CPD: Ethics and inappropriate advice

Inappropriate financial advice can breach the ethical standards that comprise the Code of Ethics.

Inappropriate financial advice exists on a spectrum, ranging from relatively minor oversights to serious breaches of professional duty. At one end, a client may simply misunderstand or misrepresent their risk tolerance, leading to the selection of unsuitable financial products. This may be unintentional and reflect a breakdown in communication rather than deliberate misconduct. In such cases, the adviser may still be acting in good faith but may have failed to probe deeply enough or adequately document the client’s goals, needs and preferences.

At the more serious end of the spectrum are instances where advisers make recommendations that clearly do not align with the client’s best interests. This may include prioritising their own interests, ignoring a client’s capacity to bear loss, or implementing high-risk strategies for clients with low risk tolerance.

These actions can result in significant financial harm and represent a fundamental breach of ethical and legal obligations. Understanding this spectrum underscores the importance of thorough client engagement, continuous professional development, and robust compliance frameworks to prevent inappropriate advice across all levels of severity.

Inappropriate advice continues to top the table when it comes to AFCA complaints. Of the 3,559 complaints about advice made in the 2023-24 year, 706 – or 20 percent – of those complaints were about inappropriate advice.  With a couple of exceptions, inappropriate advice has been a consistent source of complaints (figure one).

Key causes of complaint with respect to inappropriate advice were documented by AFCA as follows:

• Issues with retail and wholesale classification: misclassification of clients as wholesale remains a recurring problem. Adequate assessment of client suitability as a ‘wholesale’ client can result in inappropriate risk exposure. Wholesale clients do not benefit from ASIC’s product intervention orders, which can lead to increased risks.
• Confusion around Self-Managed Superannuation Funds (SMSF) classification: ongoing confusion in the advice space 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.
• SMSF suitability concerns: advice for clients with low balances to establish SMSFs continues to be a significant issue, according to AFCA, and often involves inappropriate recommendations and lack of diversification between asset classes. Further, AFCA commented that these disputes highlight the need for greater attention to the suitability of SMSF structures.

The consequences of inappropriate advice

When a financial adviser provides inappropriate financial advice to a client, it can potentially result in a complaint to AFCA or an ASIC investigation. Equally important, it can lead to significant damage to the client-adviser relationship and the advice practice more broadly.

Inappropriate financial advice can have far-reaching consequences that extend well beyond the immediate client-adviser relationship. For clients, it may result in financial loss, emotional distress and a loss of confidence in the financial system. For advisers, the repercussions can include legal action, reputational damage, loss of professional accreditation, and even the end of their career. It may have ramifications that impact colleagues in the business, as well as issues for the licensee.

Potential consequences for the client and adviser may include:

• Financial loss – the client may suffer financial losses because of unsuitable advice. This may result in a complaint and requirement for the adviser, licensee (or their insurance provider) to pay compensation.
• Deterioration of trust – inappropriate advice erodes the trust between the client and the adviser. Building and maintaining trust is essential in client relationships; once damaged, it can be challenging to rebuild.
• Emotional stress – finances are often a root cause of stress; inappropriate advice can result in a client experiencing stress, anxiety and emotional distress. An investigation by AFCA or ASIC can create stress for the adviser, licensee and others in the business.
• Legal consequences – if the inappropriate advice results in significant financial harm, the client may lodge a claim with AFCA or in some instances, take legal action against the adviser. This can result in legal expenses and potential damage to the adviser and licensee’s professional standing.
• Reputation damage – word-of-mouth is powerful in the financial industry. Negative client experiences can tarnish an adviser’s reputation, which will affect their ability to retain clients and attract new clients.
• Regulatory issues – in some cases, inappropriate financial advice can lead to scrutiny from regulators and result in fines and/or sanctions and potentially jeopardise the adviser’s license and professional standing. This is likely to have repercussions for the broader business and licensee.
• Loss of referrals – many advisers build their business from client referrals, as satisfied clients are comfortable to refer friends and family to advisers they trust. However, if this trust is compromised due to inappropriate advice, the adviser is likely to lose out on potential referrals.

The Code of Ethics is values-driven

Ethical conduct is not just a professional obligation, it is essential for long-term client relationships, the sustainability of the adviser’s business, and more broadly, the integrity of the financial services sector.

The Financial Planners and Advisers Code of Ethics is built on a set of core values that form the foundation for financial advice to be recognised as a true profession. These five values (figure two) support the twelve standards that make up the Code (figure three). Together, they establish principles across key areas such as ethical conduct, client care, quality of advice processes and professional commitment.

Financial advisers are expected to act in a manner that reflects, upholds, and promotes these values. Every provision of the Code must be interpreted and applied with the intention of advancing these foundational principles.

Each of the five core values is linked to specific ethical standards that must guide every interaction with clients. Importantly, these values also require advisers to meet their legal obligations, including ensuring that the advice provided is appropriate and tailored to each client’s individual circumstances.

Strategies to avoid inappropriate advice

When a client’s financial strategy is performing as expected and aligned with their objectives, concerns about inappropriate advice are rarely raised. However, when outcomes fall short, particularly due to unforeseen events, clients are more likely to scrutinise their adviser’s recommendations.

Two key strategies to help advisers mitigate the risk of inappropriate advice claims are client education and ongoing communication. For instance, market volatility is inevitable, and financial losses often prompt clients to question their strategy. But a well-informed client – one who understands what they’ve invested in, why those choices were made, and how they support their long-term goals – is more likely to remain confident during periods of underperformance. Regular communication that reinforces core strategies and explains changes in market conditions can also help maintain trust and reassure clients during uncertain times.

It’s important to consider the provision of advice from a client’s perspective. ASIC’s Money Smart site^[1] offers the following advice to consumers who are concerned they may have received inappropriate advice. For each point, potential breaches of the Code of Ethics are identified.

“You may have problems with a financial adviser if they:

• Seem to be pushing one solution, regardless of your needs (for example, an SMSF or borrowing to invest)
  This is an example of failing to act in a client’s best interests; as such, such action would potentially breach standards one, two and five.

It would also suggest that the adviser is not offering financial product advice with good faith and competence, thereby breaching standard nine.

• Pressure you to sign documents that you haven’t read or don’t understand
  As well as failing to act in the client’s best interests, an adviser who behaved in this way would likely breach standard four, which requires informed consent.

• Give you advice that doesn’t fit with your goals or risk tolerance
  Such advice would also breach the standards relating to acting in the client’s best interests. It could also breach standard six which requires advisers to consider the broad effects arising from the client acting on their advice and actively considering the client’s broader, long-term interests and likely circumstances.

• Make you feel intimidated or uncomfortable if you ask questions
  Such a scenario would most definitely not be in the client’s best interests.

• Are not upfront about how they make their money and the costs of the advice
  As well as requiring action in the client’s best interests, standard five also states that advisers must be satisfied that the client understands the costs of the advice and products that are recommended, and advisers must have reasonable grounds to be satisfied.

Further, standard seven requires that informed consent must be obtained for all benefits an adviser and their principal will receive in connection with acting for the client, including any fees for services that may be charged.

• Leave you in a worse financial position than before you received the advice
  Such a scenario could result in breaches of several standards, including one, two and five dealing with best interests, standard six dealing with long-term implications and standard nine that requires financial advice to be offered with good faith and competence.

• Charge you for advice that they never provide
  This could breach those standards relating to acting in the client’s best interests (one, two and five), as well as those relating to informed consent about both advice and fees to be charged (four and seven).

Each of those points raised by ASIC is rightfully a red flag for consumers and would most likely result in the adviser who exhibits such behaviours being in breach of one or more standards of the adviser Code of Ethics.

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, the FSCP or the Australian Financial Complaints Authority (AFCA) or its predecessor organisation. For each, potential breaches of the Code of Ethics are identified.

Case study one: Inappropriate and conflicted advice

Adviser John received a written direction from the Financial Services and Credit Panel (FSCP) after he recommended three clients switch their super and invest in a product associated with his licensee, ACME Advice, a product The FSCP found to be inappropriate for the clients involved.

FSCP noted that John provided a Statement of Advice to five clients and recommended that each switch their existing superannuation into a new product and invest part of it in a financial product associated with ACME Advice.

The FSCP Sitting Panel determined that in giving that advice, John contravened s961G of the Corporations Act 2001 by giving advice that was not appropriate, and s961J(1) of the Corporations Act 2001 by prioritising his interests over the clients’ interests. It also found that John contravened s921E(3) of the Corporations Act 2001 by failing to comply with the Code of Ethics – specifically noting and Standards 3, 7 and 9.

In relation to these standards, the FSCP’s Sitting Panel found:

• Standard 3: Advice was given where the adviser had a conflict of interest.
• Standard 7: The adviser did not obtain the clients’ free, prior and informed consent to all relevant remuneration arrangements by failing to disclose the benefits he and his licensee  would receive as a result of the clients’ investment in the recommended financial product, and the adviser failed to ensure that his fees and charges were fair and reasonable and represented value for money by charging the clients extraordinary fees for advice that was not appropriate and conflicted.
• Standard 9: The adviser made a recommendation that was not in good faith because the recommended financial product was performing poorly and was expensive and therefore was not an appropriate investment for the clients.

In response to these contraventions, the FSCP issued a written direction to John, requiring him to report to ASIC on a range of specified matters a fixed date. These include:

• A report produced by a compliance consultant following a comprehensive review of ACME Advice’s Australian financial services licence.
• A report produced by the compliance consultant containing the results of the pre-vetting of the next 10 pieces of John’s advice.
• Documentation showing John’s successful completion of an ethics and professionalism in financial services course.
• Documentation showing that John is no longer an associate of the financial product he inappropriately recommended to the clients.

As well as the standards identified by the FSCP Sitting Panel, John potentially breached other standards. All possibilities are identified as follows:

Case study two: ‘Cookie Cutter’ advice

Audrey, an experienced financial adviser with some twenty years’ experience, had a loyal client base at ACME Financial Planning. Most of her clients were pre-retirees or retired and many readily referred their friends to her. Although she was well qualified and despite the loyalty of her many clients, an audit raised concerns about the uniformity of advice she provided to her clients.

Although Audrey ‘s clients were largely aged 55+, they had varying financial goals, risk tolerances and investment horizons. However, a review of client documentation found that Audrey’s clients exhibited markedly similar investment strategies and asset allocations, irrespective of their personal goals and characteristics. This suggested a lack of personalised advice.

Further investigation by her licensee discovered that Audrey had been recommending a standard set of investment strategies to all clients, irrespective of their individual needs. Her reliance on these ‘cookie-cutter’ solutions led to poorly diversified portfolios and an overemphasis on high-risk assets, exposing older clients to unnecessary market volatility.

ACME Financial Planning also found that Audrey failed to conduct thorough assessments of her clients’ financial situations. She neglected to consider factors such as income levels and time horizons, as well as shorter- and longer-term financial goals. This resulted in advice that was not aligned with each client’s unique circumstances.

Consequently, Audrey potentially breached the following ethical standards:

Case study three: misleading, deceptive, inappropriate

ASIC recently banned financial adviser Patricia from providing financial services for ten years because she failed to comply with a financial services law by engaging in misleading or deceptive conduct. ASIC also found it had reason to believe that Patrica was not a fit and proper person, was not competent to participate in the Australian financial services industry and was likely to contravene a financial services law.

Between June 2022 and September 2023, Patricia was a financial adviser with ACME Advice and an authorised representative of Australian financial services (AFS) licensee ACME Wealth Pty Ltd. During this period, Patricia transferred at least $15.6 million of funds invested by her clients, family and friends to a cryptocurrency-based investment scam.

ASIC said that Patrica made false statements to clients and engaged in conduct that misled clients about the nature, risks and liquidity of the investment to induce them to invest. She told her clients that the investment was a high-yield fixed interest account, rather than cryptocurrency which carried significantly greater risk. She also told her clients, friends and family that they were dealing with her in her capacity as a representative of ACME Advice.

Instead, investors’ funds were transferred to bank accounts held by Patrica and her personal company, the majority of which were converted to cryptocurrency then transferred to various wallets nominated by the Financial Centre, purportedly a UK-based trading platform. The Financial Centre is listed on ASIC’s Investor Alert List as an unlicensed entity that should not be trusted. ASIC found that Patrica would have had suspicions about the legitimacy of the Financial Centre from at least October 2022.

As a result of her actions, Patrica has been banned for 10 years from:

• performing any function involved in the carrying on of a financial services business, and
• controlling an entity that carries on a financial services business.

ASIC encouraged those clients impacted by Patricia’s actions to lodge complaints with AFCA. As a result of her actions, Patricia potentially breached the following standards:

Case study four: In the eye of the beholder

Janice and Matthew made a complaint to AFCA about advice they received from AMCE Advice Pty Ltd. The couple are co-trustees of their self-managed super fund and say that ACME Advice gave them inappropriate personal advice to buy $75,000 worth of shares in Company A in an initial public offer (IPO).

Company A and ACME Advice are related entities as they share the same parent company.

Janice and Matthew say the advice was:

• inappropriate because the investment did not suit the SMSF’s measured approach to risk
• misleading because it misrepresented the investment risks and returns
• conflicted because it did not disclose it was related to Company A.

Conversely, ACME Advice says it provided general advice only, that all conflicts of interest were disclosed and it did not make misleading representations about the investment performance.

AFCA reviewed email correspondence between the couple and the ACME Advice’s file, and at no point does the adviser enquire about the complainants’ personal circumstances or give an impression the advice is based on anything but an assessment of the Company A stock being suggested.

ACME Advice was able to produce several file notes summarising brief phone conversations between the parties regarding the complainants’ questions about the IPO and ACME Advice assisting with the application form. In all instances where a file note was recorded to discuss the IPO, each note stated, ‘factual info provided or factual update.’

The key findings from AFCA’s review were as follows:

• ACME Advice did not provide personal advice to the complainants. There was no evidence it considered the complainants’ circumstances or goals when recommending the investment in Company A.
• ACME Advice adequately disclosed conflicts of interest. It gave the complainants the investment prospectus, which outlined the relationship between the entities in several places.
• ACME Advice did not engage in misleading conduct. There is no evidence it made any incorrect statements or guarantees about performance and the risks were disclosed in the prospectus.

AFCA found in favour of ACME Advice and dismissed the complaint. Had the complaint against ACME Advice been upheld, the firm would potentially have breached the following standards.

Providing appropriate financial advice is not only a regulatory and ethical obligation but a cornerstone of building and maintaining client trust. In an environment where clients entrust advisers with their financial wellbeing and future aspirations, sound and personalised advice reinforces confidence and strengthens relationships. By prioritising the client’s best interests, maintaining transparency and adapting strategies as circumstances evolve, advisers uphold the integrity of the profession and contribute meaningfully to long-term financial outcomes. Ultimately, appropriate advice is both a professional duty and a powerful tool for building trust, credibility and lasting value for both clients and your business.

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Legislated CPD Area: Professionalism and Ethics (0.75 hrs)

ASIC Knowledge Requirements: Ethics (0.75 hrs)

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Notes:
[1] https://moneysmart.gov.au/financial-advice/problems-with-a-financial-advisers