Over the past decade or so, Australia has seen a number of Managed Investment Schemes (“MIS”) offering investors the opportunity to acquire an ‘agribusiness’ – the prime examples being schemes offered by Timbercorp, Great Southern and Palandri which all involve investments in a plantation of sorts – eg olives, grapes, almonds etc. These MIS schemes have failed, leaving many investors with a worthless asset as well as debts payable largely because the investors were recommended to purchase the investment by borrowing the entire amount (usually through a related party of the responsible entity). When it comes to investments which have ‘gone bad’, an expert opinion may assist in establishing whether a party or parties are at fault.
Our experience in dealing with the consequences of the above MIS (including other types of investments which have gone bad) typically involves the following common issues:
Personal advice v general advice?
Those recommending the MIS (which I generically refer to them here as “advisors”) typically receive commissions from the responsible entity or a related party following the sale of an investment in the MIS. While this may be legal (I make no ethical comment here about this potential conflict of interest arrangement), it typically results in a situation whereby the advisor draws the potential investor’s attention, whether intentionally or otherwise, to the specific MIS, which could be reasonably construed as providing ‘personal advice’. Reasonably competent advisors are acutely aware of their professional and statutory obligations to go through a ‘due process’ prior to influencing a potential investor’s decision.
Has a due process been completed prior to the investment being made?
In most cases a Statement of Advice has been prepared by the advisor which ostensibly shows that a due process has been completed by the advisor resulting in a recommendation to invest in the specific MIS. However there is often poor documentation evidencing when the steps within that process were completed and how those steps were conducted. What happened during the lead time between the first mention of a specific MIS by the advisor and the actual investment date varies from case to case and can be critical in determining whether professional and statutory obligations have been met.
The quality of the Statement of Advice (“SOA”)
The quality of the SOA (assuming one has been prepared by the advisor and signed by the investor) varies from case to case. However, it is our experience that it is not uncommon for the SOA to:
* contain ‘standard paragraphs’ which pad out the document and make no sense in the overall context of the advice provided;
* contain internal inconsistencies;
* contain little supporting information for numeric projections and forecasts;
* not highlight and clearly explain the most important information about the recommended investment(s); and
* contain disclaimers and other references to other important documents such as the Product Disclosure Statements in fine print and tucked away in the back of a very long document.
The SOA can be a confusing document for an unsophisticated investor to understand and one could argue that its existence is more for the protection of the advisor rather than the investor.
Focus on tax benefits rather than commercial returns
Advisors may not properly explain negative gearing to investors. Many investors do not fully comprehend that negative gearing actually means that they will incur out-of-pocket losses and that the only commercial reason to enter a negative gearing investment is if the investor has a reasonable expectation that the investment would increase in value (ie that the capital gain on the eventual sale of the investment will more than offset the annual losses). Often the advisors, who receive commissions on sales, tend to focus the investor’s attention more on the tax benefits associated with negative gearing (which are more tangible) rather than the risks associated with the potential investment returns (which, in the case of the above MIS agribusinesses, can be highly speculative);
The Product Disclosure Statements (“PDS”)
In theory, the PDS ought to provide investors with all the necessary information about the investment to assist them in deciding whether or not they should invest.
However, in practice most PDS are long and take time to read from cover to cover. The PDS for the above MIS, in particular, tend to include favourable information about the industry and markets for the end product upfront but all the details relating to the most critical features of the investment such as; what is being acquired, all the fees and charges, the ease in which the investor can withdraw from the investment, how long the investor’s money is tied up, and the likely returns are usually interspersed throughout the entirety of document making it very difficult for the unsophisticated reader to fully absorb and comprehend the PDS. Arguably the PDS might be have been prepared to leave an overall favourable impression of the investment to the unsophisticated reader – it is not uncommon for the PDS to direct the reader to seek professional advice particularly in relation to potential risks and liquidity issues.
Does the professional advice go beyond simply restating the information contained in the PDS?
Advisors have a duty to their clients to explain to them in a manner in which they understand what the investor is committing themselves to.
For example, with regards to the above MIS, the investment is usually a mechanism for the responsible entity to obtain money from investors to acquire plantations (which will produce olives, grapes or almonds, etc). The actual business which utilises the harvest is typically a related party of the responsible entity for the MIS, however the investors do not acquire any interest in the production business. Therefore the financial success of the agribusiness MIS is highly dependent on the success of the related party production business. If the production business fails, the MIS is also likely to fail – it may be difficult to obtain any publicly available information about the production business as it is typically not a listed company. This may not be adequately explained by the advisor.
Further, the first few years will almost certainly result in losses to the investor because the ‘responsible entity’ usually acquires a young plantation and fees will be charged to manage it despite no income being generated as the plantation is not yet ready for harvest (the length of time until harvest will vary). The fees charged by a related party to manage the planation may be excessive and the risks associated with the ‘management’ of the plantation may be effectively transferred to investor. Again this may not be adequately explained by the advisor.
The above MIS may be promoted on the basis that there is some certainty over the future income yields on the basis that there is a long term supply agreement with the production business to acquire the production harvested at agreed prices. However, investors are unlikely to ever obtain a copy of the supply agreement and therefore there may be no ability to determine whether the income yields are certain, achievable and/or commercial. An advisor may fail to highlight the speculative nature of the income generating ability of the MIS.
The nature of the assets acquired by the above MIS are typically not liquid and the investment term may span decades. As a result, there is very little ability for the investor to sell his/her investment and realise cash from the MIS. Any promotion of capital gain potential might be considered misleading.
The above are just some of the issues we have encountered and opined on. Each case will present a unique set of facts and circumstances and our opinions will vary accordingly. We bring an independent and objective eye to help establish whether professional and statutory standards have been met with regards to the promotion of investment products and advice.
Call us on 02 9411 5422 if you require any expert opinions.