CPD: Trust and ethics in financial advice

In 2024, trust in financial advisers reached an all-time high. This article, proudly sponsored by GSFM, explores the inseparable links between trust and ethical practice when providing financial advice.

Defined by the Oxford dictionary as “the belief that somebody/something is good, sincere, honest, etc. and will not try to harm or trick you” trust is an integral part of the relationship between adviser and client. It aligns with the values of trust, honesty and fairness that underpin the financial adviser Code of Ethics. Further, a number of the standards that comprise the Code of Ethics also embody this definition; standards relating to honesty, integrity and acting in your clients’ best interests.

There’s no doubt that trust in financial advice – and advisers – was at a low ebb following the Hayne Royal Commission. The deep dive into Misconduct in the Banking, Superannuation and Financial Services Industry heralded many changes in the industry. The good news is that these changes have been well received by consumers and trust in advice has steadily improved.

A 2024 study by the FAAA^[1] found that trust in financial advisers has reached an all-time high, with 94 per cent of advised clients trusting their adviser to act in their best interests. The research findings included clients of financial advisers described their adviser as trusted and transparent, reliable and has good rapport.

The importance of trust

A trusted relationship is important. We are all consumers, and we all need to trust our service providers. We trust that our solicitor will ably manage our legal affairs, our dentist appropriately manage our dental health and our mechanic capably service our car at a fair price. When that trust is breached, it’s often because the service provider has not acted ethically. The mechanic that substitutes second hand parts but charges for new. The dentist that performs unnecessary procedures. The solicitor or financial adviser who defraud their clients.

When there’s a breach of trust caused by unethical behaviour that also involves substantial sums of money, it gets a lot more attention than the dentist filling the odd healthy tooth. Take for example the Courtney House group of companies. ASIC found the group had been providing unlicensed financial advice and ran a $180 million Ponzi scheme. A number of people have been charged in relation to this and it has received significant media coverage.

While such cases are, fortunately, one extreme of a continuum, the volume of reports about advisers doing the wrong thing is consistent enough to damage the industry. Standard 12 of the Code of Ethics makes it a breach of the code to fail to uphold and promote the ethical standards of the profession and hold each other accountable for the protection of the public interest. It’s a virtuous circle – a breach of trust is also a breach of ethics, and a breach of ethics will in most cases, be a breach of trust.

Trust and financial advisers

According to the FAAA’s Value of Advice study:

• four out of five respondents who use a financial adviser are confident of solving most challenges
• nine out of ten of those same respondents felt financially secure and that their finances are tangibly better off
• 80 percent are less worried about money since receiving financial advice
• 83 percent feel they cope better when faced with health issues
• 49 percent say financial advice has positively impacted their family life.

The top reported benefits of working with an adviser include:

• improved financial wellbeing and peace of mind
• help to understand and simplify financial matters
• better confidence in financial decision-making
• improved confidence in the ability to achieve desired standards of living
• help to save time/effort organising and making decisions about finances.

When extrapolated across the industry, this is good news for consumers and may well make the unadvised reconsider their status.

However, trust isn’t a place you reach and then coast along. It requires ongoing work and engagement with clients, it means keeping their best interests central to all that you do for them, and it sometimes means making hard decisions.

What happens when trust is broken?

Trust is a complex topic because it is intangible and personal. The factors that build and break trust can vary from person to person. However, one certain way to breach the trust of your client is to provide them with inappropriate advice or advice that is not in their best interests. As well as being a trust breaker, such behaviour is also a clear breach of ethical standards.

The number of consumers who believe they’ve been given inappropriate advice or advice that is not in their best interest has fallen according to the Australian Financial Complaints Authority (AFCA). In financial year 2024, AFCA received 3,559 complaints about investment and advice, a number that was down 26 percent from financial year 2023. AFCA believes this reflects the positive impact of enhanced education standards and increased professionalism within the industry, which in turn has led to fewer disputes^[2].

Claims of inappropriate advice or failure to act in the client’s best interest still dominate AFCA’s complaints in the Investment and Advice Complaints sector. While each case will have potentially breached a range of standards in the Code of Ethic, these cases – assuming they were upheld – will have most likely breached one or all of the following standards.

Importantly, once broken, trust is very difficult to rebuild. In the realm of financial advice, this is especially true, as clients rely on advisers to act in their best interests with honesty and integrity. Trust can be eroded in a myriad of ways: some intentional, such as misleading recommendations or hidden fees, and others unintentional, such as market downturns or unforeseen economic shifts that negatively impact investments.

Even when circumstances are beyond an adviser’s control, clients may still feel betrayed if they perceive negligence, poor communication or a lack of transparency. Rebuilding that trust requires consistent honesty, clear explanations and a commitment to prioritising the client’s financial well-being.

How can you build trust in your advice practice?

In short, you can engender trust by acting ethically. By adhering to each of the twelve standards of the Code of Ethics, you will build trust between yourself and your clients.

While trust building should be part of your business practice, it’s during volatile times that it will be most tested. There are many factors that could test markets over the coming year – geopolitical instability, sticky inflation, rates and the impacts of tariffs. Your clients’ cost of living is rising, and the fortitude of many clients may be tested.

To build and maintain strong trust with your clients, it is essential to demonstrate a genuine respect for their concerns and financial goals. Trust is not given freely; it must be earned through consistent actions that reassure clients of your integrity and commitment to their best interests. This starts with fostering a company culture that prioritises transparency, open communication and ethical decision-making.

Clients need to feel confident that their questions will be met with honest, straightforward answers rather than vague reassurances or industry jargon. Clear and proactive communication – whether about investment strategies, market risks, or changes in financial plans – helps clients feel informed and secure in their decision-making.

Additionally, delivering timely and efficient responses to client enquiries signals that their concerns are important and are being taken seriously. Delays or evasive answers can create doubt and erode confidence, making responsiveness a critical component of trust-building.

Beyond communication, trust is further cemented when financial advisers act as true fiduciaries, prioritising clients’ financial well-being over the adviser or practice’s interest. This means providing well-researched advice, disclosing potential conflicts of interest and continuously educating clients about financial matters so they feel empowered rather than dependent.

Ultimately, trust is the foundation of long-term client relationships. Earning it requires transparency, integrity and a steadfast commitment to serving clients’ best interests at every turn.

In financial planning, client trust has been found to be the most important factor for relationship quality^[3]. The degree to which clients trust their financial adviser is positively influenced by the belief that the adviser is acting in their best interests (customer oriented) and is negatively influenced by the belief that the adviser is acting out of self-interest (sales-oriented)^[4].

As well as being a trust breaker, acting out of self-interest will breach several standards in the Code of Ethics, again highlighting the important connection between trust and ethical behaviour.

Figure one illustrates a model of trust developed following research undertaken for a PhD Dissertation^[5]. As well as illustrating the characteristics of trust as it pertains to financial planning, it can also be used to link the importance of ethical behaviours to the elements that constitute a trust relationship. The following section will explore the interrelationship between trust factors and ethical standards more closely.

Competence – while competence is implicit in a number of standards, it is explicit in Standards 9 and 10 – all advice, not just financial product advice, must be offered with competence. From a trust perspective, this would also flow through to communications and other interactions you have with your clients.

Best interests – the research shows a failure to act in a client’s best interest to be a trust killer, it’s also a sign of unethical behaviour and, while it impacts a number of standards in the Code of Ethics, it is an overt breach of standards two and five.

Honesty – honesty and ethical practice goes hand in hand. Dishonesty of any type will crush the trust built between two people and in the context of financial advice, destroy the adviser-client relationship. It is also likely put you in breach of several Standards, in particular standards one and two. The former requires actions in accordance with the law; acting dishonesty is generally contrary to the laws that govern advice. The latter requires integrity.

Accountable – it is important to demonstrate that you, and other members of your practice, are accountable for all actions in relation to your clients. Particularly in situations where things haven’t gone to plan, accountability is essential to maintaining the trust you have developed with your client.

Feeling – while trust is built over time, it is often driven by a feeling of wellbeing (or lack thereof). By acting your clients’ best interests and adhering to the standards that comprise the Code of Ethics, you’re more likely to engender and maintain a trust relationship with your clients.

Vulnerability/Risk – all clients will feel vulnerable at various times. The stronger the trust relationship between you, the knowledge that you have acted in their best interests means the client is less likely to feel vulnerable or concerned during periods of uncertainty, be that personal or market driven. By providing informed consent, a client is more likely to understand your role and trust the advice received from you.

Faith – clients want to have faith in their adviser, want to have a trust relationship, want to know you are doing the best by them. By acting in their best interests and building a strong interpersonal connection, your client is best positioned to have faith in your role and their ability to meet their financial objectives.

Case studies

The following case studies are based on real events; however, the names of people and organisations have been changed, and some details altered. The case studies have been drawn from ASIC and the Australian Financial Complaints Authority (AFCA) or its predecessor organisation. For each, potential breaches of the Code of Ethics are identified.

Case study one: Unlicensed adviser, unregistered schemes

Operating a financial advice business without the appropriate licence is a clear breach of the law, as is running a series of unregistered managed investment schemes. Encouraging naïve investors to place their money into such schemes is an egregious breach of trust.

Rebecca and Michael sought advice from adviser Simon, who was also a director of his company, ACME Property and Investments. The couple was approaching retirement and wanted advice as to how to best structure their superannuation and other assets for retirement.

The couple had become aware of Simon and ACME Property and Investments via promotions the financial firm ran on social media, such as Facebook. These promotions offered fixed returns of 25-50 percent to be paid between 12 to 26 months.

Simon did not disclose that the schemes he recommended were operated by ACME Property and Investments. He recommended Rebecca and Michael establish an SMSF and each roll their superannuation assets into the fund. The couple did this and then invested the proceeds in the recommended investments.

After the first year, the couple realised that the promised returns were not being realised. They were convinced to give it another year. However, during that time, an ASIC investigation froze both Simon’s and the firm’s assets. Later that year, ASIC commenced civil action against Simon and ACME Property and Investments, for alleged unlicensed conduct and for operating numerous unregistered managed investment schemes. Receivers were appointed over the property of the schemes and related trusts associated with the schemes.

The Federal Court found company director Simon guilty of operating unregistered managed investment schemes and carrying on a financial services business without holding an AFSL. Handing down its judgment, the Federal Court ordered Simon to pay $1.35 million and that he be disqualified for four years. He was also ordered to pay $50,000 of ASIC’s costs.

Additionally, the court ordered that ACME Property and Investments, of which Simon is the sole shareholder and director, be wound up alongside five of the investment schemes and associated companies.

The court heard that numerous investors were referred to third parties to establish SMSFs in order to invest in the schemes. The court found that many of the 217 investors in the schemes were inexperienced in investing and believed that the funds they had invested were secure and, that returns would be significant. The investor losses totalled approximately $27 million.

The court’s judgment was understood to be the first time a court has ordered a pecuniary penalty against an individual for a contravention of section 601ED of the Corporations Act.  It is also the third highest civil penalty ordered against an individual in relation to a proceeding commenced by ASIC.

Simon’s actions potentially breached the following standards of the Code.

Case study two: Misappropriation of funds

Unfortunately, such criminal cases do occur. The case of Melissa Caddick is a recent case of notoriety – such that it spawned countless articles, a podcast and even a mini-series. Such publicity can reflect badly on the industry as a whole and reinforces the importance of the trust relationship between you and your clients. Where there is trust, such scandalous stories are less likely to have a negative impact.

Financial adviser Helene engaged in dishonest conduct in relation to the provision of financial services and advice to a number of clients of her financial advisory business, ACME Financial Advice. This occurred over several years.

Helene executed more than 175 unauthorised transfers of funds from accounts held in the names of her clients, totally over $4,500,000. The funds she misappropriated funds were used to fund jewellery, designer gear, family holidays and significant renovations to her home.

A number of her clients provided ASIC with Victim Impact Statements where they spoke of their deep distress about their personal and financial circumstances as a result of Helene’s conduct.

Helene was charged for offences against s1041G of the Corporations Act. It was noted that she had taken steps to avoid detection, and she made numerous misrepresentations when approached by ASIC.

Helene was sentenced to five years in prison and required to:

• repay the clients’ misappropriated funds
• repay professional fees incurred in seeking to recover the misappropriated funds
• repay management fees charged during the periods of offending
• pay non-economic loss as determined by AFCA
• pay interest calculated at the rate published by the Reserve Bank of Australia plus six per cent with interest accruing from the start date of the charge period for each respective victim until date of payment.

As well as breaching her clients’ trust, Helene potentially breached the following standards of the Code:

Case study three: Unlicensed advice

Unlicensed advice that involves misleading and deceptive representations to clients destroys trust relationships. An individual affected by such actions may struggle to place trust in another adviser, or indeed the profession.

ASIC has banned former financial adviser David from providing financial services, controlling an entity that carries on a financial services business or performing any function involved in the carrying on of a financial services business. David was the sole director, responsible manager and financial adviser of AFS Licensee, ACME Advice, a firm that encouraged clients to trade in derivatives.

ASIC observed that David, in relation to derivatives:

• provided unlicensed advice and dealing services
• failed to act in his clients’ best interests, provided inappropriate advice and failed to provide statements of advice to clients
• made misleading and deceptive representations to clients regarding the high returns they would achieve form his recommendations and trading
• caused significant financial losses for his clients.

ASIC also noted that David failed to acknowledge or accept responsibility both for the contraventions stemming from his advice and trading in derivatives on behalf of clients, but also for the losses his advice and trading caused his clients. ASIC believes this reflects poorly on his fitness and propriety to be involved in financial services.

David’s banning has been recorded in ASIC’s banned and disqualified register and he is likely to have breached the following standards:

Case study four: Investment in the licensee’s best interest

There are many cases where consumers have been encouraged to invest in schemes run by or related to advisers, their practices or their licensees. When these schemes are not in the client’s best interests, not only do they breach the trust relationship, they breach the Code of Ethics.

Angela and her husband Tom had been clients of ACME Advice for a number of years. Last year their adviser, Sandy, invited them to purchase membership in a timeshare managed investment scheme operated by his licensee. Both Sandy and the licensee received a financial incentive on sales.

Angela and Tom attended an information session for the investment. At that time, Sandy provided them with information and advice about the investment. During the information session, Angela asked Sandy if it was possible to cancel membership in the scheme at any time. She was advised they could cancel the investment at any time for an exit fee of $450. Angela and Tom relied on that statement when making their investment decision.

It transpired that Sandy’s statement was misleading – there was not exit clause. Sandy denied saying that the couple could exit the investment for a fee of $450. Instead, Angela and Tom were required to repay the loan they had taken out, find a buyer for their portion of the timeshare and pay an additional exit fee – one much higher than they believe they were told. This was outlined in fine print on page 44 of the scheme’s Product Disclosure Statement.

When investigated by AFCA, it was found that Sandy’s file notes were incomplete. They did not record all discussion and matters referred to by Angela and Tom in their complaint. The absence of this record in the adviser’s file notes was deemed to be important.

AFCA found the SOA provided to Angela and Tom was generic and not tailored specifically to them. It failed to identify their objectives or provide advice reasonably likely to satisfy those objectives. The SOA also failed to disclose the specified risks associated with accepting the advice in this case – investment in a long term, non-liquid managed investment scheme.

Angela and Tom told AFCA that they would not have invested had they known they could not easily exit the investment. From the details provided in the case study, Sandy potentially breached the following standards in the Code.

For the financial advice industry to thrive, it needs to engender trust. This is best achieved when advisers act ethically and in the best interests of their clients at all times. Only then can the advice industry be viewed as a true profession, one that Australians turn to with confidence when making critical financial decisions.

Trust is the foundation of any successful financial planning relationship. Without it, consumers may hesitate to seek advice, potentially missing out on opportunities to secure their financial futures. When advisers demonstrate integrity, transparency and a genuine commitment to their clients’ well-being, they not only foster long-term relationships but also enhance the reputation of the industry as a whole.

A strong ethical framework, such as the Code of Ethics, plays a pivotal role in ensuring that advisers uphold the highest professional standards. By adhering to these principles, financial professionals reinforce the industry’s credibility and demonstrate their dedication to serving clients with honesty and fairness. Over time, this commitment to ethical conduct will lead to greater consumer confidence, higher engagement with financial advice services and ultimately, improved financial outcomes for Australians.

 

Take the FAAA accredited quiz to earn 0.75 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.75 hour.

Legislated CPD Area: Professionalism & Ethics (0.75 hrs)

ASIC Knowledge Requirements: Ethics (0.75 hrs)

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Notes:
[1] Value of Advice Consumer Research, FAAA, October 2024
[2] Annual Review 2024, AFCA, October 2024
[3] Hunt, K., Brimble, M. and Freudenberg, B. (2011), ‘Determinants of Client-Professional Relationship Quality in the Financial Planning Setting’, Australasian Accounting Business and Finance Journal
[4] Bejou, D., Ennew, C. and Palmer, A. (1998), ‘Trust, ethics and relationship satisfaction’, International Journal of Bank Marketing
[5]  Source: Cull, M. (2015), The role of trust in personal financial planning, PhD Dissertation, University of Western Sydney