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The Ombudsman Examining Portfolio Risk In Troubled Times A And B Case Solution

Solution Id Length Case Author Case Publisher
2132 2108 Words (9 Pages) Chuck Grace Ivey Publishing : W14753 And W14754
This solution includes: A Word File A Word File

NYR Financial Services is an investment company responsible for participating in funds after careful examination of their customer's profiles. Richard Rush, along with his wife, invested through NYR in 2007. The Rushes were facilitated by Smythe, their financial advisor, who was responsible for providing them updated financial marketplace information and managing their portfolio. The financial crisis of 2008 resulted in the meltdown of global equity markets, and the Rushes lost 35-40% of their portfolio value. They filed a complaint with NYR for inappropriate investments and withholding information. NYR opened an internal inquiry regarding Rush and his dealings with NYR. The MFDA (Mutual Funds Dealers Association) also opened an investigation against the complaint. However, both MFDA and NYR dismissed the claim to compensate the Rushes for their losses. Rush escalated his concerns to OBSI (Ombudsman for Banking Services and Investments), which found NYR responsible for the Rushes losses and informed the company to pay $33,000. NYR responded with an offer to the Rushes for $10,000, but it was rejected.

Following questions are answered in this case study solution

  1. Introduction

  2. Stakeholders & their Expectations

  3. The Decision-making Rational

  4. Resolving the Situation

  5. The Learnings

  6. Conclusion

Case Analysis for The Ombudsman Examining Portfolio Risk In Troubled Times A And B Case Solution

2. Stakeholders & their Expectations

A formal description of stakeholders is entities actively influencing the situation or whose interests are directly or indirectly affected as the situation evolves. (Smith, 2000).. In this scenario, there are several stakeholders involved as their interests are invested and will be affected as a result of the decision they make. The Rushes had invested a portfolio worth $400,021 in Tyche Fund Company. They wanted to safeguard their investments from any risks and had invested in precious metals as they perform well in declining equity markets. The Rush husband and wife were both in their sixties and wanted income along with capital growth. They were keen to save money as they were old and had 2 young daughters. Hence, the Rushes had a conservative growth profile and a medium risk tolerance. With their capital deteriorated, the Rushes wanted to be compensated by NYR. They deemed NYR responsible for mismanaging their funds and exposing them to high-risk investments.

The second stakeholder is NYR Financial Services, as the complaint that the Rushes filed was against NYR. NYR was involved in the careful evaluation of the Rushes risk profile and subsequent informed decision to invest in medium-risk investments that had growth and income potential. Smythe was responsible as the financial advisor of the Rushes, and it was his well-versed advice that Rushes adhered to, although the Rushes were themselves actively involved in their investment. Late 2008, the Rushes had lost 35 to 40% of their original value. OBSI had instructed NYR to pay $33,000. NYR did not find its experienced financial advisor Smythe involved in errors in decision making and any miscommunication of information. NYR further asserted that the Rushes account of the events was not credible. OBSI, however, stated that if NYR did not comply with the recommendation, it would be forced to go public. This could damage NYR’s trustworthiness in the market. NYR expected to solve the problem using minimal financial resources and without a cost to its public reputation.

OBSI is also a stakeholder in this situation as the decision by NYR to not adhere to the provided recommendation would result in a public statement against NYR. OBSI had performed a suitability analysis and found inappropriate investments by NYR in Tyche. However, recently investment firms had been refusing OBSI recommendations to compensate investors, which was raising many questions about the industry (Langton, 2012). A meeting with NYR was due, and OBSI expected NYR to adhere to the proposed settlement or agree with the Rushes. 

3. The Decision-making Rational

In order to make a decision, the claims of each stakeholder have to be reviewed along with the conclusion they have reached in their analysis of the conflict. (Buckles, 1999). The Rushes claimed that Smythe had advised them to invest without clarifying the risks involved in Tyche World Balance Fund, Monthly Income Fund, and Dividend Income Fund. They were not told of other alternatives. They further claimed that they were not given a prospectus after their investment, which would help make them decisions nor were, they informed on Differed Sales charge basis of the investment. They were in the dark about any penalty. They said they raised concerns, but Smythe ignored them.

NYR opened an internal inquiry and found that the Rushes were well informed by Smythe about the nature of their investments and were aware of the risks involved. The NYR concluded that the Rushes had received a prospectus and were notified about Differed Sales Charge and knew that there were charges involved. They further blamed the Rushes for not giving an authentic disclosure of their dealing with NYR. 

However, OBSI found that the Rushes allegations about not disclosing charges or providing the prospectus were baseless. The OBSI conducted a suitability process to determine whether the investments matched the Rushes profile. The first step is to understand your customers. This is done using facts about the customer, including age, financial condition, investment knowledge, time perspective, and financial goals. Using this information, the client is provided with a set of recommendations for a relevant investment. After an objective is preferred, a portfolio is suggested to the client. 

 

Mr. Rush

Mrs. Rush

Age

67

61

Investment Knowledge

Medium

Low

Annual Disposable Income

$1,000

$0

Net Worth

$1,000,000

Same

Total Investment Assets

$500,000+

Same

Investment Objectives

Income and capital preservation

Same

Time Horizon

5 to 10 years

Same

Risk Tolerance

Conservative Growth

Same

i. NYR Customer profile for the Rushes.

The customer should be evaluated not just on their attitude or understanding of risk but also on their capability to withstand financial losses (Valtonen, Hannes, 2013). 

Using this analysis, NYR classified its clients in three categories:

  • Low 

  • Medium 

  • High

ii. The Rushes were identified as medium risk clients. 

Analysing their time horizon and risk inclination, NYR categorized the Rushes long-term objective as Conservative. These types of investors favour a balance of income and capital appreciation (Chen, 2019). The portfolio fluctuates in the medium to long term while providing a steady stream of timely income.

Conservative Growth
  • Target Allocation: 50 percent fixed income, 50 cent equities

  • Risk tolerance: Low to medium

  • Time Horizon: Medium to long term

  • Investment Income: Combination of interest, dividends, and some capital appreciation.

  • Types of funds: Balanced funds fixed incomes or bond incomes, moderate-risk equity funds

iii. NYR Conservative Growth allocation weightage.

OBSI observed that NYR had invested Rushes funds in Tyche accounts with up to 89% equity. This was 39% more than the acceptable threshold and a clear breach of their internal policy. This meant that 39% of the investment was overweight in equity and hence not balanced. Using this data, OBSI asked NYR to compensate the Rushes. 

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