CPD: Top 10 tips for providing ethical advice

The Australian Financial Complaints Authority (AFCA) does more than hear complaints; it also provides tools to help financial advisers meet their legal and ethical obligations throughout the advice process. This article, proudly sponsored by GSFM, examines some of this guidance and details how it can help you meet your ethical obligations.

When AFCA released its statistics for the 2024 financial year, it noted the receipt of 3,559 complaints about investment and advice, down 26 percent from the previous 12 months. Overall, complaints about investment and advice, once those relating to Dixon Advisory were excluded, fell to an all-time low of 2,709 complaints. AFCA’s report said this fall in number of complaints reflected greater professionalism of the sector.

While AFCA noted that complaints may have decreased overall, inappropriate advice remains the most complained about issue and accounted for 706 complaints. However, on the upside, this number was substantially lower than the 1,662 inappropriate advice complaints received in the previous financial year.

Ethics are central to financial advice, acting as the moral guide that steers professionals in their client interactions and decision-making. At its core, financial advice aims to help individuals and organisations secure their financial futures, make informed decisions and achieve both aspirational and financial objectives. The establishment of the Financial Planners and Advisers Code of Ethics 2019 (Code) was aimed to ensure that ethics held and retained a central role in the advice process.

Built around a set of core values, twelve standards were designed to encourage higher standards of behaviour and professionalism for financial advisers (figure one). The Code is a legislative instrument; section 921E of the Corporations Act 2001 (Corporations Act) requires financial advisers to comply with the Code.

AFCA – spotlight on consumer complaints

AFCA experienced another record year in 2023-24, with complaints rising eight percent to 104,861. During the same time period, AFCA resolved 104,203 complaints, which is 21 percent more than in 2022-23. Total compensation and refunds awarded amounted to $313,903,256, up 24 percent on the previous year.

In 2023-24, AFCA received 3,559 complaints in the investments and advice category, marking a 26 percent fall compared to the previous financial year. Once complaints about one firm and superannuation services were removed, investment and advice complaints came in at an all-time low of 2,709 complaints.

Each of the complaints outlined in figure three could potentially breach of one or more standards in the Code of Ethics. While the specifics of each complaint may result in the breach of different standards, in general terms, it’s likely that those advisers who have been the subject of these complaint areas will have breached common standards as follows.

Inappropriate advice

Inappropriate financial advice can have far-reaching consequences for clients, damaging both their present and future financial security, while also affecting their emotional and psychological health. Despite the overall downward trend in advice complaints, inappropriate advice was the most complained about issue; while that’s a decrease from the previous financial year (1,662 complaints), it’s a significant increase from earlier years – 241 complaints in 2021-2022 and 534 complaints in 2020-2021.

AFCA noted some areas of complaint that remain a recurring problem. The first is issues with retail and wholesale classification, notably the misclassification of clients as wholesale. Misclassification can result in inadequate assessment of client suitability for specific investments and result in inappropriate risk exposure. Wholesale clients do not benefit from ASIC’s product intervention orders, leading to increased risks, including excessive leverage for those who may be better suited as retail investors.

AFCA also notes ongoing confusion regarding the classification of SMSFs as wholesale. Some advisers incorrectly apply thresholds of $2.5 million in net assets or $250,000 income, instead of the $10 million limit specified in the Corporations Act 2001 for superannuation products. This misclassification exposes clients to unsuitable advice.

Finally, AFCA highlights SMSF suitability concerns, where advice for clients with low balances to establish SMSFs continues to be a significant issue. This often involves inappropriate recommendations and lack of diversification between asset classes.

Advisers subject to complaints about providing inappropriate advice may have breached the following of the Code’s standards:

Failure to act in a client’s best interests

Acting in a client’s best interests is a key principle that underpins the Code and the values it is based on. Where advisers are found to have failed to act in a client’s best interests, they will have likely breached a number of ethical standards, including:

Failure to follow instructions/agreement

Where an adviser has failed to follow instructions or an agreement they have made with a client, that adviser may have breached the following standards:

Service quality

Service quality is a somewhat subjective form of complaint and could arise from many different facets of advice. It could potentially breach each standard, depending on the nature of the complaint.

For example, it may have been a failure to disclose a conflict of interest (standard three) or obtain informed consent (standard four). Alternatively, it could arise from fees and charges that are not reasonable and do not represent value for money for the client (standard seven) or maintain complete and accurate records of advice (standard eight).

Interpretation of product terms and conditions

Complaints in this category have increased year on year and relate to situations where the complainant does not agree with the financial firm’s interpretation of the terms and conditions of a product or service. Advisers subject to complaints in this category may potentially breach the following standards:

 Tips for ethical advice

Acting with integrity and in a client’s best interests, ensuring their understanding of all elements of your advice and taking into account the broader, long term effects of your advice is central to acting ethically and doing the right thing by your clients.

Despite your best endeavours, some clients may choose to complain about advice they have received. AFCA has compiled a checklist of tips to help you be best positioned to provide great advice…and, in the event of a complaint, this checklist can help you demonstrate that you have met your ethical obligations.

1. Take detailed file notes

AFCA relies on evidence provided by the parties to a dispute. Documents created at the same time as the activity or advice in question are generally given more weight than later recollections of what was said or done. This means contemporaneous file notes of conversations and actions are invaluable where a dispute comes before AFCA. There have been numerous cases where a complaint has been resolved in favour of the adviser and licensee thanks to detailed contemporaneous file notes.

Whenever possible, confirm verbal instructions from a client in writing; for example, send them an email after a telephone conversation to confirm what was said and any agreements made.

Statements of Advice and file notes should detail how any conflicts between goals, available resources and willingness to take risk have been resolved.

This approach will also help you meet your obligations under standard eight, to keep and maintain complete and accurate records of advice and services provided. It will also provide a record that you have acted in your client’s best interests, in line with standards two and five.

2. Clear goals and strategy – you must have a conversation with the client about their goals

AFCA does not consider client objectives and instructions that are written using industry terms or jargon that few clients would understand to be a reliable record. Rather, AFCA recommends you write down a client’s objectives in the words the client has used when answering your questions about their aspirational and financial goals, and then quantify those objectives in detail.

This establishes that you have heard and understood the client’s goals – for example, ‘to retire at age 65 with an income of $75,000 per year’. You should confirm that objective and detail how the recommended financial strategy will enable the client to achieve each specific goal.

This will also demonstrate that you have met the following a number of ethical standards, particularly those focused on best interests (standards two and five), informed consent (standard four), the client’s long term objectives (standard six) and competent advice (standard nine).

3. Turn clients away or refer when appropriate

If your services are not suited to a particular client, you must tell them so. It’s important that you don’t try to shape the client to suit your offering or capabilities. An attempt to offer advice that you’re not qualified or authorised to provide could see you in breach of standards nine and/or ten; it’s important to only provide advice and recommendations in areas you have the competency as well as appropriate knowledge and skills.

If a client is seeking a return that does not match their risk profile and you can’t convince them to change their expectations, either send them away or refer to point four.

If providing advice that does not suit the client, or advice that does not meet their risk profile (even if it does match their return expectations), there is a risk of breaching standards six. This standard requires you to consider the broad effects of the client taking your advice, the long term impacts on the client and other family members. It also risks breaching those standards that deal with acting in the client’s best interests (two and five).

Further, if you or your licensee would have a conflict of interest or duty by providing advice to the client, you should refer them elsewhere to avoid that conflict (standard three).

4. Explain the risks to clients who choose to act against your advice

If a client chooses to act contrary to your advice, you must be very clear in explaining the risks and documenting that the course of action they have chosen is not in line with your advice. It is essential to explain the risks in language the client understands, make a contemporaneous file note, and have the client sign it.

This action can prevent you from potentially breaching a number of ethical standards, including those dealing with acting in a client’s best interests (standards two and five), informed consent (standard four) and taking into account the broad effects of the advice (standard six).

A clear and well documented explanation of the risks for those clients who elect to act against your advice should work in your favour in the event of a complaint

5. Explain what types of service you are providing

Clients generally don’t understand the difference between information, general advice, personal advice, limited advice and execution-only services.

If you don’t provide appropriate explanations and warnings, or you are unclear about your service offering and what it incudes or excludes, you could be found liable for advice or services that you had not intended to provide.

Standard four requires ‘informed consent’ and a clear explanation of the services and advice you are providing. An inadequate explanation may see you in breach of standard four – as well as liable for advice you hadn’t intended to provide.

6. Use template forms and documents carefully

It’s important to ensure template forms and documents about strategies, products and risks are appropriate to the client you are advising. According to AFCA, it will be difficult to convince them that you have selected the appropriate strategies and financial products for a client if your documentation:

• contains errors
• is missing information
• uses pro-forma jargon or complex concepts
• contain copious amounts of irrelevant material

AFCA’s advice is to tailor documents to each client’s financial literacy. Statements of Advice must be clear, concise and effective – this will ensure you meet the requirements of standard eight. The careful use of appropriate forms and documents will help you support a case that your advice is in your client’s best interests (important for standards two and five) and that you have provided competent advice (standard nine).

7. Use risk profiling tools carefully

AFCA reminds you that risk profiling tools are only tools; they may have inherent flaws that you must recognise and address to provide appropriate advice that is in your client’s best interests.

Make sure that the strategy and asset allocation you recommend to a client is consistent with the risk profile generated by the risk profiling tool you use. If there are inconsistencies, or if a client seeks a return that does not match their risk profile, you must clearly explain the potential risks and impacts.

A failure to do so could see you potentially breach several of the Code’s standards, including:

• those dealing with acting in a client’s best interests (standards two and five)
• informed consent (standard four)
• taking into account the broad effects of the advice (standard six).

8. Avoid cookie cutter advice

The best interests duty requires that advice be reasonably likely to achieve the client’s goals and that alternatives have been considered.

A ‘one size fits all’ approach is unlikely to meet the best interests test. That would most likely result in a breach of 961B of the Corporations Act 2001; in turn, this would breach the Code’s requirement to obey all laws (standard one) as well as those standards that deal with acting in a client’s best interests (standards two and five). It could also be challenging to prove your competence (standard nine) if providing cookie cutter advice.

9. Understand and explain the products

AFCA’s recommendation here is simple: understand all products that you recommend and do not advise on products you don’t understand.

The advice from AFCA is to not simply hand over a Product Disclosure Statement (PDS) – you must explain the PDS to your client and record your discussion in the SOA. Further, AFCA strongly recommends that you don’t cut and paste PDS disclosures into a client’s SOA. You need to demonstrate your understanding of each product by using the same words in the SOA that you use when verbally explaining or describing the products to your clients.

Standard five requires you to ensure your client understand the financial product recommendations being made and the rationale for those recommendations, including costs and risks.

To advise on products you don’t understand, or where you lack competence, may result in a breach of standard nine, even if your intent is not to be misleading or deceptive. Finally, to advise on products you don’t understand or are skilled-up to recommend could potentially breach standard ten, which requires you to maintain a high level of education and skill.

10. Be clear about the advice relationship with clients you know

If you are giving advice to a friend, relative, colleague or employee, it is important to formalise and document the process as you would for any other client. As with all clients, you want your professional relationships to be that – professional. Ethical behaviour underpins professional behaviour and helps you uphold standard twelve.

Case studies

The case studies have been drawn from ASIC or AFCA, although names of people, places and financial firms have been changed. For each, potential breaches of the Code of Ethics are identified.

Case study one: Inappropriate advice

The corporate trustee of a SMSF enrolled in a managed discretionary account (MDA) service, which was only available to wholesale clients. This service allowed financial firm ACME SMSFs to carry out margin FX trading on behalf of the SMSF.

To facilitate the trading, a margin FX account with 1000:1 leverage was opened with ACME SMSFs, under the SMSF trustee’s name. The trustees of the SMSF deposited $615,000 into this account and financial firm ACME SMSFs conducted the trades using a limited power of attorney granted by the SMSF.

Unfortunately, the trading led to significant losses and consequently, the SMSF trustees sought compensation. The trustees argued that they SMSF should not have been classified as a wholesale client and should not have been allowed to trade with such high leverage.

An AFCA panel found that the SMSF was wrongly classified as a wholesale client, as it had less than $10 million in assets and should have been treated as a retail client. As a result, the SMSF should not have had access to the MDA service or a margin FX trading account with leverage above 30:1.

AFCA’s panel determined that the SMSF suffered a loss of $442,520. However, due to the SMSF trustee’s director contributing to the loss by not acting with due care, the compensation was reduced by 33.3 percent, leaving $295,013.34 to be paid.

By misclassifying the SMSF as a wholesale investor, ACME SMSFs provided inappropriate advice and potentially breached the following ethical standards:

Case study two: Acting in the client’s best interests

Stephan and Trish sought financial advice from ACME Financial Advice. Adviser Mark presented the couple with several options with respect to their superannuation. Mark recommended Stephan and Trish withdraw a lump sum of $392,550 from their superannuation account and commence an indexed pension.

At the time, Stephan and Trish had the choice of receiving a lump sum, a non-indexed pension, or a combination of both. The complainants chose to follow the adviser’s recommendation to take the lump sum and start the indexed pension.

However, the couple later argued that this advice was inappropriate and that they should have been advised to start the pension without withdrawing a lump sum. They claimed that this decision led to financial losses amounting to $290,270 and questioned the appropriateness of the advice given their long-term financial needs.

Stephan and Trish alleged that the advice provided by Mark was unsuitable and that ACME Financial Advice failed to disclose all options accurately. They also sought a refund of fees paid for the advice.

AFCA’s review found that the financial advice provided was appropriate given the complainant’s circumstances and preferences at the time. Mark had thoroughly documented discussions with the clients, which indicated a clear preference for a lump sum to meet immediate capital needs, such as purchasing items and maintaining a cash reserve.

The advice to withdraw a lump sum and commence an indexed pension was found to align with the complainants’ stated objectives, which included generating sufficient annual income and meeting capital requirements. Mark was also found to have adequately disclosed the available options and their implications, despite a minor inaccuracy in the Statement of Advice regarding the non-indexed pension amount.

AFCA noted that while the advice could have been clearer, it did not impact the complainants’ decision to withdraw a lump sum. Additionally, ACME Financial Advice had already refunded part of the fees previously paid by the complainant. AFCA concluded that Mark and ACME Financial Advice had met their obligations and that no further refund of fees was justified. The outcome was deemed fair as the advice provided was consistent with the complainants’ goals and the financial firm’s service standards.

Mark’s actions as outlined in this case study indicate that he upheld the standards in the Code, notably the following:

Case study three: Inappropriate advice #2

The complainants, Helene and Terry, were 67 and 70 at the time of seeing adviser Louise, an authorised representative of financial firm ACME Financial Advice.

Louise recommended that Helene and Terry invest in a Capital Protected Fund (the CP Fund). At the time Terry had $445,200 and Monique had $355,720 to invest.

Helene and Terry were classified by Louise as ‘Assertive – Balanced’ investors. This risk profile resulted in a recommended asset allocation of 30 percent to defensive assets and 70 percent to growth assets. The complainants say they understood from Louise that the CP Fund was capital protected, and that they would get the highest return for the year locked in.

Helene and Terry later found out that they would only get the return available at the anniversary of the product. They claimed had they known this, they would not have invested as it was significantly lower than they had been led to expect. Helene and Terry also claimed that Louise charged higher fees than initially declared.

AFCA determined that Louise failed to adequately explain how the CP Fund worked. Had the complainants known the level of uncertainty associated with the product, they would not have invested. The determination also noted that Louise failed the best interest duty by not providing appropriate risk profiling and advice to her clients. Finally, AFCA accepted that Helene and Terry would have been conservatively invested if appropriately advised, which resulted in a total loss of $95,766.

This determination was found in favour of the complainants. Total compensation equating to the couple’s loss, plus 1.5 percent interest per annum compounding annually from determination to the date of payment, was ordered.

By inadequately describing how the product worked and failing to provide appropriate risk profiling and advice to her clients, Louise potentially breached the following standards in the Code of Ethics:

Ethical conduct ensures that financial advisers put their clients’ best interests first, maintain transparency and provide accurate, impartial advice. By adhering to ethical principles, advisers build trust with their clients and foster long-term relationships grounded in reliability and integrity.

In a complex financial environment, ethics form the foundation for sound decision-making, promoting both individual financial well-being and the stability of the broader financial system. Beyond benefiting clients and the profession, ethical conduct also reduces the likelihood of complaints or investigations, protecting advisers from potential legal or reputational risks.

 

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