is a “dialogue of the deaf” between them. What is regarded by the fund manager as a conservative and stable portfolio in truth represents a risk the client would find unacceptable if he understood it.

Fund managers, in my experience, are very bad at the mandatory process of getting to know their clients and the clients’ understanding of the risks of the funds.  The clients themselves, if trustees or pension trustees, have statutory obligations which a fund manager needs to take into account. Far too often you see a “tick box” approach – forms being completed over the phone in a matter of a few minutes. This perfunctory compliance with basic requirements is inadequate to secure the result the client wants.

Examples that I have seen include the following:

  • A defined benefit pension fund invested exclusively in a single Equitable life with profits] insurance policy.
  • A private trust supposedly invested 50% in equities and 50% in fixed interest in fact invested in over 90% equities about half of which were shares in a single bank (which of course bombed in 2008).
  • A small self-administered pension scheme (called and SSAS) with excessive funds invested in the sponsoring company’s business.
  • A stockbroker managing funds on a discretionary mandate confined to matched trades in bonds issued by Western European banks in fact using the funds to buy a share in a portfolio of American life insurance policies.

These are but a few of the considerable number of fund management cases that I have seen.

These claims are not always easy. Sometimes there is a degree of acquiescence by the client.  It is not fatal for a claim that the claimant contributed to his own losses. In such a case his damages may be reduced by a percentage to reflect that contributory negligence, but the claimant is not shut out from making a claim altogether.

The standards to be observed by fund managers are in part imposed by the FSA’s rules and in part by the mandate set out in the contact for the fund management services.  It is a requirement of the FSA that there should be a written contract.  So each case largely turns upon its own contract and its own facts.

Where money is simply misappropriated (sadly, this is distressingly common) the claim is relatively straightforward.  Where, however, the claim involves unsuitable investments the issues may be more nuanced and may call for expert evidence from a good quality professional fund manager.

But it starts with the client being willing to see someone about the problem.

I am of course always wiling to help and always willing to talk to people without charge in the first instance to see if there is anything to be done.

But remember there are limitation periods. These are the permissible periods of delay between the loss and the commencement of proceedings. In fund management cases these are sometimes quite difficult to calculate. The rules are more complex than usual. So it is important to take advice as soon as it becomes clear that a significant loss has been suffered.


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