Relying on a PDS (without doing your own research)

S 1012C of the Corporations Act 2001 (Cth) obliges product issuers to provide a Product Disclosure Statement (PDS). Many advisers mistakenly believe that this means that they can simply rely on the contents of a PDS without thinking more deeply about that document.  This can be a substantial mistake.

One PDS described its product as being suited to “moderate growth investors”. On checking, the adviser was surprised to find the fund was 80% international shares and 18% Australian shares, with 50% internal gearing (and a Management Expense Ration based on gross assets – that is, the MER applied to the debt-financed assets as well. This effectively doubled the MER applied to the client’s ‘stake.’ Remember, lenders get their money back before investors).

One person’s  “moderate growth” is another (or, in the case of that particular PDS, every other) person’s “very high risk”. The actual investment strategy meant that the product was immediately inappropriate for all clients with the mooted ‘moderate growth’ profile and thus could not possibly be in the client’s best interests.

The fact that it was the product issuer, who writes the PDS, that misstated the risk profile of the product does not matter. The Courts have held that the adviser is responsible for making sure a PDS accurately describes the product being recommended. What’s more, the Courts then find that the adviser is liable for losses sustained by a client caused by a (negligent) omission to do so.

This means that the adviser needs to do more than read the PDS. He or she needs to think long and hard about the provider of that PDS. What is their reputation? What is their history? If the provider is well-known and reputable (an AMP or a Vanguard, for example), relying on the PDS is more justifiable. If the provider is not well-known, the PDS needs to be read subject to other information known about the product.

It is this, combined with a natural, healthy level of scepticism that explains why Dover is generally reluctant to add obscure and small fund managers to its Approved Products List. It is simply too difficult in many cases to obtain relevant information, other than the self-selected PDS, from such providers. If we do not know what the fund manager did last, how can we know what they will do next?

The Dover Group