by Susan Edmunds
It has made a submission to the Senate Economics Legislation Committee inquiry into the Scrutiny of Financial Advice, saying that significant consumer losses involving product failure are frequently incorrectly attributed to financial advisers.
"It is important to note that product failure should not be confused with advice failure."
AFA chief operating officer Phil Anderson told Good Returns that there had been a noticeable increase recently in the number of lawyers seeking to take action against financial advisers in cases where a product failed.
Sometimes this was because the adviser was the last in the chain left standing – the product manufacturer had often failed too, leaving only the adviser for the client to pursue.
“Financial advisers are subject to the complaint procedures as set out in the Corporations Act and thus they become an obvious target,” he said.
Anderson said it was easier for manufacturers than advisers to tick the boxes saying they had made plain the risks of a product, because they could do it through the product disclosure statement.
He said: “The risks are greater for financial advisers as the key issue often comes down to whether the product was suitable for the client. It is often much more difficult for the adviser to prove that the product was suitable for that specific client, particularly where it failed for one reason or another.”
Situations where adviser remuneration was higher than normal were often highlighted in product failures, Anderson said, but he said this was never the reason for the failure.
When advisers were aggressively seeking high returns and investing in higher-risk products, advisers should ensure that they fully understood the risk involved, Anderson said.
“Greater financial literacy will ensure better decision making by clients and a greater understanding of the potential for investments to not perform as was expected. It is also the case that improved documentation of the interactions with clients and recording of their needs and objectives provides increased protection.”
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