Liability for poor investment advice?

Question

[Country is South Africa but I am also interested in this in the context of the U.S. / Europe]

A good friend of mine has trusted a wealth manager with her sizeable portfolio for the last 6 years. Her goal has been to maximise profit over the long term. As a friend I offered to take a look at her investment portfolio. There are red flags; namely:

1. no ETFs; only active investments (fees are between 2-3%)
2. overly complicated portfolio consisting of ~20 actively managed funds

When looking at the growth of her portfolio, it has barely kept up the inflation rate of (6%/year); and the net worth of the portfolio would be significantly larger had she invested in a low-fee global ETF. Here is the analysis I did (y-axis linearly scaled to conceal real amounts):

I can only conclude that this wealth manager is either:

1. taking advantage of my friend
2. clueless about long-term investing

Is a wealth manager legally liable for poor investment advice? It only took me a book and a few blog posts to gather enough information to fully appreciate how bad this portfolio is.

Another look at it: When we go to a mechanic for a vehicle repair, we trust the car mechanic to repair only what needs to be repaired and nothing more. Sometimes this doesn't happen and we get ripped off. One might lose out on a couple hundred dollars at worst (I would guess?). However the difference between good and bad investments on a sizeable portfolio can amount to strikingly large differences that cut away at earnings year after year.

Is her wealth manager in any way legally liable?

Answer 1

1) No in such a case he cannot be held legally responsible, I would assume something is written on the fine print regarding no guarantees.

2) If he could be held responsible and perhaps make up the difference, then it would basically be risk free. Meaning he would assume huge risks himself, and his fees would probably outshine any excessive surplus. Some pension funds offer guaranteed investments, meaning they hold legal responsibility; typically they offer (in current environment) perhaps 1-2% guaranteed. Which is definitely not “maximizing the portfolio”

You use the phrase “maximize portfolio”, which typically doesn’t go hand in hand with ETFs. Not if you are trying to beat the market at least, which I assume “maximizing” means in this case.

Last note, I assume your friend has had access to look at the underlying assets quite a few times over the years, and that the manager is probably somewhat transparent - then it is a bit difficult to come afterwards and trying to claim something. Imagine eating a whole steak at a restaurant and afterward finding out there were other steaks at other restaurants that were bigger - you can’t come back and tell the restaurant that you wanted a bigger steak and they should make up the difference.