FEDERAL COURT OF AUSTRALIA

Jordan v HLB Mann Judd Wealth Management (NSW) Pty Ltd [2013] FCA 315

THE COURT ORDERS THAT:

1.    The applicant have leave to amend her Amended Fast Track Application filed on 11 April 2012 by filing and serving a Further Amended Fast Track Application in accordance with MFI-2 marked as such on 28 May 2012.

2.    The Application and the whole of the proceeding instituted thereby be dismissed.

3.    The applicant pay the respondents’ costs of and incidental to the said proceeding.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    The applicant, Vicki Jordan, has sued HLB Mann Judd Wealth Management (NSW) Pty Ltd (HLB) and Lonsdale Financial Group Limited (Lonsdale) for damages in respect of financial losses suffered by her when two investments made by her upon the recommendation of HLB and Lonsdale both failed.

2    Lonsdale is a financial services licensee. HLB is Lonsdale’s authorised representative. Together, Lonsdale and HLB carry on business providing financial services. Lonsec Limited (Lonsec), a corporation associated with Lonsdale, carries out research and provides analyses and reports in respect of potential investments that might be undertaken by clients of Lonsdale and HLB.

3    Ms Jordan approached HLB in 2005 to act as her financial adviser in relation to the investment of a substantial sum of money paid to her as a matrimonial property settlement upon divorce from her ex-husband. In that property settlement, Ms Jordan received $7 million. After purchasing a family home in which she and her two children were to live, Ms Jordan intended to invest approximately $5.21–5.5 million with the assistance of HLB.

4    Ms Jordan is not well educated and had little experience of financial matters when she approached HLB. She relied entirely upon Mr Michael Hutton of HLB to help her articulate her goals and objectives and to identify and recommend appropriate investments.

5    In broad terms, Mr Hutton recommended that Ms Jordan invest $1 million in a BT-Managed Superannuation Fund and $4.21 million in a diverse investment portfolio.

6    Mr Hutton is a very experienced financial planner. He has a Bachelor of Economics and is a Chartered Accountant (Financial Planning Specialist). He holds a Diploma of Financial Planning, is a Certified Financial Planner and a Member of the Financial Planning Association of Australia, the Australian Institute of Company Directors and the Self-Managed Super Fund Professionals Association of Australia.

7    Mr Hutton commenced employment with HLB in 1984 as an Accountant/Financial Adviser. He then worked in a number of overseas postings before returning to Australia. In 1996, he established HLB’s Self-Managed Super Fund Division. In 1999, he established HLB’s integrated Personal Wealth Management Division and has worked as a Financial Planner within that Division ever since.

8    Since about 1999, Mr Hutton’s principal duties and responsibilities have been to oversee HLB’s Self-Managed Superannuation and Financial Planning Divisions.

9    As at November 2006, HLB had approximately $140 million of funds under advice and 150 financial planning clients.

10    In a letter dated 16 November 2006 with which was enclosed a detailed Statement of Advice dated the same day (the first Statement of Advice), Mr Hutton recommended a number of investments to Ms Jordan. Before finalising that letter, he had given a great deal of thought to her circumstances with a view to determining an appropriate set of recommended investments for her. Included within the recommended investments were investments in two Basis Funds being:

(a)    The Basis Aust-Rim Opportunity Fund (Basis Aust-Rim Fund); and

(b)    The Basis Capital Yield Fund (Basis Yield Fund).

11    In July 2007, it became apparent that the two Basis Funds in which Ms Jordan had invested were in financial difficulty. Not long thereafter, it was clear that Ms Jordan had lost all of the funds which she had placed into those two Funds ($537,500.00).

12    Ms Jordan contends in this proceeding that HLB should never have recommended that she invest in either of the Basis Funds or, alternatively, should not have done so without explaining more fully than it did the risks, features and historical performance of both of the Basis Funds. Ms Jordan does not criticise the overall investment strategy recommended by HLB nor does she complain about any of the other investments recommended by HLB in the first Statement of Advice.

13    Ms Jordan alleges that HLB and Lonsdale breached contractual and tortious duties of care owed by each of them to her. She also claims that they engaged in misleading or deceptive conduct or conduct that was likely to mislead or deceive by representing to her in the first Statement of Advice that the investment recommendations which they made in that letter were suitable for her having regard to her risk profile when clearly they were not. She also argues that both HLB and Lonsdale breached s 945A of the Corporations Act 2001 (Cth) (the Corporations Act) as it then stood by making the recommendations which they did without having a proper basis for doing so. Section 945A was repealed on 1 July 2012.

14    Ms Jordan lost her capital ($537,500.00) plus interest. She also claims the quantum of returns that she would have derived had she invested in certain alternative fixed securities instead of investing in the two Basis Funds. The assumption behind this approach to damages is that all of the other investments recommended by HLB were satisfactory and are to be included in Ms Jordan’s postulated investment portfolio. The only change involves the two Basis Funds.

15    Ms Jordan does not distinguish between HLB and Lonsdale in terms of liability for the losses which she suffered. The respondents, on the other hand, do make a distinction between the position of HLB and that of Lonsdale. In due course, should I find for Ms Jordan, it will be necessary to determine whether the respondents’ contentions are correct.

The Parties’ Pleaded Cases

The Applicant’s Case

16    Ms Jordan’s case, as pleaded in her Amended Fast Track Statement dated 11 April 2012, may be summarised as follows:

(a)    Lonsdale was a financial services licensee within the meaning of s 761A of the Corporations Act and held an Australian Financial Services Licence granted pursuant to s 913B of the Corporations Act.

(b)    HLB was the authorised representative of Lonsdale within the meaning of s 761A of the Corporations Act;

(c)    Lonsdale and HLB carried on business providing financial services within the meaning of s 761A of the Corporations Act, including financial product advice within the meaning of s 766B of the Corporations Act;

(d)    Ms Jordan was an unsophisticated investor with no formal financial training or experience who had, until her divorce in 2006, relied entirely on her ex-husband to deal with the family’s financial matters;

(e)    Upon her divorce, Ms Jordan received approximately $7 million by way of a property settlement. When she approached HLB in November 2006, she wanted to invest $5.21 million, being the cash which she then had available after purchasing a family home after her divorce;

(f)    Ms Jordan wanted to invest the $5.21 million so as to provide for her children on her death and for her to have a regular monthly income;

(g)    Ms Jordan was risk averse and wanted relatively secure investments so as to ensure as far as reasonably possible her future and the wellbeing of her children;

(h)    In November 2006, Ms Jordan retained HLB to provide financial planning and advisory services. The retainer was wholly oral. The retainer included the following material terms:

a.    HLB would exercise all reasonable care, skill and diligence required of a professional financial advisor;

b.    HLB would recommend investments that were appropriate having regard to the Applicant’s personal circumstances, risk profile and investment objectives;

c.    HLB would recommend investments that did not put at substantial risk any part of the Investment Amount [referring to the $5.21 million mentioned in subpar (e) above];

d.    it would fully and properly inform the Applicant of the risks attendant on any investment proposed by HLB; and

e.    HLB would conduct annual reviews to assess the progress of the Applicant’s investments and the structure of the Applicant’s portfolios.

(As to which see par 16 of Ms Jordan’s pleading.)

(i)    Ms Jordan also claimed that HLB owed her a common law duty of care in the same terms as the contractual duty of care imported into the retainer upon which she relied;

(j)    On 16 November 2006, HLB provided a detailed written Statement of Advice in which it made a number of investment recommendations to Ms Jordan. Included within those recommendations was a recommendation that, as part of the hedge fund component of the recommended portfolio, Ms Jordan should invest in the Basis Aust-Rim Fund and the Basis Yield Fund;

(k)    In providing the Statement of Advice to Ms Jordan, HLB represented that the investment recommendations contained in it, including the recommendation to invest in the two Basis Funds, were suitable investments for Ms Jordan, taking into account her personal circumstances, risk profile and investment objectives;

(l)    In late November 2006 and in reliance upon the representation articulated in sub-par (k) above, Ms Jordan instructed HLB to make the recommended investments in accordance with the Statement of Advice which included the following investments:

(i)    $207,500 in the Basis Aust-Rim Fund; and

(ii)    $330,000 in the Basis Yield Fund.

(m)    In July 2007, both Basis Funds failed leaving Ms Jordan with investments in those Funds which are now worthless; and

(n)    By recommending that she should invest in the two Basis Funds, HLB breached its contractual duty of care, common law duty of care, s 945A of the Corporations Act, s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) and s 1041H of the Corporations Act. These latter two provisions provide that a corporation in trade or commerce shall not engage in conduct that is misleading or deceptive or is likely to mislead or deceive in relation to a financial service.

17    At par 38 of her existing pleading, Ms Jordan set out the breaches on the part of HLB which she contended constituted the relevant breaches of the contractual and tortious duty of care owed to her by HLB and the alleged contraventions of s 945A of the Corporations Act.

18    Paragraph 38 is in the following terms:

38.     HLB breached the material terms of the Retainer in that:

a.    it failed to properly consider the Applicant’s personal circumstances as described in paragraphs 7–14 above;

b.    it failed to make the appropriate enquiries as to the Applicant’s appetite for risky investments;

c.    it failed to ascertain that the Applicant was risk averse and did not want any part of her investment portfolio in investments that had a relatively high risk of failure;

d.    it recommended investing in the Hedge Funds when these were high risk investments and which had a relatively high risk of failure;

e.    failed to take into account the levels of risk in the funds;

f.    failed to make alternative recommendations in relation to the Hedge Funds investments;

g.    failed to adequately or at all to explain the substantial risk of the Hedge Funds.

h.    Failed to adequately or at all advise the Applicant on her level of risk in investing in the Hedge Funds.

i.    Failed to adequately or at all advise the Applicant on the quality of the underlying Investments to which the Hedge Funds were exposed.

19    At pars 41–44 of the pleading, Ms Jordan alleged that, when HLB represented that the investments in the two Basis Funds were suitable for Ms Jordan, taking into account her personal circumstances, risk profile and investment objectives, HLB engaged in conduct that was misleading or deceptive or was likely to mislead or deceive in that the investment in those two Funds was not a suitable investment for Ms Jordan, taking into account her personal circumstances, risk profile and investment objectives.

20    Ms Jordan claims damages, being the loss of the total amount invested in the two Basis Funds ($537,500), plus interest, and the amount that she would have earned in an appropriate alternative investment from the date of the investment in the two Basis Funds to the date of judgment. The postulated alternative suitable investment, as pleaded, was the Dimensional 5 Year Fixed Investment Trust, which is said to have provided an annual return of 7.10% for the period between February 2006 and February 2011. Ms Jordan accepted that she had to bring to account by way of credit amounts received by her from her investment in the two Basis Funds. According to her pleading, those amounts totalled approximately $68,490.00. At the trial, Ms Jordan put forward different alternative investments for the purposes of assessing and calculating her damages.

The Respondents’ Case

21    The respondents deny breaching any duties which either they or either of them owed to Ms Jordan. Further, they deny having engaged in misleading or deceptive conduct or conduct that was likely to mislead or deceive. The respondents also contest the way in which Ms Jordan has approached her damages claim.

22    In addition, the respondents rely upon two other specific matters. These are:

(a)    The provisions of s 945A of the Corporations Act are not engaged at all in the circumstances of the present case. This is because Ms Jordan was not a “retail client” within the meaning of that section because the value of the financial products to which the relevant financial service or advice related exceeded $500,000.00 (as to which see s 761G(7)(a) of the Corporations Act and reg 7.1.19(2) and (5) of the Corporations Regulations 2001 (Cth) (the Corporations Regulations)); and

(b)    Ms Jordan was guilty of contributory negligence. Any compensation or damages awarded to Ms Jordan should be reduced to such extent as the Court thinks just and equitable having regard to Ms Jordan’s share and responsibility for the damage, pursuant to the general law, s 9 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 1041I of the Corporations Act and s 12GF of the ASIC Act.

The Proposed Further Amended Fast Track Statement

23    On the first day of the trial, Counsel for the respondents submitted that Ms Jordan was endeavouring to rely upon a claim which did not fairly arise on the pleadings as they then stood. After brief argument, I indicated to Counsel for Ms Jordan that I was of the opinion that the point being made by his opponent was a good one. In light of that indication, Counsel sought leave to amend the Amended Fast Track Statement dated 11 April 2012 by adding a further misrepresentation case and clarifying, for the purposes of that case and generally, that it was Ms Jordan’s contention that HLB had represented that the Basis Yield Fund was a fixed interest investment. The critical paragraph sought to be added by the amendment is par 26 which is in the following terms:

The Representation [referring back to the definition of that expression in par 25] included the description of:

(a)    The Basis Yield Fund as a fixed interest investment and the Basis Aust-Rim Opportunity Fund as a defensive hedge fund at p 14 of the Statement of Advice; and

(b)    The fixed interest component of the portfolio and the Hedge Funds (defensive) component of the portfolio at pages 13 and 14 of the Statement of Advice.

24    The proposed amendment has the effect of expanding that which was alleged to have been represented in the first Statement of Advice thereby also expanding the statutory causes of action based upon misleading or deceptive conduct.

25    When Ms Jordan sought leave to amend her Amended Fast Track Statement, Counsel for the respondents suggested that I should defer ruling on the proposed amendment until delivery of judgment. He indicated that he was in a position to conduct the case without the need for any adjournment should I be willing to proceed in that fashion. I agreed to proceed as suggested by Counsel for the respondents. Notwithstanding his suggestion, Counsel for the respondents submitted that I should now refuse leave to amend because the proposed amendment was futile.

26    Although the proposed amendment arose very late in the piece and is difficult to understand, I do not think that there is any good reason to disallow it. It is quite obvious that the respondents are not prejudiced by the making of the amendment. While it does expand the case slightly, it has not had such a serious impact as to warrant being refused.

27    For these reasons, I propose to grant leave to the applicant to amend her Amended Fast Track Statement filed on 11 April 2012 in accordance with the proposed Further Amended Fast Track Statement dated 28 May 2012 which became MFI-2.

HLB’s General Approach to Investment

28    In 2002, a group of HLB employees (Messrs Hutton, Christopher Hogan, Stephen Preen and Jonathon Philpot) established the “HLB Mann Judd Investment Committee” (HLB Investment Committee). From that time, the HLB Investment Committee has met every three to six months. Mr Hogan has been the head of HLB’s Investment Committee since 2002.

29    At some stage before June 2003, the HLB Investment Committee compiled a model balanced portfolio for HLB’s wrap clients (HLB model portfolio). The make-up of the HLB model portfolio has been varied by the HLB Investment Committee on a number of occasions since 2003.

30    HLB’s wrap clients are clients who make most of their investments via an individual wrap account. For that reason, those clients have to decide where their funds ought to be invested and in what proportions. The other main investment pathway employed by HLB is to make investments via a “manager of managers” (such as MLC) who would make investment decisions on the client’s behalf. According to Mr Hutton, the HLB model portfolio was to serve as a firmwide starting point which HLB’s financial planning staff would then vary on a case by case basis, depending on the circumstances and objectives of the particular client. The thinking behind the creation of such a portfolio was to ensure that there was a degree of consistency in the advice being given by the staff of HLB and that the funds and products being recommended to HLB’s clients were specifically considered and approved by the HLB Investment Committee before client funds were invested.

31    The HLB Investment Committee meetings were intended to monitor the performance of the HLB model portfolio; to decide which of the funds or products approved by Lonsec ought to be included in HLB’s model portfolio; and to decide what the appropriate allocation was, as between those funds and products. Mr Philpot said that he had always worked on the assumption that the hypothetical investor for whom the HLB model portfolio had been designed had a risk profile of between 4 (Balanced) and 5 (Growth) applying the Lonsec Risk Profile Definitions (70% growth, 30% income).

32    At some stage prior to October 2003, the HLB Investment Committee had decided to include within the HLB model portfolio a 10% allocation to Hedge Funds of Australia’s Diversified Fund (HFA Diversified Fund). HFA was a manager of managers and the HFA Diversified Fund invested in a number of different hedge funds, each of which followed a different investment strategy.

33    At a meeting of the HLB Investment Committee held on 28 October 2003, the Committee decided to reduce the HFA Diversified Fund’s allocation within the HLB model portfolio from 10% to 5% and to allocate the 5% thereby made available to the Basis Aust-Rim Fund.

34    Both Mr Hutton and Mr Philpot gave evidence as to their reasons for selecting the Basis Aust-Rim Fund to be included in the HLB model portfolio. Each of them also gave an account of what they had done to satisfy themselves that this was an appropriate step to take.

35    At par 4.8 of his affidavit sworn on 15 May 2012, Mr Philpot said:

4.8    In making that decision, I particularly relied on what I had read in the Lonsec research reports, and on the fact that the Basis Aust-Rim Fund:

(1)    Had been researched and was recommended by Lonsec;

(2)    Employed a number of different investment strategies, which reduced overall risk;

(3)    Was managed by people who (I believed) understood and were focused on the risks; in particular, how macro events might impact the portfolio;

(4)    Aimed to provide positive returns from both upward or downward movements in other areas, and from pricing discrepancies;

(5)    Complemented the HFA Diversified Fund quite well, in that the Basis Aust-Rim Fund had a significant exposure to the Asian region and fixed interest assets; whereas the HFA Diversified Fund had more of a US focus and a higher exposure to equities;

(6)    Had a consistent and positive performance record. Exhibited and marked JP11 is a copy of a document that Basis provided to me in April 2007, which details the monthly returns of the Basis Aust Rim Fund from August 2000 to April 2007. xxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxx

36    Mr Hutton said that he did not believe that allocating 5% of the HLB model portfolio to the Basis Aust-Rim Fund involved a high degree of risk. He said that the Fund had been highly recommended by Lonsec, had a very good track record and provided diversity within the absolute return/hedge fund sector of the portfolio. In his view, it was a hedge against poor performance in other sectors (especially equities). He also formed the view that, because the weighting within the portfolio was small, the risk overall was not significant.

37    In September 2004, the HLB Investment Committee again revised the HLB model portfolio, on this occasion by allocating 10% of that portfolio to the Basis Yield Fund. They explained their reasons for this in evidence before me.

38    Both Mr Hutton and Mr Philpot gave evidence to the effect that the HLB Investment Committee met regularly and that at those meetings the performance and composition of the model portfolio were reviewed and discussed. They also said that, in the periods between meetings, regular informal discussions were held among committee members.

39    Mr Philpot testified that, as he understood it, the principal risk associated with the Basis Funds was credit risk. He said that, up until July 2007, he believed that Basis Capital had put a lot of thought into the credit risk question and had sufficiently addressed it. He had been told that Basis Capital had carried out stress tests in order to ensure that their management of these funds was effective.

HLB’s Dealings with Ms Jordan

40    When Ms Jordan first approached HLB in 2005, she was almost 49 years of age. At that time, she was in the throes of divorce from her husband of 25 years whom she had first met in 1972.

41    Ms Jordan completed Year 9 at Warilla High School and three years later completed Year 10 at night school at Gymea TAFE. After leaving school, she trained as a secretary and completed secretarial courses in the evening at Gymea TAFE. Ms Jordan was employed as a secretary for approximately twelve years, commencing in 1973. She said that she had had “… no accounting or finance experience” as at November 2006.

42    In 1985, Ms Jordan ceased full-time work as a secretary. In March 1985, she gave birth to her first child, a daughter. She had her second child, a son, in May 1987. She has not worked in paid employment outside the home since early 1985.

43    At pars 12 to 15 of her affidavit sworn on 30 March 2012, Ms Jordan said:

12.     During the course of our marriage I paid the household bills, including the food bills and utility bills from my husband’s wages. I was aware of mortgages over the property of the marriage, because I was named on them and I knew that my ex-husband owned some shares. During the course of our marriage, I assumed that all of the assets and investments of the marriage were in my husband’s name, apart from the houses that we lived in over the years, which were in both of our names and a small investment in Macquarie shares that was made in my name the late 1980’s.

13.     Robert Jordan [Ms Jordan’s ex-husband] is currently the Managing Director of Australia and New Zealand division of the Westfield Group and he also manages that company’s interests in the United States. As the MD of Westfield, I believe that Robert Jordan had a large amount of experience in making investments and in business and finance generally.

14.     During the course of my marriage, I did not ask my husband about the family finances or the nature of and extent of our assets. He was never interested in discussing finances with me and I was happy to let him manage them. I believe that I lacked experience and consequently he handled all of the family investments. I really had no idea about the extent of the family assets during the time that I was married to Robert Jordan, apart from the fact that during the course of my marriage, I became aware that Robert Jordan had shares in Westfield. I knew this because from time to time I would see dividend cheques come into the house and I would have to bank them at his request.

15.     I was aware, however, that Robert Jordan used the services of a financial advisory firm, HLB Mann Judd for our taxes. I recall Robert Jordan telling me that he used two other accountants for his share investments, but I do not now recall who those accountants were.

44    Ms Jordan said that she was introduced to HLB by her best friend, Ruth Preen. Ruth Preen’s husband, Stephen, worked at HLB. Coincidentally, he was a member of the HLB Investment Committee. Also, Ms Jordan’s ex-husband had used the services of HLB over the years and she said that, if HLB was good enough for her ex-husband, they would be good enough for her.

45    Ms Jordan said in her evidence-in-chief that she first approached HLB in about November 2006. She said that, at that time, she agreed on the terms of a property settlement with her ex-husband. She received $7 million in cash in that property settlement. She used approximately $1.5 million of that $7 million to purchase a home for her children and herself at Taren Point and placed the remaining $5.5 million with HLB to invest on her behalf. At pars 19 to 21 of her 30 March 2012 affidavit, Ms Jordan said:

19.     Prior to receiving the funds, I spoke to Ruth Preen about retaining a financial advisor, given that I had very limited experience with financial affairs and had just come into a large sum of money. I had to decide who was going to be my financial advisor. I needed someone I could trust given that there were a lot of accountants and financial advisors in Sydney. I had no experience in these matters and I had just come into a lot of money.

20.     I decided that I wanted to retain Stephen Preen at HLB Mann Judd. I trusted Stephen to look after my financial affairs and was very comfortable because I knew him so well. I also felt that if HLB Mann Judd were good enough for my ex-husband, Robert, they would be good enough for me.

21.     I recall that in or around November 2006, Ruth Preen had a conversation with me in which she said:

“Stephen said that he does not want to look after your finances directly but Michael Hutton is an expert in investing and will be able to help.”

46    In her affidavit, Ms Jordan did not mention having met with Mr Hutton in September 2005. Nor did she refer in that affidavit to any telephone conversations which she had had with him in the months of August, September and October 2006.

47    In his affidavit sworn on 11 May 2012, Mr Hutton gave a detailed account of a meeting which he had with Ms Jordan on 26 September 2005. He also recounted the substance of six telephone conversations between Ms Jordan and him in the months of August, September and October 2006. Mr Hutton’s evidence of these discussions was based upon and supported by contemporaneous file notes made by him.

48    Counsel for the respondents cross-examined Ms Jordan about the 2005 meeting and the six telephone conversations. Despite being closely questioned about these discussions, Ms Jordan said she was unable to remember any of them. She went on to deny having had six telephone conversations in the months of August, September and October 2006. She accepted that she may have had one conversation but said that she had definitely not had six.

49    I pause to observe that, during her oral testimony, which occupied approximately 1¾ hours, Ms Jordan said “I can’t remember”, “I can’t recall”, or words to that effect, more than 90 times. The frequency with which she used that expression was very noticeable. I will set out a few questions and answers from the early part of her cross-examination in order to illustrate the point. At Transcript p 14 ll 26–39, the following exchange took place:

Well, but you accept that you may have had at least one telephone conversation with Mr Hutton before the end of October 2006?---I really can’t recall. I can’t recall, I’m sorry.

I think, earlier this morning, you were asked some questions about discussing financial goals with Mr Hutton. Am I right in recalling that you can’t remember whether that was one discussion or more than one discussion?---No, I can’t recall if it was more than one discussion.

It may have been more than one discussion, correct? And those discussions or – let me withdraw that. You discussed your financial goals with Mr Hutton before you handed over the cheque to which you refer in mid November 2006, correct?---Well, I don’t – can’t remember if I handed it – said that after I handed over the cheque or just in that meeting but I did say it.

50    I have no difficulty accepting that Ms Jordan is unsophisticated. I also appreciate that she did not remain at school beyond Year 9 and has not received any tertiary education beyond the TAFE courses she attended in 1972 and 1973. In 2005, she lacked experience in managing her own financial affairs: Until her divorce she had relied entirely on her husband and trusted him to obtain appropriate advice when required. On the other hand, she did not appear to me to be incapable of grasping even difficult concepts and did not present as a person of low intelligence. I formed the impression that she had decided to say “I don’t recall” in many of her answers in order to forestall cross-examination on the topics about which she was being questioned. This was particularly so when the September 2005 meeting and later telephone conversations were raised with her. It was also the case when the written advices and monthly reports given to her by HLB were mentioned. In the end, however, it does not matter whether her answers were a deliberate attempt to deflect difficult questions or just the result of poor memory. The result is the same. There is no contest of any importance between Ms Jordan’s evidence and that of Mr Hutton as to the substance of their dealings or the timing of them.

51    Ms Jordan did not file any evidence in reply to Mr Hutton’s affidavit nor did her Counsel challenge any part of Mr Hutton’s account of his dealings with Ms Jordan.

52    In those circumstances, I accept all of Mr Hutton’s evidence and find that his dealings with Ms Jordan took place as he said. He did not have a perfect recollection of those dealings but he did have quite a good recollection of them. He was also aided by file notes. My acceptance of Mr Hutton’s evidence extends to his account of the reasoning process which he employed when putting together Ms Jordan’s investment portfolios in November 2006.

53    Mr Hutton said that he met with Ms Jordan on 26 September 2005 and that the duration of the meeting was 1.7 hours. He used his diary and time record to refresh his memory. At pars 3.5 to 3.15 of his affidavit, Mr Hutton said:

3.5     I do not remember everything that was said during the September 2005 Meeting. However, having refreshed my memory by reading the Fact Sheet, I recall that, during the September 2005 Meeting, I asked a number of questions and Ms Jordan told me words to the following effect:

(1)    “I am going through a divorce. I have been married for 24 years.”

(2)    “I need you to complete my 2005 tax return and give me financial advice regarding my divorce settlement once it comes through.

(3)    “The divorce process has taken 1½ years so far. At the moment it’s a 45:55 split, with me getting $5.2 million and my husband Robert getting $5.8 million. I will try for a 50:50 split.”

(4)    “Robert has been at Westfield for about 17 years. He’s the Chief Operating Officer for Australia and New Zealand.”

(5)    “I’m living in the same house as Robert at present. My aim is to buy a new place with a water view for $1.5 million to $1.8 million.”

(6)    “I was born on 18 October 1956 and am 48 years old. Robert was born on 26 November 1953.”

(7)    “Robert owns Westfield shares worth about $7 million. I’ve got about $100,000 in the Commonwealth Bank. We jointly own our home. It’s worth about $3 million. I don’t want to keep the house: it’s too big a block. I also own a Mercedes E240. Robert owns an Audi TT.”

(8)    “I don’t have any debts, apart from credit card bills and lawyer’s fees for the divorce.”

(9)    “I don’t have any super or personal insurance.”

(10)    “I have two children. My daughter, Carlie, is aged 20. She’s studying Arts/Psychology at Wollongong Uni. She also works at K-mart 4 days a week. My son Andrew is doing the HSC at Newington. He wants to do Commerce/Law at Macquarie.”

(11)    “I am thinking of retraining and going back to work, but I haven’t worked for 20 years.” (I recall thinking it was unlikely that Ms Jordan would return to the workforce).

(12)     “My main priorities are to buy a house for myself and the children, and to generate an income to live on. I don’t want something that requires me to do a lot of administration. It should be tax efficient.”

3.6     During the September 2005 Meeting, l also showed Ms Jordan a number of printed “slides” which I kept within a folder and was in the habit of using when first meeting with a new client. Exhibited and marked MGH19 are copies of the “slides” that I showed Ms Jordan during the meeting (Slides).

3.7     As I showed Ms Jordan the Slides, I spoke about the matters referred to in each of them. I cannot remember everything that I said to Ms Jordan about the matters referred to in the Slides. However, amongst other things, I said words to the following effect:

(1)    “You’re only 49, which means you’re going to need a good long-term portfolio that maintains value after allowing for the impact of inflation, and generates enough income for you to live off it for the next 30 years or more.”

(2)    “It is important to have a portfolio of investments that is diversified, so that you don’t have all your eggs in one basket. You don’t want to be overly reliant upon the success of a single investment or asset class.”

(3)    “We have designed a model balanced portfolio, which has diversification across asset sectors and is diversified within each asset sector, by investing in more than one fund manager or product. It is designed to generate income and growth over the long term from a range of shares and managed funds.”

(4)    “The model portfolio is summarised on this slide [slide 9 at MGH19]. It invests 25% in income related assets, 65% in growth assets (split up into 40% Australian shares, 20% international shares and 5% in Property), and the remaining 10% is invested in Absolute Return or Hedge Funds. The aim of the Growth component is to invest in Australian and International shares, both through managed funds and directly, with a view to matching or exceeding the performance of the share indexes. The Absolute Return Funds aim to produce a positive return even when the capital market is failing or fluctuating: they are intended to stabilise the overall portfolio returns when other sectors are experiencing adverse market conditions.”

(5)    “The portfolio can be made more or less aggressive by increasing or reducing the income component above or below 25%.”

(6)    “An alternative way to go is to invest the lot with a company such as MLC, which then spreads the money between a variety of different fund managers across different investment sectors. This slide [slide 10 at MGH19] shows the sector allocations and fund managers used by MLC in its Horizon 4 fund. The funds go from Horizon 1 (which is all cash) to Horizon 6 (which is all shares).”

3.8    The last of the Slides (slide 15 at MGH19) refers to a “client pack”, including a “Financial Services Guide” and a “client questionnaire”. At my first meeting with any financial planning client, it was in 2005 (and it remains) my practice to provide the client with a “pack” of documents which included a brochure about HLB, HLB’s Financial Services Guide, and a client questionnaire. I cannot remember giving those documents to Ms Jordan at the September 2005 Meeting, and I may not have given her a copy of the client questionnaire. However, I believe that I did provide Ms Jordan with the HLB Brochure and Financial Services Guide. A copy of the Financial Services Guide current as at September 2005 is exhibited at MGH20. Although HLB’s Financial Services Guide has been updated (e.g. for contact details and fee scales) over the years, I do not recall any substantial amendments being made to the content of it after September 2005, apart from ownership details for Lonsdale.

3.9     xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx I update the Asset Class Returns Chart that I use about once a year, after 30 June. I showed the Asset Class Returns Chart to Ms Jordan during the September 2005 Meeting. Exhibited at MGH21 is the version of the Asset Class Returns Chart that I showed Ms Jordan during the September 2005 Meeting.

3.10    When showing Ms Jordan the Asset Class Returns Chart, I said to her words to the following effect:

“This chart shows the different asset sectors you can invest in. The yellow squares highlight the best performing sector in each year. You can see that each sector has a different level of return each year, and the returns can vary a lot from year to year. We believe it’s a good idea to have investments in each of the sectors to give a steadier level of return. There will still be volatility – same good years and some bad years – but you reduce the volatility overall by having a range of investments.”

3.11    I also said words to the following effect to Ms Jordan during the September 2005 Meeting:

(1)    “Because you probably won’t have any other income, it’s best to set up a direct credit arrangement where a fixed amount gets deposited into a bank account every month for you to live on. If you just wait until there’s a dividend payment or income distribution from the investment portfolio, it’s a bit unpredictable and uneven: you won’t really know how much cash you’ll have (from month to month."

(2)    “We should also consider making superannuation contributions to minimise the tax on your portfolio.”

(3)    I also explained to Ms Jordan, with reference to a slide in my presentation pack, how our fees are charged. There was to be no charge for our initial meeting, but should we go ahead and provide a Statement of Advice, and if she accepts that and we implement the recommendations, then at that point there would be a charge of 1.1% or the first $1,000,000 invested ($11,000). From then on our monthly fees would be charged on the basis of the portfolio value, at a sliding % age rate, as shown on the chart in the presentation pack.

3.12    At no time during the September 2005 Meeting (or at any time thereafter) did Ms Jordan say words to the effect that she was risk averse, preferred a conservative investment approach or wanted investments that were secure. She never said words to the effect that she was uncomfortable with or did not understand the portfolio of investments I had discussed with her. I understood Ms Jordan to be comfortable with a model balanced investment portfolio, and with holding a mix of shares and managed funds across different sectors.

3.13    Nor did Ms Jordan tell me during the September 2005 Meeting (or at any time thereafter) that one of her goals was to double her money by the time she died; or that she wanted to make sure that there was enough money for her children to live comfortably after she died.

3.14    Ms Jordan did say wards to the effect: “I’m not sure Robert will provide for the kids, so I’ll have to provide a home and living expenses for them. I feel responsible.” I understood this to be a reference to her children’s accommodation and living expenses for the next few years, while they were studying and establishing themselves. However, I understood that the average life expectancy for females in Australia was about 84 years, which meant that Ms Jordan’s children were likely to be in their 50s by the time she died.

3.15    I understood from the September 2005 Meeting that Ms Jordan was not an experienced or sophisticated investor. However, she did not express or appear to have difficulty understanding what I was telling her. I believed that she had raised high achieving children, had been married to a successful husband, was relatively well off and was not suffering from any disability or incapacity, and understood that a large portion of her family's wealth was tied up in Westfield shares.

54    Mr Hutton said that he had a telephone discussion with Ms Jordan on 10 August 2006 which lasted approximately half an hour. It was in that conversation that Ms Jordan told Mr Hutton of her divorce settlement and the quantum thereof: $7 million in cash plus cars. She said that she currently spent $14,000 per month on living expenses and needed funds to cover her contribution to her children’s university fees. At par 4.4 of his affidavit, Mr Hutton said:

4.4    Having refreshed my memory by reading my file note, I also recall that during the telephone conversation on 10 August 2006, I said to Ms Jordan words to the following effect:

(1)    “If you’re currently spending around $14,000 per month, let’s start off with a drawing of $15, 000 per month into your bank account, for living expenses, and we’ll see how things are going once you’ve settled in to the new house. This can be reduced later, when the kids are more in charge of their own finances” (Ms Jordan said words to the effect that she agreed).

(2)    “If you can invest $5 million, you will be in very good financial position. If you’re spending $14,000 per month, that’s $168,000 per year. Before tax – (assuming we use super and have a tax rate of 15% – you’ll need your portfolio to generate about $200,000 a year. That’s under 5% of $5 million, so it’s achievable.”

55    On 28 August 2006, Mr Hutton and Ms Jordan again spoke by telephone. She mentioned in that conversation that she was, at that time, looking for a house for her and her two children in the price range of $1.2 million to $1.3 million.

56    On 8 September 2006 and again on 14 September 2006, there were further telephone discussions.

57    On 16 October 2006, Ms Jordan told Mr Hutton that her divorce settlement would be completed on 13 November 2006 and that, after she had purchased a house, there would be approximately $5.5 million remaining for investing.

58    On 17 October 2006, Mr Hutton prepared an action sheet and a plan note in respect of Ms Jordan. He gave a copy of these documents to Chris Hogan. At pars 5.2 to 5.7 of his affidavit, Mr Hutton said:

5.2    I refer to my Plan Note and say that, based on my discussions with Ms Jordan up to that time, it was my opinion that:

(1)    $1 million of Ms Jordan’s divorce settlement ought to be deposited in a Superannuation Wrap Account with BT, and those funds invested in the Russell Balanced Fund (a multi-manager fund with a 70/30 asset allocation between Growth and Income sectors).

(2)    $4.2 million of Ms Jordan’s divorce settlement ought to be deposited in a Personal Wrap Account, and those funds invested in accordance with HLB’s model balanced portfolio.

(3)    The remaining $1.8 million of Ms Jordan’s divorce settlement would be required to fund the purchase of a house, stamp duty, set-up costs and legal costs.

5.3    The principal reasons why I concluded that HLB’s model balanced portfolio (as opposed to a more “conservative” portfolio) was suitable for Ms Jordan were:

(1)    Her age and the long-term nature of her investment. Ms Jordan was under 50 years of age and on normal life expectancies could be expected to live for another 34 years or more. This led me to believe that it was essential to have a portfolio that could deliver long-term capital growth in excess of inflation.

(2)    Her lack of any other source of income. This led me to believe that the portfolio would have to generate regular income sufficient to fund Ms Jordan’s living expenses for another 34 years or more. Largely for this reason, I decided that it was appropriate to invest a large portion of Ms Jordan’s Australian equities allocation (nominally part of the Growth component of the model balanced portfolio) into the Lonsec Model Income Share Portfolio, which comprised a select group of shares that were expected to deliver a high yield (dividend income), as opposed to high capital growth.

(3)    The need to ensure the portfolio was tax effective. Since most of the portfolio would (to begin with) be held by Ms Jordan personally (i.e., not in superannuation or a trust structure), I believed that it was unwise for her to derive unnecessarily high amounts of personal income (on which a marginal tax rate would be payable), as opposed to deriving capital gains (only half of which are taxed at the marginal rate and only when realised) and earning imputation credits from equities.

(4)    The fact that she would own her own home, had no substantial liabilities, and her children were attending university. I believed that it was reasonable and prudent for a person in Ms Jordan’s position to accept a level of investment risk that would not have been appropriate if, for example, she had very young or disabled children, did not own her own home or had substantial liabilities.

(5)    I regarded it as a fairly standard portfolio for long-term investors. I also believed that quite a lot of thought had been given to the composition of the model balanced portfolio; that each of its components had been researched and recommended by Lonsec; and that, considered as a whole, it constituted a diversified, sound and tax effective approach to long-term investing.

5.4    In arriving at my opinion that HLB’s model balanced portfolio was suitable for Ms Jordan, I considered the Risk Profiles Definitions published by Lonsec (with which I was very familiar) and concluded that Ms Jordan fell between Risk Profile 4 (Balanced) and Risk Profile 5 (Growth). Exhibited at MGH29 is a copy of the Risk Profile Definitions that were current as at October 2006. I refer to those Risk Profile Definitions and say:

(1)    I believed that Ms Jordan did not fall within Risk Profile 1 (Secure) because that is not an appropriate approach for long-term investors. It offers no capital growth and therefore does not provide sufficient protection against inflation. It is also likely to deliver a relatively low return over the long term; and it would not be tax effective.

(2)    I believed that Ms Jordan did not fall within Risk Profile 2 (Defensive) for similar reasons. That approach is suited to short-term investors whose main emphasis is on generating an income. It would also not be very tax effective.

(3)    I believed that Ms Jordan did not fall within Risk Profile 3 (Conservative), having regard to the matters I mentioned in paragraph 5.3 above; and because it was my view that a Conservative approach was suited to medium-term investors who were primarily seeking an income stream, and was not very tax effective.

(4)    I believed that Ms Jordan fell between Risk Profiles 4 (Balanced) and 5 (Growth). My view was that she was an investor who needed to produce capital growth in the long-term and generate a tax effective income stream, which pointed to Risk Profile 5. On the other hand, her need for a regular income stream of about $15,000 per month, her lack of prior investment experience, and the lower level of risk associated with greater diversification pointed to Risk Profile 4.

(5)    I believed that Ms Jordan did not fall within Risk Profile 6 (High Growth), primarily because of her need for a regular income stream and the higher level of risk associated with investing 100% in growth assets.

5.5    On or about 17 October 2006, when I gave him the Action Plan and the Plan Note, I spoke to Chris Hogan about Ms Jordan and instructed him to draft a Statement of Advice in accordance with the Plan Note. I also discussed Ms Jordan’s portfolio and circumstances with Mr Hogan at that time and later when he was preparing the Statement of Advice, but I cannot remember what was said.

5.6    I remember giving consideration, at about that time, to establishing a family trust or a self-managed super fund for Ms Jordan, and I believe I discussed those alternatives with Mr Hogan. I decided against those alternatives due to the extra cost and complexity involved, for insufficient benefit. I also decided that gearing was not required or appropriate for Ms Jordan. I wanted to keep the investment structure relatively simple, in line with Ms Jordan’s wish to have minimal administration, and I considered that this best suited Ms Jordan’s needs.

5.7    I also considered whether I should recommend Ms Jordan invest the personal component of the portfolio with a “manager of managers” (such as MLC), rather than using an individual wrap account, but I decided against it, primarily for reasons of cost and flexibility. The fees charged by MLC and the like tended to be relatively cheap for investments of under $1 million, but less competitive for larger investments. I did, however, decide to recommend the Russell Balanced Fund (which followed a “manager of managers” approach) for the $1 million super component of the portfolio.

59    Ms Jordan made available to HLB the residue of her divorce settlement funds on 10 November 2006. The amount handed over was $5,510,007.

60    Ms Jordan also testified that, prior to retaining HLB, she had never sought financial advice. She said:

I basically gave them a cheque straight from the property settlement and relied on them to manage my financial affairs for me. I do not recall completing any forms or answering any questions about risk.

61    Ms Jordan suggested in her evidence that she wanted to double her money before she died and that she had informed Mr Hutton of this. Mr Hutton doubted that he was ever told by Ms Jordan that she wanted to “double her money”. She said that she also wanted to have enough money to live on each month. $15,000 per month was the figure ultimately discussed as the amount she required for living expenses.

62    On 16 November 2006, Mr Hutton met with Ms Jordan and handed her a letter and the first Statement of Advice which were both dated that day. At pars 5.10 to 6.8 of his affidavit, Mr Hutton said:

5.10    I refer to the Lonsec reports annexed to the First Statement of Advice and say that I had read each of them by 16 November 2006. I had also read many prior Lonsec reports relating to the same funds in the past.

5.11    Exhibited at MGH31 are copies of documents recording the recent past performance of the “HLB Model Portfolio” and the “Lonsec Model Portfolio” as at September 2006. I had also reviewed those documents (and earlier versions of them) by 16 November 2006.

5.12    By 16 November 2006, based on the discussions I had previously had with Ms Jordan, I believed that I had sufficient knowledge of her personal circumstances and requirements to make the recommendations set out in the First Statement of Advice.

6    Presenting the First Statement of Advice

6.1    On 16 November 2006, I met with Ms Jordan (November 2006 Meeting) and I provided her with a copy of the First Statement of Advice at the commencement of that meeting. The meeting lasted about 1½ to 2 hours plus preparation time. Mr Hogan was also present xxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. I do not recall him saying anything during the November 2006 meeting. Exhibited at MGH32 is my diary entry of the meeting appointment with Ms Jordan.

6.2    During the November 2006 Meeting, Ms Jordan had her copy of the First Statement of Advice in front of her. I sat facing Ms Jordan and I turned pages within her copy of the First Statement of Advice, pointing to various paragraphs and sections, as I explained them to her. I did not read the First Statement of Advice to Ms Jordan, but I endeavoured to explain the substance of the document to her.

6.3    I first pointed out the Personal Details section on page 3 of the First Statement of Advice and asked Ms Jordan to confirm that those details were correct. I believe she did so, as no changes are made to those details, although Mr Hogan’s notes on page 2 indicate that Ms Jordan mentioned additional matters.

6.4    I then proceeded to take Ms Jordan through the First Statement of Advice and summarised various parts of the document and, as is my habit, I marked some key points on Ms Jordan’s copy of the document. I cannot remember what words I used when summarising the First Statement of Advice. However, it took us about 1 hour to run through the whole document. During that time, I at least drew Ms Jordan’s attention to and summarised the split between the personal investment account and the superannuation account that is referred to on page 4 of the First Statement of Advice; the 6 asset classes referred to in the Investment Portfolio section on page 5 with a particular focus on the defensive hedge funds, fixed interest and cash components (as shown by my handwritten markings on Ms Jordan’s copy of the first SOA); the Monthly personal payment section on page 6 (also reflected by my underlining of the amount $15,000); the undeducted contributions sections on page 9; the Investment Recommendations section on pages 13 to 15. My markings record the fact that I paid particular attention to that section, particularly the hedge funds and fixed interest and cash sections; the fund descriptions on pages 16 to 17; the Investment Structure diagram on pages 21 and 22; the information about the Russell Balanced Fund on page 20; as well as the Fees and Disclosure information on pages 26 to 28. I also corrected the disclosure information to correctly identify that I was a “director” of Lonsdale at page 28. I also pointed to the annexed Lonsec Research Reports (but I only did so briefly, so as to show Ms Jordan they were there if she wished to read them). During the November 2006 Meeting, I told Ms Jordan words to the effect that the investments we were recommending were “not capital guaranteed” and the earnings were “not guaranteed.” I ran through the annexures projecting the portfolio value highlighting that these were not guaranteed and assumed an earnings rate of 8% pa – as shown by my marking of the 8% on Annexure 1 of Ms Jordan’s copy. I also told her words to the effect that HLB’s model portfolio “invests in sectors and funds with varying levels of risk, but it is diversified so that you will not be overexposed to any one area.”

6.5    Towards the end of the November 2006 Meeting, Ms Jordan and I signed an “Acceptance and Authority to Proceed” form (Acceptance) which included confirmation that we had her details correctly recorded. Exhibited at MGH33 is a copy of the Acceptance, signed by Ms Jordan and me.

6.6    It was my practice in 2006 (and still is) to have Product Disclosure Statements for each fund that I am recommending available for the client and to offer the client a copy to take home. Many clients take them home, but others do not. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Exhibited at MGH34 and MGH35 are copies of those documents. I cannot remember whether Ms Jordan took them home with her following the November 2006 Meeting.

6.7    At no time during the November 2006 Meeting did Ms Jordan say that she was uncomfortable with my recommendations or the level of risk involved. She did not say words to the effect that she was risk averse, preferred a conservative investment approach or wanted secure investments. Nor did Ms Jordan say that she did not understand the First Statement of Advice, or what was proposed.

6.8    Ms Jordan did not tell me during the November 2006 Meeting that one of her goals was to double her money by the lime she died; or that she wanted to make sure that there was enough money for her children to live comfortably after she died.

63    In her 30 March 2012 affidavit, Ms Jordan said that she did not recall being taken through the first Statement of Advice. She accepted she was given the Statement of Advice but claimed that she did not read it. The Statement of Advice comprises 28 pages of text and eight annexures.

64    On p 5 of the Statement of Advice, the following was said:

Personal Investment Account

We recommend you establish a personal investment account with $4,210,000 (including Macquarie CMT balance).

•    Investment portfolio

We recommend your personal investment account be invested in a diversified investment portfolio. Diversification will be achieved by investment in the following asset classes:

•    Australian shares.

•    International shares.

•    Property.

•    Defensive hedge funds.

•    Fixed interest.

•    Cash.

See the Investment Recommendations section of this report for our suggestion of an appropriate investment portfolio.

65    HLB recommended that the portfolio pay $15,000 per month to Ms Jordan. HLB said that Ms Jordan’s portfolio would derive the following primary earnings:

•    Earnings

Your personal investment portfolio will derive the following primary earnings:

•    Australian dividend income with attached imputation credits that reduce your income tax liability on the income.

•    International dividend income with attached foreign tax credits that reduce your income tax liability.

•    Capital growth on Australian shares, international shares, hedge funds and property.

•    Interest income.

We recommend all the above earnings are re-invested within your personal investment account. If the above earnings were paid to you directly you would receive payments at irregular intervals and for irregular amounts.

66    At pages 13 to 19 of the Statement of Advice, HLB discussed the investments which it recommended to Ms Jordan.

67    At pages 13 to 15, the following was said:

Investment Recommendations

We have provided you with a recommended personal portfolio and superannuation account.

•    Personal investment portfolio

Asset Allocation

Our model asset sector allocation of 65% to growth assets (Australian & international shares and property), 25% to income assets (fixed interest and cash) and 10% to defensive hedge funds is suitable for your personal investment portfolio:

This allocation provides the opportunity for strong capital growth whilst being focused on capital preservation.

Our model portfolio is well diversified. It is diversified at the asset sector level, the regional level, the fund manager level and the individual asset level. Diversification reduces volatility and increases the likelihood of capital preservation. The portfolio will thus never be over exposed to an underperforming asset.

Growth Assets – Equities and Property

The portfolio has an Australian equity bias. This takes advantage of imputation credits attached to dividends which increases the after tax return of Australian equities. We advocate the use of both direct equities and managed funds.

The portfolio is also significantly invested in international equities. This recognises the vast stock opportunities available globally.

The portfolio has only a minor weighting to property. This is a reflection of our view that local listed property is not as attractive as equities on a risk/return basis going forward.

Income Assets – Fixed Interest and Cash

The fixed interest allocation acts to reduce volatility in the portfolio. We use a wide array of fixed and floating interest investments, with varying levels of risk, This provides the opportunity for strong stable returns whilst still providing capital protection in down times.

Cash is kept at a minimum to cover short term expenses. This recognises the inferior returns of cash compared to other asset classes.

Hedge Funds (Defensive)

Defensive absolute return or hedge funds aim to provide positive returns (usually high single-digit or low double-digit) regardless of market conditions. These funds do not attempt to follow any index but rather aim to produce consistent returns irrespective of rising and falling markets. These funds not only purchase and hold stocks and fixed interest instruments but use various other strategies such as short· selling and identifying and exploiting arbitrage situations to produce returns. We employ hedge funds to reduce volatility in the portfolio and to provide greater asset diversification.

Investment Portfolio

The following is the portfolio we recommend for your personal investment to be established with an amount of $4,150.000.

Lonsec Model Income Share Portfolio

Lonsec have constructed a model income share portfolio which has been in existence since August 2002. It consists of 8 stocks each with an equal weighting of 12.5% of the portfolio. The aim of the portfolio is to deliver an attractive fully-franked income yield together with some capital growth, over the medium to long-term. The fund invests in the ASX Top 150 and is bench marked against the ASX 100 Accumulation Index. Since inception the portfolio has outperformed the benchmark.

The Lonsec Model Income Share Portfolio is currently as follows:

There are several advantages of using the Lonsec Model Income Share Portfolio over a more traditionally operated share portfolio:

•    The portfolio is defensive in nature however positioned to achieve some capital growth. Lonsec includes its best income stock ideas in the portfolio and does not ‘punt’ on any stocks. Stocks are picked to achieve medium to long term performance rather than for short term price speculation.

•     The portfolio is diversified with the 8 stocks covering 8 minimum 4 industry sectors.

•     The portfolio’s operation is cost effective. Trades are placed directly through the investment platform at a discounted rate ($39 or 0.1 % whichever is greater).

•     The portfolio operates in a similar way to an Individually Managed Account (lMA). If you give us authority all portfolio changes can be made immediately once announced by Lonsec, and we can then notify you of the change.

•     The portfolio is only ever 8 stocks. This prevents building up too many stocks which can create monitoring and administration hassles and potentially a drag on performance.

•     As the portfolio recommendations are made by Lonsec and implemented by us emotional decisions are not made which may be detrimental to performance.

•     Attached franking credits will reduce your personal income tax.

We have enclosed at Annexure 5 a recent monthly report from Lonsec which indicates the performance of the portfolio since inception. Please note that past performance is no guarantee of future performance.

In terms of the managed funds included in the portfolio we comment as follows:

68    At pages 16 and 17, HLB described the other investments which they recommended. At page 18, HLB explained the BT Wrap Asset Choice investment platform.

69    The advice contained a detailed analysis of the asset allocation of the recommended investments. The weighting of the recommended investment portfolio was as follows:

70    On the same day as she received the Statement of Advice, Ms Jordan signed an Acceptance and Authority to Proceed in the following terms:

VICKI JORDAN SOA 16 NOVEMBER 2006

ACCEPTANCE & AUTHORITY TO PROCEED

It is confirmed by the signature below that:

•     The details in relation to personal circumstances, financial position and lifestyle and financial objectives have been accurately summarised in this document, and no correction is required

•     The basis of the advice and recommendations given have been expressed in such a way that I have understood these matters

•     I have familiarised myself with the way in which my adviser will receive remuneration

•     I understand that any projected returns or outcomes cannot be guaranteed

•     I have received the Product Disclosure Statements for the investments recommended in this advice.

•     I have received a copy of your Financial Services Guide.

•     Lonsec Model Income Share Portfolio–- I hereby give authority to you to implement the changes to my own portfolio contemporaneously with the changes made by Lonsec to its model. In providing this authority I acknowledge that I will not be notified of the changes before they are implemented (delete by crossing this part out if you do not wish to give this authority.)

Accordingly I wish to instruct you to proceed in the matter set out in this document.

    Vicki Jordan

Date:     ______/______/______

Accepted for an on behalf of Lonsdale Financial Group Limited by:

Signed:     _______________________

    Michael Hutton

Date:     ______/______/______

71    She also signed a similar document for her superannuation investment of $1,000,000 with a BT-managed superannuation fund. That document was in the following terms:

VICKI JORDAN SOA 16 NOVEMBER 2006

ACCEPTANCE & AUTHORITY TO PROCEED

It is confirmed by the signature below that:

•     The details in relation to personal circumstances, financial position and lifestyle and financial objectives have been accurately summarised in this document, and no correction is required

•     The basis of the advice and recommendations given have been expressed in such a way that I have understood these matters

•     I have familiarised myself with the way in which my adviser will receive remuneration

•     I understand that any projected returns or outcomes cannot be guaranteed

•     I have received the Product Disclosure Statements for the investments recommended in this advice.

•     I have received a copy of your Financial Services Guide.

Accordingly I wish to instruct you to proceed in the matter set out in this document.

Signed:     ______________________

    Vicki Jordan

Date:     ______/______/______

Accepted for an on behalf of Lonsdale Financial Group Limited by:

Signed:     _______________________

    Michael Hutton

Date:     ______/______/______

72    On 22 November 2006, HLB reported to Ms Jordan that, in accordance with their recommendations, it had placed $3,945,116 from her Investment Wrap cash account into the following investments:

73    On p 2 of its letter, HLB said:

Receipts of the above transactions are attached for your records. Once these transactions have been completed the balance of the cash account will be approximately $204,884.

AssetLink SuperWrap

In accordance with our recommendations we have placed $980,000 into the Russell Balanced Fund.

A receipt of this transaction is attached for your records and once complete the balance of the cash account will be approximately $20,000.

Periodic Monthly Payments

In order to establish your monthly periodic payments of $15,000, to be transferred from your Investment Wrap account to your Macquarie CMT account and then into your CBA account, please sign the enclosed form where indicated and return to us in the reply addressed envelope provided. Your first periodic payment should appear in your CBA account on or around the 20th of December and then on the 20th of each month thereafter.

If you have any queries in relation to the above please do not hesitate to contact me.

74    Ms Jordan had invested $207,500 in the Basis Aust-Rim Fund and $330,000 in the Basis Yield Fund.

75    In this proceeding, Ms Jordan does not complain about any of the other investments recommended by HLB to her. The only investments about which complaint is made are the two investments totalling $537,500 in the two Basis Funds. Although she said that, at the time the above investments were made, she had no real idea about asset classes, Ms Jordan did not say that she did not understand the contents of the first Statement of Advice or the explanations of HLB’s recommendations given to her by Mr Hutton on 16 November 2006. She did, of course, say that she did not read the first Statement of Advice. Having regard to the terms of the two acknowledgements which she signed on that day and to my assessment of her capabilities, I find that Ms Jordan understood the substance of the first Statement of Advice as it was explained to her on 16 November 2006. In particular, I think that she appreciated that some of the recommended investments involved greater risk than others but that some degree of greater risk was necessary if she was to achieve her fundamental goals and objectives.

76    Thereafter, HLB sent regular reports to Ms Jordan in which were set out details of the performance and current state of her investment portfolio.

77    On 20 July 2007, Mr Hutton sent a letter to Ms Jordan. It was headed “Basis Funds” and was in the following terms (omitting formal parts):

Basis Funds

We have enclosed an interim report for the period 1 July 2006 to 31 May 2007 for your Wrap portfolio. We are still waiting on 30 June prices and distributions for some fund managers. We will send your 30 June 2007 quarterly report in the next few weeks.

We are sending this interim report to bring to your attention an issue regarding your holding in the Basis Yield Fund and Basis Aust-Rim Opportunity Funds. Basis advised us on 11 July 2007, that for the month of June the fund’s had a significant loss, as follows.

These large falls were due to the valuation of loan investments known as Collaterialised Debt Obligations (CDO’s) being reduced across the board by US investment banks. This is as a result of some having exposure to the US sub prime loans market which has experienced a rising number of defaults. The Basis funds have minimal exposure and they have actively avoided exposure to this sector. However, as the whole CDO market has been downgraded, this has affected the asset value of the Basis portfolio.

As a result of the decline in the asset value, some banks that have lent money to Basis have now called on them to repay outstanding loans which would force Basis to sell some assets at low valuations and realise significant losses. Basis has indicated that if enforced to sell at distressed sale prices then this could result in a reduction in the net asset value of the units for the Basis Yield Fund to below 50% of the level as at 31 May.

Basis is currently in negotiations with the eight lending banks and is hopeful that the lending consortium will realise the underlying quality of the investment assets and that the asset valuations will recover after a review of the CDO market by Standard & Poor.

The impact on the Aust-Rim fund is expected to be lower than for the Yield fund due to a reduced exposure to the CDO market. Lonsec (and other leading research houses) have had a Highly Recommended rating on both the Yield Fund and Aust-Rim Opportunity Fund for approximately 3 years and they have been part of our model client portfolios for most of that period. The performance over the 3 year period has been as follows:

Lonsec have now placed both funds on “Fund Watch” and all applications and redemptions to and from both funds have been suspended indefinitely. You may have read or heard in the media that Basis funds are on the brink of collapse. From our two telephone conferences with Basis this week, they do not foresee the collapse of either fund.

We have enclosed this week’s Lonsec fund update on the Basis Yield fund. We will keep you wonned as further information comes to light.

If you would like to discuss the above, please contact me.

78    Mr Hutton gave evidence that, before sending the letter of 20 July 2007 to Ms Jordan, he telephoned her to discuss its contents. He said:

8.2    Exhibited at MGH38 is a copy of a letter I sent to Ms Jordan on 20 July 2007 regarding the Basis Funds. I telephoned Ms Jordan before sending that letter to forewarn her. At the time of making the call I had the letter in front of me. This included a portfolio performance report and a Lonsec Update. During that call, I told Ms Jordan words to the effect: “There has been a problem with 2 of your investments. The Basis Funds have advised us that they are likely to suffer a large decline in value. All redemptions have been suspended so we are unable to cash in your investment. I am sending you a letter to provide information regarding this. You have $330,000 in Basis Yield fund and $207,500 in Basis Aust Rim Fund. We have spoken to Basis and they are hopeful that valuations will recover.” I believe that telephone conversation (which occurred prior to or on 20 July 2007) to be the phone call referred to in paragraph 38 of Ms Jordan’s Affidavit, wherein she recalls me saying words to the effect that she had “lost money.” xxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

79    Ms Jordan’s investments in the two Basis Funds are now virtually worthless.

80    In early 2008, Ms Jordan instructed HLB to sell some of her investments in order to finance a loan and gift which she intended to make to her son. $730,000 was made available to her son at this time.

81    On 6 March 2009, Ms Jordan was given a second Statement of Advice dated that day. On p 4 of that Advice, HLB stated her goals and objectives in the following terms:

Goals & Objectives

We have recorded the following as being your key financial objectives:

•    To receive an income stream sufficient to cover your living expenses.

•    To preserve and build your overall wealth.

•    To distribute sums to your children to assist them over time. Andrew has been gifted $100,000 to assist him with the purchase of his unit and you expect to do the same for Carlie in due course.

•    To minimise the amount of administration you are required to do.

•    To minimise tax.

We will discuss with you other financial objectives you may have.

82    Those goals and objectives did not include doubling Ms Jordan’s capital. They were broadly consistent with the goals and objectives Mr Hutton believed were Ms Jordan’s goals and objectives in 2005 and 2006.

83    Mr Hutton described Ms Jordan’s risk profile in the second Statement of Advice as 4.5 (Balanced to Growth).

84    Ms Jordan did not complain to HLB about her losses in the two Basis Funds until late 2011—4½ years after the losses first became apparent. Ms Jordan attempted to dilute the impact of these circumstances by suggesting that she did not appreciate that she had lost money in the Basis Funds until about April 2010. I do not accept that evidence. The letter dated 20 July 2007 informed Ms Jordan of the fact and extent of the losses as they were then known. Further, Mr Hutton had spoken with her by telephone on the same day and explained the problems to her. Later regular reports kept her informed of developments and they also reinforced the decline in the value of the Basis Funds.

85    Ms Jordan testified that:

(a)    She accepted HLB’s investment recommendations because she relied on the judgment of Mr Hutton to recommend investments that were suitable for her needs;

(b)    She believed that he would do or obtain the necessary research and recommend all investment decisions for her to make; and

(c)    She would accept his investment recommendations and advice even if it involved investing in products she did not understand.

86    Ms Jordan did not give any evidence at all as to what she would have done had she been more explicitly warned of the risks inherent in the Basis Funds or had she been told all of the things that she now contends in this proceeding she should have been told. Her case was built on the fundamental proposition that she would have done whatever Mr Hutton advised her to do. In order to succeed, therefore, Ms Jordan must demonstrate that HLB was negligent or otherwise acted wrongfully by recommending to her that she should invest in the two Basis Funds as part of a diverse portfolio of investments designed to produce substantial income for the rest of her life while, at the same time, preserving and growing her capital. This is why, in par 1 of her Outline of Opening Submissions, Ms Jordan submitted that:

The applicant’s case is, quite simply, that she should never have been advised to invest in either the Basis Aust Rim Opportunity Fund or the Basis Yield Fund. Both investments were:

(a)    entirely unsuitable for her risk profile;

(b)    were misrepresented in the Statement of Advice (SOA).

87    Nor did Ms Jordan testify that she read the first Statement of Advice carefully and interpreted the information concerning the two Basis Funds in any particular way. She said that she could not recall discussing the Basis Funds with Mr Hutton. She did not even accept that she read the first Statement of Advice.

88    Mr Hutton said that he spent about an hour explaining the first Statement of Advice to Ms Jordan. He remembered telling her that the investments which he recommended were not “capital guaranteed” and “not guaranteed”. The first Statement of Advice also made this very clear. He told Ms Jordan that HLB’s model portfolio invested in sectors and funds with varying levels of risk but was diversified so that she would not be overexposed to any one area.

89    Ms Jordan probably did not understand or absorb everything that she was told on 16 November 2006 both orally and in writing. But she must have appreciated that the investments which she was about to make were not risk free. She was content to leave it to HLB (particularly Mr Hutton) to select the particular investments for her to make having regard to her circumstances and to her goals and objectives.

The Basis Funds

The Basis Aust-Rim Fund

90    On p 17 of the First Statement of Advice, HLB described this Fund as a hedge fund. It continued its description in the following terms:

•    Fixed interest hedge fund manager.

•    Invests predominantly in the Asia-Pacific region.

•    Several underlying strategies primarily focussed on fixed income and hybrid securities.

91    According to this Fund’s Product Disclosure Statement (PDS) dated July 2006, 38.5% of the Fund was invested in CDO and CLO securities, 41.5% of the Fund was invested in the US and the rest of the Fund was invested in at least 22 other countries. The Fund was permitted to invest in all forms of securities and obligations including those below investment grade. The assets of the Fund were available to acquire leveraged trading positions. The PDS included a statement to the effect that any purchase or sale of a leveraged investment may result in losses in excess of the amount initially deposited as margin for the investment. The PDS also included a statement to the effect that the Fund may employ investment techniques such as short sales, leverage, securities lending, option transactions and forward transactions (among others) which could, under certain circumstances, magnify the impact of any negative market, sector or investment outcome. The PDS also made clear that, in the Fund’s opinion, as at July 2006, global levels of volatility in all asset classes were on the rise. It was said that the instruments used by the Fund have a high price volatility which might impact adversely on the value of the Fund’s assets.

92    Against these theoretical statements of risk had to be balanced the Fund’s actual performance over several years prior to November 2006. It had out-performed the cash index by 5.6% p.a., had achieved high annual returns and had a Sharpe Ratio of 2.3 over the three years to June 2006. In its report concerning this Fund dated August 2006, Lonsec rated the Fund as “Highly Recommended”. It commented very favourably upon the management skills of those key personnel who made investment decisions on behalf of the Fund.

93    The evidence as to the collapse of this Fund that was tendered before me was essentially confined to disclosure notices given by the Fund itself. Those notices suggested that the difficulties for the Fund were caused by the devaluation of assets within the Fund leading to margin calls from financiers to the Fund. The losses in this Fund may also have been contributed to by its exposure to the Basis Yield Alpha Fund which was the underlying Fund for the Basis Yield Fund.

94    These events occurred only a few months before the worst period of the US subprime crisis. That crisis was having a significant impact in the latter half of 2007 and ultimately contributed to what has become known as the global financial crisis which is generally accepted to have impacted the financial systems of the world in the period from late 2007 into early 2009 and perhaps beyond.

The Basis Yield Fund

95    In the first Statement of Advice, this Fund was described as follows on p 17 of that Advice:

•    Relatively new fund commencing in December 2003, with highly experienced team.

•    Alternative income fund investing in relatively complex structured credit securities such as collateralised debt obligations (CDO’s).

•    A positive performance result has been achieved in every month since commencement.

96    Most of this Fund’s assets as at April 2006 were below investment grade. This Fund was permitted to leverage thereby magnifying the risk to investors. It also employed similar trading techniques as were being employed by the Basis Aust-Rim Fund.

97    This Fund is said to have been described by HLB as a fixed interest investment. Ms Jordan argues that it was no such thing because it did not display any of the secure characteristics of a traditional fixed interest investment.

98    This alleged misdescription of this Fund is at the heart of the case being sought to be litigated by Ms Jordan as a result of the amendment which was sought on the first day of the trial and which I have now allowed.

99    The collapse of this Fund was, according to the reports released by the Fund itself, caused by essentially the same factors as the collapse of the Basis Aust-Rim Fund.

100    The Lonsec report provided to Ms Jordan as part of the first Statement of Advice made clear that the Basis Yield Fund was the highest credit risk offering in the Lonsec alternative income sector. Nonetheless, it received a “Highly Recommended” assessment because of its sound performance up to that time and its high returns. The critical factor in Lonsec giving that recommendation in respect of this Fund was the high regard which it had for the expertise within Basis in the segment of the income sector in which this Fund was operating. The Lonsec report provided to Ms Jordan provided a fair amount of detail as to the identity of and capabilities of the key personnel managing the assets of this Fund. Nonetheless, that report made very clear that this Fund was a relatively high risk form of investment.

Consideration

101    The following matters are not in dispute:

(a)    Ms Jordan had between $5.2 million and $5.5 million to invest after securing a satisfactory residence for her and her children.

(b)    She wished to generate $15,000.00 per month as income from investing the amount referred to in (a) above.

(c)    She wished to have sufficient capital over the balance of her life (expected for assessment and calculation purposes to be approximately 34 years) in order to generate the income which she said she required.

102    Ms Jordan may also have informed Mr Hutton that she wished to have some flexibility in the future to bestow reasonably substantial sums of money by way of gift or loan upon her children in order to assist them with their future commitments.

103    Ms Jordan gave no evidence to the effect that she was “risk averse” or wished to take no risks with her capital. She did testify that she wished to “double her money” but I very much doubt that she informed Mr Hutton of this. Even if she did, a goal such as that would require a reasonably aggressive investment program given that she also wanted to derive $15,000.00 cash or its equivalent in future dollars every month for the rest of her life. Mr Hutton did some calculations for the purposes of this proceeding which addressed this topic and, although the expert called on behalf of Ms Jordan originally took issue with those calculations, in the end, there was little difference between them as to the rate of return that would be required to enable Ms Jordan to double her money.

104    Mr Hutton assessed Ms Jordan’s risk profile at 4.5 (between 4 and 5) on the Lonsec risk profile scale. By reference to the definitions in that scale, he came to the view that he needed to position her non-superannuation investment portfolio approximately half way between a balanced portfolio and a growth portfolio.

105    The provision of investment advice requires a good deal of judgment and, although based upon information which may to some extent be described as objective, is largely a subjective exercise. A critical factor in providing reasonable investment advice is making a reasonably accurate assessment of the goals and objectives of the investor who has come to the adviser for that advice. The process is interactive in the sense that there are no absolutes. What might suit one investor’s circumstances, goals and aims may not suit those of another investor. Different investors have different levels of tolerance of risk.

106    Once the adviser has developed a reasonably accurate appreciation of the client’s goals and objectives, he or she can then set about compiling an appropriate portfolio by reference to those goals and objectives.

107    In the present case, Mr Hutton and his colleagues went about the task of compiling a set of recommendations for Ms Jordan in an entirely conventional manner. The recommendations that resulted from the work that Mr Hutton and his colleagues did, are criticised by Ms Jordan, not as a whole, but in a highly selective manner.

108    It is Ms Jordan’s case that both Basis Funds were high risk investments and completely inappropriate as investments for Ms Jordan having regard to her risk profile and her goals and objectives. It is Ms Jordan’s case that she was risk averse and conservative, although she gave no evidence to that effect and did not inform Mr Hutton that that was her investment strategy. Propositions to that effect can form no part of Ms Jordan’s profile for present purposes.

109    The PDS in each case made clear that both of those Funds were:

(a)    Hedge funds;

(b)    Highly geared; and

(c)    Able to invest in highly speculative securities.

110    However, balanced against these statements of observable risk, both Funds had performed well for three or so years prior to November 2006 and had provided excellent returns to investors.

111    Counsel for Ms Jordan questioned both Mr Hutton and Mr Philpot at considerable length about the PDSs for the two Basis Funds and about the Lonsec reports which assessed those Funds, all of which comprehensively set out the risks involved in investing in those two Funds.

112    Although the PDSs for the two Funds may not have been provided to Ms Jordan, the Lonsec recommendations in respect of both Funds were provided to her.

113    Counsel for Ms Jordan established that each of Mr Hutton and Mr Philpot were well aware of and understood the risks involved in investing in the two Basis Funds because each of them had read the relevant Lonsec reports and had also read the PDS for each of the Funds. He also established that, before HLB made its recommendations to Ms Jordan on 16 November 2006, Lonsdale’s compliance auditors had suggested to HLB that, in the future, HLB should provide a more detailed explanation of these two Funds with a view to highlighting in greater detail the risks involved in investing in them and that HLB had not followed that suggestion. In particular, Counsel emphasised that HLB had not adopted the Lonsdale compliance auditor’s recommendations in respect of the advice and recommendations which it made to Ms Jordan.

114    It was submitted on behalf of Ms Jordan that:

(a)    Mr Hutton had not made sufficient enquiries to determine Ms Jordan’s risk profile. The “mind map” produced in 2005 was, so it was submitted, an insufficient basis for determining HLB’s investment recommendations for Ms Jordan.

(b)    Mr Hutton had not sufficiently investigated Ms Jordan’s income needs.

(c)    HLB breached the duty of care owed by it to Ms Jordan because it recommended to her that she should invest in the two Basis Funds when it knew or ought to have known that those Funds were highly speculative investments and contained assets which were below investment grade to a significant degree.

(d)    It was misleading or deceptive for HLB to describe the recommended investments as appropriate and consistent with Ms Jordan’s risk profile as HLB did in the first Statement of Advice. She was actively misled by this misdescription. Mr Hutton had not made sufficient enquiries to enable him to determine her risk profile.

115    Ms Jordan relies upon several causes of action. At the heart of each of them, however, is the following simple proposition: No ordinary skilled financial adviser should have recommended to Ms Jordan that she invest $537,500.00 out of investment funds of $5.2–5.5 million in the two Basis Funds. This was approximately 10% of her investment capital. It was submitted that this proposition was virtually self-evident since, when due regard is paid to Ms Jordan’s circumstances and to her goals and objectives, both investments were entirely unsuitable for her because of the level of risk involved in them and the speculative nature of the Funds’ investment activities.

116    The alleged shortcomings in the conduct of HLB all concern the initial recommendations made by it to Ms Jordan in November 2006. There is no allegation that HLB failed to monitor her investments satisfactorily after November 2006. Whether the alleged shortcomings are regarded as breaches of a duty of care or are said to fall short of being a satisfactory basis for the investment advice and recommendations provided by HLB does not really matter.

117    I have set out at [28]–[31] above the evidence given by Messrs Hutton and Philpot concerning the formation of the HLB Investment Committee and the subsequent creation of the HLB model portfolio. The HLB Investment Committee met regularly and monitored and reviewed the make-up of the HLB model portfolio. True it was that the HLB operatives relied upon Lonsec’s research and reports but the fact that they would do so was made clear to Ms Jordan and was, in any event, a reasonable approach to take in all of the circumstances. Further, the circumstances in which the Basis Funds were introduced into the HLB model portfolio are recounted at [32]–[39] above. It is important to remember that the HLB model portfolio was intended to be a portfolio of investments which was weighted 70% growth and 30% income and was also intended to produce growth over the long term. In order to achieve that kind of outcome, it was necessary to invest a portion of the available funds in investments which were higher risk than government bonds or what Counsel for Ms Jordan termed “traditional fixed interest securities”.

118    Explanations of HLB’s general investment strategies and of the HLB model portfolio were given to Ms Jordan by Mr Hutton in a lengthy conference which took place in September 2005. It is not suggested in this proceeding that those explanations were inadequate or misleading nor is it suggested in this proceeding that the fundamental approach taken by HLB as explained to Ms Jordan at that time was in some way deficient. It is clear that, at the September 2005 meeting, Mr Hutton gave a preliminary explanation to Ms Jordan of the need to invest in different asset sectors in order to spread the risk. He also explained that there will always be volatility in investments and that it was necessary to have a diverse range of investments in order to reduce the impact of such volatility.

119    When, in November 2006, Mr Hutton turned his attentions specifically to developing an overall investment strategy for Ms Jordan, he gave careful consideration to her relevant circumstances.

120    Those relevant personal circumstances were the matters set out at [101] above coupled with the fact that she had no liabilities and did not intend to resume full time paid work outside the home. Mr Hutton gave specific and detailed consideration to the Risk Profile Definitions published by Lonsec and reasonably concluded that risk profiles 4(Balanced) and 5 (Growth) best described Ms Jordan. This assessment made by Mr Hutton was not challenged in cross-examination. Although it is not necessary for HLB to establish that Mr Hutton was correct in the assessment which he made, I conclude that his assessment was a reasonable one. Adjunct Professor McMaster, who was an expert qualified by Ms Jordan and called in her case, agreed that Ms Jordan had attributes falling within the Lonsec definitions of risk profiles 4 and 5. In particular, Professor McMaster agreed that Ms Jordan was an investor who was able to bear some investment risk.

121    Although it has been submitted on behalf of Ms Jordan that Mr Hutton never really determined Ms Jordan’s risk profile, the evidence establishes the contrary proposition. Mr Hutton said that he met with her for 1.7 hours in September 2005 and subsequently spoke with her on the telephone. He managed to ascertain the matters which I have summarised at [101] and [120] above from the discussions which he had with Ms Jordan. It is not clear to me what it is about Ms Jordan’s true risk profile that Mr Hutton failed to ascertain. If it is suggested, as I think it must be, that he failed to ascertain that she was risk averse or conservative in her outlook, the evidence adduced in the present case does not make that proposition good. As I have already mentioned, Ms Jordan did not give evidence to the effect that she was risk averse or conservative in outlook and did not give evidence to the effect that she told Mr Hutton of this.

122    In my judgment, Mr Hutton made a reasonable and substantially accurate assessment of Ms Jordan’s risk profile according to the Lonsec Risk Profile Definitions which were both reasonable and pertinent to the assessment of Ms Jordan’s risk profile.

123    Having determined Ms Jordan’s risk profile, Mr Hutton proceeded to compile a set of recommendations for Ms Jordan. Those recommendations are reflected in the first Statement of Advice. It is important to note that Mr Hutton and HLB recommended that Ms Jordan set aside $1 million in a BT-Managed Superannuation Fund and invest approximately $4.2 million across a range of funds, products and asset sectors which conformed with the fundamental characteristics of the HLB model portfolio. In evidence before me, Mr Hutton gave a detailed explanation of the reasoning which led him to the selection of the particular investments which he recommended to Ms Jordan. Given Ms Jordan’s risk profile as determined by Mr Hutton and the explanations which he gave in evidence as to why he selected the investments which he recommended to her, there is no basis, in my judgment, for suggesting that the inclusion of the two Basis Funds in the recommendations made by HLB was, in and of itself, and without more, negligent or wrongful. The Basis Funds had both performed well up to November 2006. They had delivered stable returns on a monthly basis over a considerable period. Both of the Basis Funds were highly regarded in the market place. There is no suggestion in the material before me that HLB, or any of its operatives, were aware or ought to have been aware of particular information which should have led them to arrive at a different assessment of those Funds and of the future prospects of those Funds. Furthermore, the inclusion of the Basis Funds in Ms Jordan’s portfolio was the result of only one (or perhaps two) decisions made in respect of the portfolio which HLB recommended for her. Had those two Funds been removed from the mix, consideration would have had to have been given to replacing them and to otherwise altering the remaining investments. It is highly artificial to focus on the two Basis Funds and to assume that all other recommendations would have remained the same.

124    In its reports in respect of the two Basis Funds, Lonsec had stated that those Funds were suitable for investors with a risk profile of 3, 4 or 5 with the allocation ranging from 5% for those in risk profile 3, to 10% for those in risk profiles 4 and 5. Professor McMaster agreed that it would not be unreasonable for a financial adviser to rely upon the assessments made by Lonsec in those reports. At Transcript p 146 l 11 to p 149 l 7, the following exchange took place:

If you could kindly go to the next page, page 298, I draw your attention to the top left hand corner, second arrow. There’s a reference to the fund [referring to the Basis Aust-Rim Fund] displaying historically low volatility and it is then said:

Lonsec considers this product spans both the alteratives-conservative for some risk profiles and alternatives-aggressive components of a balanced portfolio.

Do you see that, sir?---I do.

The fund is suitable for mid to high risk profile investors with a three plus year investment time horizon.

Do you see that?---I do.

Lonsec considers an allocation of up to 5 per cent at risk profile 3 but not 2, 10 per cent at risk profiles 4 and 5 per cent at risk profile 5 to be suitable for this fund.

Do you see that, sir?---I do.

And you understand that to be a statement by Lonsec as to the suitability of this fund for investors fitting particular risk profile definitions, don’t you?---Yes.

And you would agree with me that it would not be unreasonable for a financial advisor in the position of Mr Hutton to act in accordance with that recommendation?---No.

I’m sorry?---I’m agreeing.

You agree? So that if Mr Hutton assessed a client’s risk profile as a three, then you agree it would be reasonable for him to recommend up to 5 per cent investment in this fund?---Based on Lonsec’s advice, yes.

Well, and you agree that it would have been reasonable for him to base his recommendation on that advice?---Subject to assessing it for reasonable, yes. Yes.

But if he though it was reasonable?---Then the answer is yes.

And if Mr Hutton assessed a client as having a risk profile of four or five, then you agree that it would be reasonable for him to recommend a 10 per cent allocation to the risk – sorry – to the Aust-Rim Fund?---Yes.

And Ms Jordan’s allocation to the Aust-Rim Fund, as you understand it, represented 5 per cent of the personal investment component of the portfolio, didn’t it?---Yes.

And if you included the superannuation component, it was about 4 per cent, correct?---Yes.

And according to Lonsec’s advice, that allocation would have been appropriate for anybody who had – I withdraw that. Now, could I next ask you to go, please, sir, to page 306A in this same bundle. Do you see that if you look on the right hand side towards the top, Lonsec Opinion of the Fund? Do you have that?---Yes.

And they describe the Basis Capital Yield Fund as an offering in the alternative income sector. Do you see that?---Yes, I do.

If you go over the page for me to page 306B, do you see the second arrow:

This fund should be used to complement existing fixed interest exposure in client portfolios.

?---Yes.

And that’s a recommendation which you agree a financial adviser would be entitled to rely upon in giving advice?---Yes.

And in the third bullet point:

Lonsec refers – recommends that advisors consider how the risk return profile of the Yield Fund differs from other income products.

There’s a mention of its heavy exposure to high yielding structured credit instruments, etcetera, and the last sentence in that paragraph:

Advisors must consider the appropriateness of the risk return profile of the fund in relation to the risk return profile of their client before making an allocation.

Do you see that?---Yes, I do.

And, as you understand it, Lonsec have said that the individual advisor must turn his mind to and consider the appropriateness of the profile of the fund in relation to their client’s profile?---Yes.

It’s a judgement that the advisor makes or should make on a case by case basis. Do you agree?---I do.

Now, do you still have volume 1 there with you, Professor?---Yes.

Might you turn to page 208 for me. Now, do you see there a Lonsec document described as Core Model Portfolio Structure Review June 2006?---Yes.

And you understand, don’t you, that research houses like Lonsec often prepare model portfolios as a guide to financial planners so that they can see what particular funds the research house would recommend clients be invested in?---Yes.

And that the research house tends to pick the funds that they think are the best picks in particular asset areas, correct?---Yes.

And that is then often relied upon by financial planners because they see which funds have been specially selected by the research house and they often rely upon that selection for their own purposes, correct?---Yes.

And you see on this model portfolio structure as at June 2007, that if you look on the right hand side, the second choice funds referred to, the Basis Yield Fund appears. If you look down, there’s income assets and across on the right hand side you see Basis Yield Fund?---Yes.

And you would understand that to be a nomination of the Basis Yield Fund as a suggested alternative to the UBS Hybrid Income Fund or one of the other income funds over on the left hand side, correct?---Yes.

Now, have you still got volume 2?---Yes.

All right. Can I ask you to just put volume 1 aside for a moment and pick up volume 2 again and I would like to take you, if I may, to page 327. I’m sorry. First, 326, page before. Now, you see towards the bottom of page 326, there’s a heading Income Assets, Fixed Interest and Cash?---Yes.

And it’s said:

Fixed interest allocation acts to reduce volatility in the portfolio.

Do you see that?---I do.

And you understand that to be a reference to volatility in the portfolio as a whole, correct?---Correct.

And you would agree that – I withdraw that. Now, if you then go over the page you will see on page 327 under the heading, hedge funds defensive. There’s a reference, in particular in the last sentence of the first paragraph, “We employ hedge funds to reduce the volatility in the portfolio as a whole.” Do you see that?---I do.

And you understand that to be a reference to the volatility considered as a whole portfolio basis?---I do.

And you agree with me, don’t you, that the negative – the fact that both of the basis funds were negatively correlated to traditional assets meant that they did act to reduce volatility in the portfolio as a whole because they were negatively correlated to what was happening in the equities component, for example?---Correct.

125    In addition, Lonsec assessed each of the Basis Funds as “Highly Recommended”.

126    In my judgment, Ms Jordan has failed to make out the core contention which is at the heart of her case, namely, that no reasonable financial adviser called upon to advise her in November 2006 and to make investment recommendations to her at that time should have included within his or her recommendations for investment, investment in either of the Basis Funds.

127    The misleading and deceptive conduct cases raised by Ms Jordan depend upon the Court making findings that it was misleading for HLB to suggest that the recommendations which it made were suitable for Ms Jordan and misleading for HLB to describe the Basis Yield Fund as a fixed interest investment.

128    The first of the ways in which the statutory causes of action based upon misleading and deceptive conduct are relied upon by Ms Jordan must fall with the negligence cases in contract and tort. This first case depends upon Ms Jordan making good the core proposition to which I have referred at [126] above and she has failed to do so.

129    As to the misdescription contention referred to at [127] above, it is necessary for Ms Jordan to satisfy the Court that, on the assumption that the product was misdescribed, if it had been accurately described, she would have acted differently. There are very substantial obstacles in the way of the Court making such a finding. First, Ms Jordan testified that she would accept the investment recommendations of Mr Hutton, even if she did not understand the products or funds in respect of which the recommendations were being made. Second, consistent with the first point, she testified that she did not read the first Statement of Advice. She even said that she did not remember receiving it. Third, she gave no evidence that she had interpreted the first Statement of Advice in any particular way. Specifically, she did not give any evidence that she noticed the commentary contained in the first Statement of Advice concerning the two Basis Funds. If she did not understand the Statement of Advice as asserting that which is now said to have been a misdescription, how can she have been misled? Fourth, Ms Jordan gave no evidence to the effect that, had she known or been told certain matters, or had particular disclosures been made in the first Statement of Advice, she would have acted differently. Specifically, she did not give evidence to the effect that, had the Basis Yield Fund been accurately described (that is to say, described in the manner that is now contended for by Ms Jordan) she would have acted any differently. The misdescription case must fail.

130    I should add that, in any event, I am not convinced that the Basis Yield Fund was misdescribed in the first Statement of Advice. However, for the reasons explained at [129] above, I do not think that it matters whether it was or was not so misdescribed.

131    No submissions were addressed to former s 945A of the Corporations Act by Counsel for Ms Jordan in closing address. In November 2006, s 945A(1) provided:

945A(1) The providing entity must only provide the advice to the client if:

(a)    the providing entity:

(i)    determines the relevant personal circumstances in relation to giving the advice; and

(ii)    makes reasonable inquiries in relation to those personal circumstances; and

(b)    having regard to information obtained from the client in relation to those personal circumstances, the providing entity has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and

(c)    the advice is appropriate to the client, having regard to that consideration and investigation.

Note: Failure to comply with this subsection is an offence (see subsection 1311(1)).

132    Counsel for the respondents submitted in his written Opening Submissions that s 945A was not engaged at all in the present case because Ms Jordan was not a “retail client”. Section 945A is only engaged if the financial advice or principal services are provided to a person as a “retail client”. A retail client is someone whose investment the subject of the advice or service is $500,000 or less (see ss 944A(6), 761A and 761G(7)(a) of the Corporations Act and reg 7.1.19(2) and (5) of the Corporations Regulations).

133    The respondents’ submission is sound and should be accepted.

134    In any event, for reasons already explained, had s 945A(1) been engaged in the present case, HLB complied with it.

Damages

135    Given my findings on liability, it is not necessary for me to consider the question of damages. However, I wish to record that, had it been necessary for me to assess damages, I would have had considerable difficulty in accepting Ms Jordan’s approach to the task. In my view, given that HLB’s retainer was to advise and to make recommendations in relation to Ms Jordan’s investment sum ($5.2 million–$5.5 million) and given that HLB performed that retainer by making the recommendations in the first Statement of Advice, any assessment of loss suffered by Ms Jordan as a result of the breach of that retainer or otherwise based upon the causes of action relied upon by her in the present proceeding must involve an assessment of the recommendations made by HLB as a whole and may also involve an analysis of the performance of all of the investments the subject of such recommendations over the period from 2006 to (at least) the date of the trial. I do not think that the requirements of causation in a case such as the present can be met by focussing all attention on two so-called bad investments and ignoring all other investments.

Conclusions

136    For all of the above reasons, Ms Jordan has failed to make out her case. Her Application must be dismissed with costs.

Associate:

Dated:    9 April 2013