CPD: The adviser’s fiduciary duty in an ethical practice

It is both a legal and ethical requirement for financial advisers to fulfil their fiduciary duty to their clients. This article, proudly sponsored by GSFM, explores the importance of the fiduciary duty in ethical financial planning and how it safeguards clients’ best interests.

Ethical financial planning is an essential aspect of ensuring the wellbeing and financial success of individuals and businesses alike. Within this, fiduciary duty plays a crucial role in establishing trust, integrity and client-focused decision making.

Defined by the UN PRI (United Nations Principles of Responsible Investment), fiduciary duty exists to ensure that those who manage other people’s money act in the interests of beneficiaries, rather than serving their own interests. For financial professionals, fiduciary duty serves as a guiding principle that compels them to put their clients’ best interests first.

What is fiduciary duty?

A fiduciary duty is a fundamental legal and ethical responsibility that financial advisers, investment professionals and others in the financial services industry owe to their clients. This duty requires them to act with loyalty, care and transparency, always prioritising their clients’ best interests above their own.

At its core, fiduciary duty means that financial professionals must exercise sound judgment, due diligence and integrity when making recommendations or managing assets on behalf of their clients. They are obligated to make decisions that align with their clients’ investment objectives, financial goals and risk tolerance, and ensure that all advice and actions serve each client’s financial well-being rather than the professional’s personal gain.

Fiduciaries are held to a high standard of care, meaning they must demonstrate expertise, prudence and diligence in their decision-making process. This includes thoroughly researching investment opportunities, assessing potential risks and continuously monitoring financial strategies to ensure they remain aligned with the client’s best interests.

Additionally, fiduciaries must provide full disclosure of any conflicts of interest that could influence their recommendations. This transparency requirement ensures that clients receive unbiased advice, free from hidden incentives or undisclosed relationships that could compromise their financial interests.

An adviser’s fiduciary duty serves as a cornerstone of trust and accountability, which reinforce fruitful, long term relationships between adviser and client. It is strongly aligned with acting in the client’s best interests, which underpins the Code of Ethics (Code). In fact, many of the words used in this introduction will be found in the values or standards that comprise the Code.

ASIC describes the best interests duty and related obligations as:

“…designed to ensure that retail clients receive advice that meets their objectives, financial situation and needs, and that you act in the best interests of your clients when providing advice.”

As it relates to financial advisers, this can be distilled into acting in the client’s best interests at all times, acting with competence, honesty, integrity and fairness. In other words, the way any one of us would expect to be treated by a professional service provider, whether they be a lawyer, architect, dentist or accountant.

When the Future of Financial Advice Reforms (FOFA) was introduced in July 2013, it included an amendment to the Corporations Act 2001. This amendment enshrined the best interest duty into law and extended the existing fiduciary duty financial advisers owe to clients. This particular duty was the one which covered the need to ‘know your client’, know the products you recommend and always act with the interests of those clients front and centre. Alongside this amendment came penalties for failing to act in a client’s best interests, including banning and disqualification orders.

Section 961B of the Corporations Act 2001 (as amended) lists the actions advisers must undertake to satisfy the best interests standard. In summary, these are^[1]:

1. To identify the client’s financial situation, objectives and needs; these should be provided to the adviser by the client.
2. To identify the subject matter of the advice sought by the client (whether explicitly or implicitly).
3. To identify the client’s relevant circumstances – the objectives, financial situation and needs that would reasonably be considered as relevant to the advice sought on the identified subject matter (i.e. the client’s relevant circumstances).
4. To ensure this information is complete and correct and make reasonable enquiries should gaps or inconsistencies be apparent.
5. To assess whether you have the expertise required to provide the client advice on the subject matter sought and, if not, decline to provide the advice.
6. When considering the advice sought, whether it would be reasonable to consider recommending a financial product. If a financial product is deemed relevant, a recommendation should only be made after thoroughly investigating the most appropriate products relevant to the client’s circumstances.
7. When advising the client, the financial adviser must base all judgements on the client’s relevant circumstances.
8. Take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

Number eight is a catch all statement that encapsulates the spirit of the legislation. Irrespective of the client’s requirements, the advice must be underpinned by knowledge of the client and their circumstances. While the best interest duty applies to retail clients, a similar fiduciary duty is required for dealings with wholesale clients. To meet the obligations imposed by section 961B of the Corporations Act 2001 is, indisputably, a requirement to act ethically in all dealings with clients.

A failure to act in a client’s best interests would not only breach section 961B of the Corporations Act 2001, it would also breach several ethical standards, notably:

ASIC notes that the best interests duty and related obligations are designed to ensure that retail clients receive advice that meets their objectives, financial situation and needs, and that you act in the best interests of your clients when providing advice.

ASIC’s Regulatory Guide 175 AFS licensing: Financial product advisers—Conduct and disclosure  (November 2024) contains guidance about:

• how the best interests duty applies to personal advice (both comprehensive and scaled advice)
• features of good quality advice
• the ‘safe harbour’ provisions, defining how to comply with the best interests duty
• the modified best interests duty and when it applies
• use of processes to provide advice
• how to recognise a possible conflict of interest, and
• the conflicts priority rule and how it applies to products or services provided by a related party.

Practical measures to meet your fiduciary duty

There are a number of practical measures your advice practice can implement to ensure your team consistently meets its fiduciary duties and ethical responsibilities as outlined in the Code (figure one).

Client centric decision making

A steadfast commitment to client centric decision making provides the foundation for meeting your fiduciary duty. Fundamentally, this approach means placing the client’s best interests at the forefront of every recommendation and action, to ensure clients’ financial wellbeing remains your top priority.

Financial advisers have a legal and ethical obligation to act in their clients’ best interests, which requires prioritising factors such as their life goals, financial objectives, risk tolerance and financial security. By embracing a client centric mindset, you can tailor your advice to align with each client’s unique circumstances, aspirations and long term financial success.

This approach involves more than just providing financial guidance – it requires active listening, deep understanding and strategic customisation. By taking the time to genuinely understand your clients’ needs, preferences and concerns, you can develop financial strategies that are both effective and personally meaningful. In addition to benefiting your clients, this method fosters trust and strengthens long-term relationships, which enhances the credibility of your practice. A strong client-adviser relationship is essential to build and sustain a successful financial advisory practice.

A client-centric approach also allows you to deliver personalised financial solutions that empower clients to achieve their objectives with confidence. This not only reinforces your fiduciary responsibility but also elevates the value and impact of the financial advice you provide.

Importantly, adopting a client first approach ensures compliance with key ethical and professional standards, including those outlined in the Code, particularly within the ‘Client Care’ subsection (standards 4-6). By prioritising your clients’ best interests at every stage of the advice process, you fulfill both your fiduciary duty and ethical obligations and, at the same time, enhance the overall quality and effectiveness of your advice.

Transparency and disclosure

Your fiduciary duty accentuates the importance of transparency and disclosure in financial advice. You and your peers must provide clear and comprehensive information about remuneration structures (including any fees or commissions you or your practice and licensee receive), as well as potential conflicts of interest. There are several ways transparency and disclosure can support your fiduciary duty:

1. Transparency ensures that your clients have access to all relevant information about their investments, including potential risks, fees and conflicts of interest. By disclosing such information, your clients are able to make informed decisions and understand the implications of their investment choices. This transparency helps you fulfill your fiduciary duty by avoiding any misleading or incomplete information that could compromise any clients’ best interests.

Transparent disclosure of fees enables clients to understand the costs associated with your advice and their investments. This disclosure allows your clients to assess the value they receive from your services and make informed decisions about their financial goals.

Transparency also ensures you meet standards 4 and 7 of the Code; without transparency, a client cannot provide informed consent. Being transparent about your advice, particularly about any benefits you receive – whether they flow to you or your licensee – are more likely to result in costs that are fair and reasonable and represent value for money for the client, as required by the standard.

2. Advice professionals are obligated to avoid or appropriately manage conflicts of interest. By being transparent about any potential conflicts that could compromise clients’ interests, you can provide clarity to your clients and take necessary steps to mitigate such conflicts. Full disclosure allows your clients to evaluate the advice they receive and helps you to maintain your clients’ trust and meet your fiduciary obligations.

Being transparent about any potential conflict of interest and how it is being managed can ensure you don’t breach standard 3.

3. Advisers must be transparent about investment advice provided to clients; the strategies, the risks associated with those strategies and any potential limitations or drawbacks. Clients need to understand the risks involved in their investments and have a clear understanding of how your recommendations align with their financial goals and risk tolerance.

Transparent disclosure helps clients make informed decisions and ensures you fulfill your fiduciary duty by providing suitable investment advice. Advice and product recommendations are covered by standards 5, 6 and 9. Approaching advice with full transparency will help you meet those standards.

Ultimately, transparency will enable your clients to make informed decisions and trust that you have their best interests at heart.

Duty of care and skill

Fiduciary duty also encompasses a duty of care and skill. Financial advisers must possess the necessary expertise and knowledge to provide competent advice. As you are well aware, there is an expectation that you continually update your skills and knowledge, and stay informed about industry trends, regulations and best practices.

By maintaining a high standard of competence – and ensuring your team does likewise – you can be confident that clients will receive advice based on the latest information and the most suitable strategies. Meeting this duty of care and skill demonstrates your professional commitment and will help meet the requirements of standard 10.

Legal protection and accountability

Fiduciary duty also provides clients with legal protection and avenues for recourse in the event an adviser does the wrong thing for a client. Clients can seek redress through AFCA, and both ASIC and AFCA can hold financial professionals accountable for any misconduct or negligence that results in financial harm.

The legal framework that governs financial advice creates a strong incentive for advisers to act with integrity and maintain the trust of their clients. Legal protection and accountability is also enshrined in the Code of Ethics. Standard 1 requires that you abide by all applicable laws, while Standard 11 requires cooperation with the regulator and other bodies, such as ASIC and AFCA, in the event of a complaint.

Case Studies

The following case studies are based on real complaints submitted to AFCA or cases dealt with by ASIC; however, the names of people and organisations have been changed and some details altered. For each case study, it will be shown where the adviser has potentially breached or upheld their fiduciary duty and how this did or did not comply with the twelve standards that comprise the Code of Ethics.

Case study one: Fraud – a fiduciary failure

Under the Corporations Act and National Consumer Credit Protection Act, ASIC may permanently ban a person from providing financial services and engaging in credit industries if they are convicted of fraud. The regulator invoked this power last year, permanently banning NSW based adviser Edward after he was convicted of fraud for stealing funds from a client’s superannuation account.

ASIC noted that Edward failed to comply with the regulator’s requests for information and made attempts to impede their investigation.

Edward has been banned permanently from:

• providing any financial services
• performing any function involved in the carrying on of a financial services business
• controlling an entity that carries on a financial services business
• engaging in any credit activities
• performing any function involved in the engaging in of credit activities, and
• controlling, whether alone or in concert with one or more other entities, another person who engages in credit activities.

Edward was convicted of fraud under and sentenced to seven years imprisonment. His permanent banning has been recorded on ASIC’s banned and disqualified register.

In this case study, Edward failed in his fiduciary duty to his clients and did not act in his client’s best interests. Specific standards in the Code that Edward likely breached in relation to this case include:

Case study two: Speculative investments

Using a free superannuation ‘health check’ as a strategy to lure investors, Melbourne-based financial services director Greg and his advisory business ACME Advice were found to be recommending clients invest in speculative investments and roll over their superannuation to fund these investments.

ASIC found that ACME Advice’s authorised representatives would cold call prospective clients and, under the guise of the free health check, recommended they establish an SMSF, roll over their existing superannuation into the SMSF and invest it in highly speculative investments related to the financial services director.

ASIC cancelled ACME Advice’s AFSL based on findings that the advisory firm and its authorised representatives:

• Used a client onboarding process that lured people into investing their retirement savings in ACME-related products. The representatives made cold calls to prospective clients using details obtained from a third-party website operator
• Through its authorised representatives, ACME Advice recommended investments to clients that included speculative investments in ACME Melbourne Capital Property Fund Limited in which Greg had an interest.
• Attempted to contract out of its personal advice obligations. However, ACME’s representatives did provide personal advice to clients in breach of those obligations, which included failing to act in clients’ best interests and giving them inappropriate advice.
• Contravened a number of its general obligations as an AFS licensee including the obligation to do all things necessary to ensure the financial services authorised under its licence are provided efficiently, honestly and fairly; the obligation to take reasonable steps to ensure its representatives comply with financial services laws, and the obligation to have adequate arrangements in place to manage conflicts of interest.

Further, ASIC banned Greg having determined that he:

• Was involved in ACME’s conduct as its responsible manager and key person under the licence.
• Demonstrated a fundamental lack of competence and a cavalier attitude to his management of ACME and the importance of complying with financial services laws.
• Created a culture of non-compliance and incompetence at ACME.
• Cannot be trusted to comply with financial services laws.

The result of this investigation was:

• ASIC banned Greg for 10 years from providing financial services, performing any function involved in carrying on of a financial services business, and controlling an entity that carries on a financial services business.
• ASIC cancelled ACME’s AFSL, although ASIC specified the licence still has effect for limited purposes including that ACME continues to be an AFCA member until May 2025, and it continues to have insurance cover for clients.

Greg, ACME Advice and its authorised representatives failed in their collective fiduciary duty to their clients. As a result, the following standards in the Code were potentially breached.

Case study three: Bad advice?

Anna received personal financial advice and wealth management services from ACME Financial Planning. She believed her adviser Miles and the financial firm had failed in their fiduciary duty by mismanaging her investments and providing her with inappropriate advice. Anna believed the advice did not meet her objective of delivering investment performance to enable her to retire at age 60.

Anna’s major concerns centred around lacklustre investment performance. She stated that her prime objective was to maximise capital growth so that she could retire at age 60 and fulfil a number of lifestyle objectives.

ACME Financial Planning and Anna’s adviser Miles denied they had mismanaged her investments or made poor financial product recommendations. ACME Financial Planning supported Miles and claimed he had provided appropriate advice. Further, ACME Financial Planning noted the decline in the capital value of the complainant’s investment portfolio was due to a number of sizable withdrawals she had made over several years.

AFCA’s investigation acknowledged that the complainant believed she informed her adviser that she wanted her investments to support her early retirement objective. However, the contemporaneous written documents (fact finds, file notes, SOAs and ROAs) did not support Anna’s assertion that early retirement was her overarching objective. AFCA gave greater weight to the contemporaneous written documents than to the complainant’s recollection as they were created at the time the complainant communicated with her advisers.

To have achieved the performance required by the complainant, she would have needed to take on significantly more risk; this would have exceeded Anna’s tolerance for investment risk and would have exposed her portfolio a higher probability of capital loss. Advice to achieve that level of earnings would have been inappropriate and not in Anna’s best interests having regard to her risk profile.

AFCA found in favour of ACME Financial Planning and adviser Miles. Accordingly, the firm was not liable for the compensation sought by Anna. AFCA noted Anna’s disappointment with the fact her investment portfolio balance had depleted as quickly as it did. However, there was no information to show Miles or ACME Financial Planning were responsible for this because the advice provided was appropriate, there was no evidence of mismanagement, and Anna had made several sizable withdrawals of capital.

In this case, Miles met his fiduciary duties. Specific standards in the Code of Ethics that he upheld in relation to this case include:

Case study four: Appropriate advice and recommendations

The complainants, Carolyn and Patrick, were dissatisfied with advice received from Kate, an authorised representative of the financial firm ACME Advisers. The couple had moved from another financial advisory practice and had wanted to maintain elements of the advice they’d previously received, particularly in respect to their Australian equities portfolio.

However, the complainants claimed the risk profile in a Statement of Advice dated in September 2023 (the September 2023 SOA) was inappropriate for them and, as a result, the investment funds of their SMSF were inappropriately invested in October 2023.

Carolyn and Patrick claimed ACME Advisers had an obligation to act in their best interests and should not have taken action to implement the investment strategy set out in the September 2023 SOA during a period of market volatility. The complainants claimed that the timing of their entry into the market caused them a $27,880 loss on the first investment day.

ACME Advisers said that it does not time the markets and always takes a medium to long term investment position. It also pointed out that Carolyn and Patrick had specifically requested the asset allocation used by Kate and that this particular investment strategy had been agreed to and approved by the couple.

AFCA’s investigation found that Kate properly assessed the clients’ risk profiles, although they were then specifically altered by the complainants to maintain a pre-existing portfolio asset allocation. AFCA observed the asset allocation for the portfolio was within the variation tolerance for each of the complainants’ adjusted risk profile. AFCA also found there was no obligation for Kate or ACME Advisers to time the market and that there should be no reasonable expectation they would.

AFCA’s determination was in favour of Kate and ACME Advisers. No compensation was required to be paid to the complainants.

This case study demonstrates that Kate provided appropriate advice and recommendations to the complainants and met her fiduciary duty. As such, according to the case study, Kate upheld the following standards of the Code of Ethics:

Fiduciary duty is more than just a legal obligation – it’s the cornerstone of ethical financial planning and a guiding principle that defines the integrity of the financial advisory profession. By consistently placing clients’ interests above all else, financial advisers can build trust, strengthen long-term relationships and enhance their clients’ financial wellbeing.

The fiduciary standard is deeply rooted in transparency, full disclosure and client-centric decision-making, which are key elements that align with the ethical expectations outlined in the Code of Ethics. Upholding this duty requires advisers to act with diligence, honesty and professional care, and ensures that every recommendation serves the client’s best interests rather than personal or external influences.

Beyond benefiting individual clients, the commitment to fiduciary principles plays a vital role in elevating industry standards. By adhering to the highest levels of professionalism and ethical conduct, financial advisers contribute to a more trustworthy and accountable financial sector – one that prioritises client wellbeing over short-term gains.

Fiduciary duty is not just about regulatory compliance; it is about demonstrating unwavering commitment to ethical leadership. Financial advisers who uphold this responsibility set a benchmark for excellence and reinforce the value of trustworthy financial guidance. In doing so, advisers not only protect and empower their clients but also strengthen the profession as a whole.

 

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Notes:
[1] http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s961b.html