Have your say: Should financial advisers have liability insurance and rebate commissions?

The High Court has ruled that a 75 year old Napier widow, Joyce Breeze, be paid NZ$250,000 in damages and costs by her financial advice firm VPFS Financial Planner Ltd after she was advised to put money into apartment investments set up by Mark Bryers' Blue Chip. However, VPFS director Venn Plummer has said it cannot pay because it does not have any money and his professional indemnity insurance was withdrawn days before his court case, meaning he did not have any money to employ lawyers and could not defend the case. He told interest.co.nz he believed he had a strong defence and his firm had done nothing wrong, adding that the Justice system did not work when companies could not afford legal aid. The NZHerald and the DominionPost have more details on the case here, which some said could provide a benchmark for other investors who have lost money in Blue Chip or in finance companies. Here's what the DomPost reported.

Mrs Breeze won the award after VPFS chose not to defend a claim in the High Court at Napier this month of negligence relating to advice given to her. She mortgaged her home in 2007 and put the money into a planned Blue Chip property development. At the time she was 75. Lawyer Neil Thinn, who acted for Mrs Breeze, said the case did not set a precedent as it was not defended and the ruling was specific to Mrs Breeze's case, but it should encourage others who invested in Blue Chip, which collapsed last year owing $84 million to 3000 investors. "All Blue Chip clients should look at issues of negligence and breach of fiduciary duty in terms of the relationship between the client and their financial adviser and the lawyer," he said. Institute of Financial Advisers president Lyn McMorran said the case was likely to spark claims from those who lost money in Blue Chip and other failed companies. "I think a lot of advisers probably are worried." Labour commerce spokeswoman Lianne Dalziel, who as commerce minister steered through tougher laws for financial advisers that will take effect from next year, said it was a landmark case. "[It] will give hope to the hundreds of investors who invested in Blue Chip, many of whom had no idea about the nature of the risk they were taking with their hard-earned money." Judge Simon France ruled that the advice given to Mrs Breeze was negligent because of the risk involved and her age.

Here's what the NZHerald reported.

Myles Wealth Management director Craig Myles suggested yesterday that the 3000 investors who lost money through Blue Chip could compare the detail of their case with that of the Napier case. "If the facts of your case mirror the case that has just received judgment; the closer your circumstances are ... the more likely your claim would be successful. When you establish liability through case law like this, it will now create a benchmark for others to be assessed against."

Ven Plummer, the director of VPFS, told interest.co.nz he had not defended the case because his professional indemnity insurer QBE, had withdrawn his cover days before the case was due to be heard. "I feel for financial advisors who are carrying on any business because I wonder whether their indemnity insurers will be there will need them," Plummer said. VPFS had not operated for two years and Plummer said he was now looking for work. Plummer said he was prepared to defend the case and believed his firm had done nothing wrong in providing the advice to Breeze, who had been receiving a 16% commission from Blue Chip until it failed, in addition to having her mortgage paid. Plummer said justice was not done in this case because he was unable to defend the case after any means to pay for a lawyer was withdrawn, given there is no legal aid for companies. What I think Some financial advisors who are not accredited to the Institute of Financial Advisers are not required to have professional indemnity insurance, although it sounds like this insurance isn't worth much anyway. One reason for the growth of many financial advice firms over the last decade was the ability for financial advisors to claim commissions upfront and through trailing commissions from the institutions raising money. This engendered a short-termist approach driven more by hunger for sales than caution for the saver. The Australian government is now pushing to force financial advisors to charge fees for service rather than receive commissions. I think this is a good idea. There are good financial advisors around, many of whom already rebate their commissions to customers and charge a fee such as 1% to manage portfolios. This is a much more sustainable and sane model. Your view? We welcome your thoughts and comments in the comments below.