A financial planner has lost his appeal against an order that he pay compensation to a motor accident victim for failing to warn her against over-spending her injury compensation funds.
She consulted Anthony Avery of Avery Financial Planning to provide financial advice concerning the $1.13 mil that was available for investment.
By June 2007 her portfolio had grown to $1.308 mil. By the end of 2008 – as a result of unsuitable investments and imprudent spending – just $700k was left.
Most imprudent was a long-term money drain in the form of an international surfing photography fantasy which turned out a complete failure.
Avery advised her in October 2008 to close the business and abandon the premises she had leased even if she couldn’t find anyone to take over the lease.
But it was what he had failed to tell her before then that sparked the lawsuit against him after Michelle terminated his services in June 2010.
The Statement of Financial Advice prepared back in 2002 recorded “lifestyle goals” of “large gifts to her mother and brother” and “adequate tax effective income to meet current and projected living expenses” estimated at $54k/yr indexed to inflation.
That and the career as a self-employed freelancer surfing photograper.
Justice Glen Martin concluded in May 2019 that Avery’s advice was “too low key” for this particular naïve client and that his absence of warning against – what to others might been obvious – extravagant travel to international surfing events, made him liable for her “loss”.
When the matter came before the Court of Appeal in November 2019, Avery emphasised again that the dissipation of her funds arose from Michelle’s own imprudence.
Justice Walter Sofronoff in delivering the lead judgement with which Justices Philip Morrison and Anthe Philippedes concurred, agreed that the planner’s advice had been inadequate and that he ought to have warned her against high spending, generous gifts and improvident investments.
“She wrongly believed that she had enough money to afford these expenditures,” he wrote in his 35 page judgement and it was Avery’s duty to temper her optimism which he failed to do.
The planner had also raised a defence under Civil Liability Act s15 contending that it did not owe a duty to warn about an “obvious risk” ie a risk that would have been obvious to a reasonable person in her position.
Although she must be taken to have known that the depletion of her capital would reduce or even eliminate her capacity to fund future needs, “what she did not understand was that her ongoing expenditure would have the same effect”.
Or put another way, she “lacked the experience and knowledge to understand the potential consequences of her actions”.
“It should be obvious that a professional adviser must approach an inexperienced client in a different way from a sophisticated client,” the appeal court President observed. “If a client lacks the necessary experience …. the scope of the duty to advise will be wider and indeed may be much wider”.
Justice Sofronoff also considered the planner’s calculation of Michelle’s prospective annual income at $58k to be “financial alchemy”. He noted that after fees her net income – using the planner’s own calculations – was only $34k and for other years about $45k.
Avery was successful in gaining a $36k reduction in the “gross up” included in Justice Martin’s award. He had contended that no gross up – a component added to an award so that after payment of tax, the claimant is left with the desired sum net of tax. Justice Martin had allowed for both the tax the damages and the tax that would be attracted by the gross up sum itself. The second gross up – $36k – was disallowed, leaving Michelle with $1.103 mil as her ultimate outcome.