To assist in their financial planning needs, people often engage the help of a financial planner. A financial planner is a licensed professional who is able to provide personalised financial advice to help best manage your finances and achieve your financial goals.
While financial planners are legally required to act in the best interests of their clients, this regrettably does not always occur in practice. More and more news is surfacing about investors who have suffered devastating financial losses after being lead astray by bad financial advice from the major financial institutions.
How have the biggest financial institutions been involved?
Evidence of financial planning negligence has been found amongst the biggest banks in Australia, including:
- Financial planners who made switches to higher risk financial products which generated higher fees and commissions, without the consent of their clients. These financial planners went so far as to forging their client signatures in order to do so.
- Clients who did not receive all the promised services from their financial planners despite having paid for it, such as a failure to provide documented annual reviews for several years.
- Numerous cases of suspension and termination of financial planners due to giving their clients bad financial advice.
- Misclassifying certain clients as sophisticated investors rather than retail investors to reduce the amount of paperwork and requirements the financial planners had to meet. By classifying their clients as sophisticated, financial planners were able to push them into more complex products, earning them higher fees and commissions.
How have the clients of financial planners been affected?
There is a clear imbalance of power between financial planners and their clients. Financial planners have more experience and knowledge than the average investor, and are therefore better equipped at guiding their clients toward achieving their financial goals. Clients, however, usually do not have sophisticated financial knowledge to know whether the financial advice they receive is appropriate. This is evidenced by research undertaken by the Australian Securities and Investments Commission (ASIC), where a survey showed 86% of clients were satisfied with advice given by licensed financial planners, although the advice clearly lacked a reasonable basis. This illustrates that many clients are often given bad advice, and mistakenly believe it is good advice.
Due to this imbalance of power, clients are very vulnerable to any inappropriate actions of their financial planners. Clients who have received negligent advice from the major institutions are now facing large amounts of debt and lost savings and retirement funds.
What is being done to rectify the situation?
Financial planning compensation claims
The victims of bad financial advice are taking legal action against the major financial institutions, costing these institutions millions in compensation payouts. These payouts can be substantial, costing these major institutions millions of dollars. However, such compensation can take a long time to be paid out, further prolonging the financial hardship and emotional distress of victims.
Future of Financial Advice (FOFA)
As a result of the financial planning scandals, Australian laws have been amended to reflect the importance of giving quality financial advice, in order to protect investors and to restore trust and confidence in the financial planning industry. This is increasingly important as a national survey conducted by Roy Morgan showed that of 50,000 consumers, only 24% have trust in financial planners.
New legislation, entitled the Future of Financial Advice (FOFA), introduces new provisions such as:
- A fiduciary duty requiring financial planners to legally act in the best interests of their clients, and to place the best interests of their client before their own
- A ban on conflicted remuneration, such as commission-based remuneration, for all financial advice
- Opt-in obligations that require financial planners to renew the fee agreement between their clients every two years
- Annual fee disclosure statement requirement to all clients
Proposed Compensation Scheme
A Senate Committee has proposed an industry-wide compensation scheme, entitled the “scheme of last resort”, which provides a safety net for investors who have received bad financial advice but are unable to receive compensation because their financial planner was unable to pay or has gone out of business. This can often be the case with smaller financial planning businesses, or individual financial planners.
The scheme currently has the support of 3 of the major banks, who are willing to provide this safety net for victims of their smaller competitors, and to pay higher licensing fees to help fund the policing of the industry.
If you would like some assistance with obtaining compensation for negligent financial advice, call Schreuder Partners today on 1300 892 691.