Journal

Posted October 16, 2023

Posted By Meghann Cannon

Are you willing to say no to a client?

Some clients walk into an adviser’s office with only the broadest goals for their financial future. Others arrive with strong opinions about how and where they want to invest their money.

Both ends of the spectrum challenge an adviser, who’s obligated to act in a client’s best interests, in different ways.

AFCA recently considered a complaint involving the second scenario. The clients sought advice on a specific investment strategy – to set up an SMSF to make geared investments in residential property.

When the strategy did not perform as well as the clients’ expected, they complained to AFCA that the advice was not in their best interests and was inappropriate, and they asked for compensation for their losses.

AFCA agreed the advice was not in the client’s best interests, but only required the advice firm to repay the advice fees to the SMSF. The client was not entitled to additional compensation.

In our view, the adviser made a very lucky escape here. We wanted to unpack why.

The bad advice didn’t cause the loss…

It might seem strange that AFCA could decide that the advice was not in the clients’ best interests and at the same time decide they weren’t entitled to compensation.

The main reason for this was that AFCA found the clients were determined to follow the SMSF investment strategy despite previous advice not to do so from other advisers.

While the adviser did many things wrong in this case, one thing they got right was file noting. AFCA quoted part of a file note as evidence of the clients’ determination to pursue the strategy in the face of previous advice.

…but it was still bad advice

AFCA was very clear, however, that the advice given was not in the clients’ best interests and was inappropriate.

In particular, AFCA focused on how the adviser has characterised the clients’ goals and objectives.

The SOA included the following goal: ‘You would like to use your superannuation funds to purchase a residential property in Melbourne as you have been waiting some time to do so.’ The adviser also listed the clients’ goal retirement savings amount as $2,000,000.

AFCA said the adviser was wrong to identify the purchase of an investment property via an SMSF as an ‘objective’.

The decision stated: ‘It is, at best, a means in which an objective (such as capital growth and rental income generation) may be achieved.’

In addition, AFCA found that the adviser:

  • hadn’t identified how the advice, if implemented, would have been likely to achieve the clients’ objective to retire with $2,000,000; and
  • included projections in the SOA that clearly showed the clients would have been better off leaving their superannuation in their existing funds.

Repay the fees, but no compensation

These facts produced AFCA’s seemingly contradictory decision: that the advice was not in the clients’ best interests, but that the clients weren’t entitled to compensation.

Because the advice was bad, however, AFCA did not think it was fair for the adviser to keep any fees and required the adviser to repay the SOA fee and the ongoing advice fee to the SMSF.

A lucky escape and a couple of lessons learned

In our view, the adviser was very lucky to get away with only having to repay the fees and not to have to pay compensation for the clients’ losses

Yes, the clients were determined, but the adviser could (and should) have taken a different path here.

They should have refused to provide advice or provided a recommendation not to establish a SMSF, just as the advisers the clients had consulted before had done. The adviser’s legal and ethical duties to act in the client’s best interests mean this was the most appropriate course to take.

This case also highlights a couple of other issues that we frequently discuss with our clients.

Firstly – the need to identify specific goals and objectives that are based on a desired (and realistic) end state (e.g. retirement savings valued at $X) over a specific timeframe (e.g. to retire at 65).

In our view, acquiring a specific product is never an appropriate goal or objective. It’s only ever a starting point for the adviser to ask more questions to understand what it is about a specific product (or strategy) that can shed light on what a client really wants to achieve.

Secondly – the importance of file notes. In this case, the adviser’s record of the context surrounding the advice saved them from having to pay compensation. Keeping detailed and timely file notes is one of your best risk mitigation strategies for when things do go awry.

And finally – we hope this goes without saying – if your projections for implementing a particular strategy show the client will not be better off, you need to stop right there. Do not pass go. Do not collect $200 (or any other advice fee).

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