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How to avoid a negligence case

Advisers are being urged to take extra care to ensure they do not end up on the wrong end of a negligence claim.

Wednesday, August 19th 2015, 6:00AM 2 Comments

by Susan Edmunds

Two cases have been in the news recently, in which clients took action against their advisers after suffering hefty losses.

In one, a Napier couple tried to sue their adviser after losing $1.6 million in finance companies.

In the other, a couple lost $1.256 million after investing in riskier assets than they said they would have been comfortable with.

In both cases, the bulk of the plaintiffs' claims were struck out because they were time-barred.

David Ireland, who is chairman of the committee that determines the Code of Professional Conduct for Authorised Financial Advisers, said there were a number of things that advisers could do to reduce the chances of a negligence claim being made against them, or of such a claim being successful.

"It does come down to have you adequately discharged your duty of care? The prospect of a claim of negligence is always there."

He said it was more likely during shaky periods. "Even for the most prudent and careful adviser, when the market starts to falter, that's when if you've got any skeletons in the closet, that's when they are most likely to come to the surface."

He said a common cause of problems was when advisers slipped into a friendly relationship with their clients.

"The client you might have the best relationship with today could be your most aggressive claimant tomorrow if they lose their shirt. That's where advisers can get themselves stuck, they start to blur the line between professional advice and a friendship. You can't let your guard down. That's a particular challenge in the financial adviser space because you're trying to be a trusted adviser and develop a relationship and understand what's going on with the client."

Ireland said it was also important to keep good records, even though many advisers found their paperwork requirements a burden.

"If there is a claim in court and you haven't got records, it comes down to he said/she said. The likelihood is that the adviser ends up on the wrong side of such an argument because as a professional they are expected to have maintained the records. The absence of records is likely going to count against you. Be disciplined and ruthless in your record-keeping. It might seem like you are wasting time, particularly if it is an innocuous piece of advice but any advice can be a hand grenade that blows up in your face."

Ireland said there should be less scope for negligence claims in the modern advice industry because the way it was delivered had improved.

But he said such instances would never be completely eliminated. "The legal profession has been operating as a profession for a long time yet every month there are any number of negligence claims involving solicitors. Having rules and regulations around a profession is not in itself going to mean no claims or negligence will occur. Mistakes will happen. It's a matter of advisers making sure they have systems in place to protect themselves."

Tags: Code Committee David Ireland financial advisers

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Comments from our readers

On 19 August 2015 at 10:40 am Brent Sheather said:
I would have thought it was obvious as to how we can avoid negligence actions from looking at these two cases – just tell the clients that everything will be ok, it’s only a paper loss and time in the market is more important than timing. Then wait for the action to be “time-barred”. Obvious really.
On 20 August 2015 at 3:39 pm traveller said:
Brent is absolutely right. You give a client a long term plan, 10years+, the market corrects after a couple of years and the clients go ape. Surely the response to that is: "you were told the markets go up and down over short periods, let's wait for ten years and see if things come right. If not, sue me then."

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