A lot of people quite rightly consider financial abuse to be a malevolent form of elder abuse. However, it’s not just the elderly that fall prey to financial abuse, it can infiltrate all ages and socioeconomic groups.

In fact, financial abuse was identified as such a significant issue that in 2024, there was a formal Parliamentary Joint Committee, titled ‘Financial abuse: an insidious form of domestic violence’. The committee made 61 recommendations that call on the financial system, governments and key operators in the sector to make numerous changes to protect vulnerable Australians.

Of the 61 recommendations made by the Parliamentary Joint Committee, three are of particular interest to the advice sector:

• The government to undertake a review of the intersection between financial abuse and the super system, particularly in relation to SMSFs
• The SIS Act 1993 be amended to provide a mechanism so that an abuser can’t be a beneficiary of the account holder’s super death benefits
• The government is to undertake a review of all financial products and services so abusers can’t financially benefit from the death of their victims

At any time, you may have a client who is perpetrating financial abuse or is a victim of financial abuse. As a financial adviser, you’re generally well positioned to identify such abuse.

What is financial abuse?

Financial or economic abuse occurs when one person removes another’s access to money, manipulates their financial decisions or uses their money without consent. It can include exerting control over income, spending, bank accounts, bills and borrowing. A Deloitte-Commonwealth Bank report^[1] estimates that the financial toll on victims of financial abuse is estimated to be $5.7 billion.

Financial abuse often goes hand in hand with coercive control, the prevalence of which is increasing in Australia. Coercive control is often defined as a pattern of controlling behaviour, used by a perpetrator to establish and maintain control over another person. Coercive control is estimated to effect 3.6 million Australians (and, of those, 2.3 million experienced some form of economic abuse)^[2].

Within the context of coercive control, financial abuse is a tactic to keep a person disempowered, by utilising strategies such as:

• placing one on a strict budget that barely covers the essentials such as food or clothes
• limiting access to bank accounts
• hiding financial resources
• preventing one from having a credit card
• rigorously monitoring what a person spends.

Financial abuse can take many forms, and the perpetrator could be a partner, a family member, carer, guardian or friend of the victim. It often occurs gradually as actions that take place over an extended time period.

Examples may include:

• Stealing or ‘borrowing’ a person’s money, debit or credit cards, assets or property without their knowledge or consent.
• Monitoring a person’s spending and not letting them choose how to spend their own money.
• Creating debts in another person’s name.
• Taking control of another person’s financial accounts and not providing information to them about their money or assets.
• Forging a signature or forcing a person to sign a document without disclosing the contents of that document.
• Using a vulnerable person’s money or assets knowing they are unlikely to complain because they are dependent on the other person for care and support.
• Pressuring a person to sign or change a will, power of attorney, enduring power of attorney or contract.
• Using an enduring power of attorney in a way that is not in the interests of the principal or is not consistent with the principal’s instructions (for example, using money from their account to pay for personal expenses).
• Pressuring a person to act as a co-borrower or guarantor for a loan.

Advice and financial abuse

Broad areas into which financial advice could be drawn are:

1. Economic and financial manipulation
   This can include a client leveraging a partner’s emotions, dependence, or traditional expectations about financial management to achieve financial gain or cause financial disadvantage for the partner. Examples include a perpetrator lying about their financial situation or misrepresenting their income to minimise their liability for child support payments.
2. Economic and financial entanglement
   This might include situations where a client uses their financial resources to keep the other partner in the relationship. Examples include creating joint debts and other liabilities that reduce their partner’s economic independence and ability to leave the relationship.
3. SMSFs and financial abuse
   The SMSF sector has been identified as one where there have been examples of circumstances where financial abuse had been overlaid with superannuation, where money had been moved into an SMSF and, ultimately, control had been taken over by one partner.

An SMSF can be manipulated by abusive partners or family members. For example, by removing someone’s access or coercing them into making decisions that are beneficial only to them. In such cases it can be very difficult to clawback. Unfortunately, the victim in such a case has no coverage under AFCA.

Recommendation 9 from the Parliamentary Joint Committee focused specifically on SMSFs as follows: Recognising the legitimate choice of Australians to have self-managed superannuation funds, the committee recommends that the Australian Government undertake a review of the intersection between financial abuse and the superannuation system, particularly in relation to self-managed superannuation funds; and ensure that the review is informed by the lived experience of victim-survivors^[3].

4. Elder financial abuse
   Elder abuse is a single or repeated act or lack of appropriate action, occurring within any relationship where there is an expectation of trust, which causes harm or distress to an older person^[4].

Financial elder abuse is defined as the misuse or theft of an older person’s money or assets and is the third most common form of elder abuse, after psychological abuse and neglect.

A key aspect of the definition is that elder financial abuse typically occurs in relationships where there is an expectation of trust; those with family members, friends, neighbours, carers and some professionals. Elder financial abuse involves a trusted person unethically exploiting a power of attorney or other legal mechanisms that give them control over an older person’s assets.

The risk factors that contribute to financial elder abuse are expected to increase in the next 20-30 years as Australia’s population continues to age. These factors include:

• • an ageing population, with people living longer and healthier lives
  • the largest intergenerational wealth transfer in history
  • inheritance impatience
  • growing economic pressures – the rising cost of living, housing costs and low wage growth.

Elder financial abuse can take many forms and can include repeated or one-off actions, threats or even a lack of action. In many cases, it may not be ‘technically’ illegal but is always unethical.

Some of the most common types of elder financial abuse include:

• • abusing a Power of Attorney where the attorney uses their power to take a person’s assets for themselves or for others
  • forcing an older person to sign over ownership of assets or make someone a beneficiary of their will
  • improper use of funds
  • theft
  • inheritance impatience, which occurs when adults feel entitled to an ageing relative’s assets and they take assets from them
  • coercing the older person to be guarantor for a home, business or investment loan.

Recognising potential financial abuse

Financial abuse isn’t always obvious. The well-dressed, friendly client who never appears with their partner, but always has the paperwork signed. The virtuous daughter looking after her ailing parents’ financial affairs. Financial abuse can take many forms, and a financial adviser is generally well-positioned to identify warning signs. Although some forms of financial abuse may be harder than others to detect, there may be discrepancies, patterns, or behaviours that suggest financial abuse.

Here are five scenarios of financial abuse you may be able to identify:

1. Unexplained changes in financial behaviour: a client who has been consistent with their saving and spending habits suddenly starts making large, unexplained withdrawals or taking on excessive debt. You might notice sudden purchases of luxury items or transfers to unfamiliar accounts, indicating possible financial manipulation or coercion by a third party.
2. Signs of undue influence from a third party: a client’s decisions start to consistently favour a particular individual – such as a family member or friend – who is exerting control over their financial choices. For example, a client might begin to give large sums of money or assets to someone close to them, or they might stop making decisions without consulting that individual. An adviser might spot a pattern of unusual joint accounts or legal changes in the client’s estate plan that seem out of character.
3. Excessive fees or charges: a client is being charged unusually high fees for services may indicate that a third party is taking advantage of the client’s vulnerability. You may be able to detect excessive or unnecessary charges that point to exploitation by an unscrupulous salesperson, family member, or carer.
4. Sudden reluctance to discuss financial matters: a previously transparent client suddenly becomes secretive or evasive about their finances. This could signal they are being financially manipulated or pressured by a third party. The adviser may notice that the client defers to someone else when discussing their accounts or financial matters, which could indicate that the client is under duress or coercion.
5. Coercion into risky investments: a client might be encouraged to invest in high-risk financial products or assets that are unsuitable for their financial goals or risk tolerance. This may occur when a third party, such as a partner or family member, pressures them into making decisions that disproportionately benefit the third party. A financial adviser might notice that the client is being pushed into making these risky moves, often accompanied by vague or misleading explanations.

Other signs of financial abuse include instances where:

• your client does not understand or is unaware of recently completed transactions
• your client expresses concern about missing funds, or missing personal or financial documents
• your client indicates they should have enough money to pay bills but are unable to do so for example, they complain of having no heating despite the fact they can afford it)
• you receive unusual requests such as adding an additional party/ies as a signing authority or giving such parties digital access to the client’s financial information
• changes are made to an address on an account by an authorised third party, or requests are made by the authorised third party to send correspondence to them
• there are changes in operation of client’s finances or unusual activity following the appointment of an enduring power of attorney.

Principles for good industry practice

Financial abuse is complex and can present challenging situations for you and your team members. Financial advisers play a key role in identifying and addressing financial abuse. To do so effectively and ethically, you must adhere to principles of good industry practice – such as the Code of Ethics (figure one) that protect the interests of clients, promote transparency and ensure that you and your peers act with integrity and professionalism. Each of these are actions that underpin the Code of Ethics.

Here are some key principles of good industry practice for financial advisers when identifying and dealing with financial abuse:

1. Client-centred approach

• Principle: always prioritise the best interests of the client, ensuring their financial well-being is at the forefront of decision-making.
• Application: Financial advisers should establish clear communication and trust with clients, making sure to understand their financial goals, needs, and preferences. They should be vigilant for signs of abuse and be prepared to intervene when there is any concern about exploitation, ensuring that clients’ decisions are made voluntarily and independently and with informed consent.

This will support you to meet the following standards:

2. Confidentiality and privacy

• Principle: Respect the privacy and confidentiality of the client’s financial information, sharing it only when necessary and with proper consent.
• Application: If a financial adviser suspects financial abuse, they must carefully balance confidentiality with the need to protect the client. In cases where there is a risk of harm, advisers may need to escalate concerns, but they should always do so in accordance with legal and ethical standards, such as reporting to relevant authorities or involving legal counsel.

This will support you to meet the following standard:

3. Clear communication and record-keeping

• Principle: Maintain clear, accurate and up-to-date records of all client interactions, including financial advice provided and any concerns regarding financial abuse.
• Application: The adviser should document all relevant conversations, financial transactions, and any signs of potential abuse observed. This documentation can be crucial if the situation requires escalation to regulators, legal authorities, or other professionals.

This will support you to meet the following standard:

4. Ongoing monitoring and review

• Principle: Conduct regular reviews and monitoring of the client’s financial situation to identify any changes that might indicate potential financial abuse.
• Application: Financial advisers should periodically review client accounts, transactions, and investments, looking for unusual patterns such as unexplained withdrawals, sudden changes in spending behaviour, or pressure from third parties. They should proactively address any irregularities by speaking with the client to understand their financial decisions.

This will support you to meet the following standards:

5. Detection of Red Flags

• Principle: Be alert to signs of financial abuse, such as sudden changes in a client’s financial behaviour, the involvement of a third party in decision making or reluctance to discuss finances.
• Application: Financial advisers should be trained to recognise the common signs of financial abuse, such as unexplained withdrawals, undue influence by family members or others, or the client showing confusion or distress about their financial situation. Early detection is crucial in preventing further harm.

This will support you to meet the following standard:

Financial advisers must uphold the highest ethical standards by acting with integrity, honesty, and transparency when dealing with clients and financial matters. If financial abuse is suspected, you should not be afraid to take the necessary steps, even if it means challenging the behaviour of a client’s family member or other third party who may be involved.

You can work collaboratively with other professionals, such as legal experts, social services and relevant authorities when financial abuse is suspected. You can also refer clients to appropriate external resources, such as legal counsel, financial abuse helplines or support organisations. Collaboration with other professionals ensures a coordinated response to address and prevent further harm.

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: Coercive control

Peter and Dee have been married for a number of years and Dee has, over the years, been convinced by Peter he is the ‘financial brains’ in the partnership and that he should have oversight of their financial affairs. Although Dee attended the first few meetings with Jake, when Peter suggested she ‘not bother’, she went along with it. However, according to all records, both Peter and Dee were Jake’s clients.

They have a financial adviser Jake, who went to school with Peter and was best man at the couple’s wedding. When Peter sees him with paperwork signed by Dee, he does not question it. Two events did present as red flags to Jake, these were:

1. The couple’s super accounts were closed and the money used to establish an SMSF.
2. Peter withdrew all possible equity from their home and invested it in a property development in which Jake had an interest.

Jake asked if Dee knew and was happy about the situation and took his friend’s word for it that she was. While Dee had signed the paperwork, she was not informed as to the nature of the contents, nor did she read it. She was happy to accept Peter’s explanation.

A year later the marriage broke down. All assets except the family home – which was mortgaged as far as possible – were in Peter’s name. The equity that had been withdrawn from the home was tied up in an illiquid business and the SMSF made it difficult to split and required many resources and legal hours to get Dee her share. Jake had chosen to ignore the red flags because he knew Peter and didn’t think he’d do the wrong thing by Dee.

By ignoring the red flags, Jake potentially breached the following standards in the Code of Ethics.

Case study two: Elder financial abuse via misuse of POA

Elizabeth is in her early 80s and a client of ACME Financial Advice. In early 2018, Elizabeth’s son and daughter established a joint EPOA should their mother require assistance and stewardship in her later years. Elizabeth’s financial adviser Christian is aware of the POA and has met with both children.

Despite a recent stroke, Elizabeth’s mental acuity remains strong. However, she’s no longer able to drive and finds other forms of travel difficult. As a result, her daughter Sian has become her default carer. Sian has moved from full time to part time work so she can care for her mother.

Sian contacted Christian and asked him to redeem a managed fund investment valued at $65,000. She explained that it would be used to make some modifications to Elizabeth’s home to make it safer and more comfortable for her to continue to live in her own home.

Christian called Elizabeth at a time he knew Sian would be working. He wanted to ensure that Elizabeth was aware of this request, its purpose and quantum. Elizabeth was aware of the building works and had the quotes to hand. It transpired that the building works had been quoted at $50,000. Sian had intended to keep the remaining $15,000 as ‘payment’ for her services as a carer but without her mother’s knowledge or approval. Christian made a file note of this issue in case a similar situation arose again at a time he wasn’t present at the firm.

Although AFCA acknowledges that employees of financial firms are “not expected to be detectives”, it is their duty to exercise reasonable care and skill, which includes an obligation to question the client’s authorisation of a transaction. This includes circumstances where there’s a possibility that a client is being financially abused, or the use of funds is not consistent with the customer’s wishes or for their benefit.

Through his actions, Christian acted in Elizabeth’s best interests and did not breach the Code of Ethics. However, had he simply actioned Sian’s request, he would have potentially breached the following standards:

Case study three: Undue influence

Mary is a career woman who, as a client of David at ACME Finance, has amassed a significant nestegg over their 15-year business relationship. As someone who had not married or had children, David was aware of Mary’s goals to retire early at 55 and spend 2-3 years travelling before moving to the coast. Mary had three more years before her planned retirement.

At their annual financial review meeting, David noticed some changes in Mary’s behaviour and financial decisions that raised red flags. At the meeting, Mary introduced David to Jason, a new man in her life who had recently moved in with her. David was surprised that Mary seemed to depend on Jason’s input regarding financial decisions, which was a sharp contrast to the independent woman David had known for years.

David noticed several red flags:

• Mary had made several large withdrawals and transfers over the past six months, which were not consistent with her usual spending patterns. In one instance, she transferred $30,000 from her savings account to a joint account she had opened with Jason. This transfer was made without any prior discussion with David, and it raised questions about the necessity of such a move.
• David noticed that Mary had opened a joint savings account with Jason, something she had never done before. This was especially concerning because Mary had always kept her finances separate and had been firm about maintaining control over her assets. David asked Mary about the decision, and she mentioned that Jason “suggested it would be easier to manage her finances together.” However, David was concerned that Jason might be exerting undue influence, as Mary had never previously considered joint accounts in prior relationships.
• In reviewing Mary’s estate planning documents, David noticed that she had recently changed her will to leave a significant portion of her assets to Jason, who was now named as the primary beneficiary. This was unusual, as Mary had never previously indicated such an intention, and she had often expressed a desire to leave her assets to charity and a few close friends. When David enquired further, Mary became defensive and told him that Jason had advised her to make those changes, claiming it would help simplify matters.
• In the past Mary was always an active participant in her financial planning. However, during their recent meeting, she seemed reluctant to make decisions without Jason’s approval. When David suggested an adjustment to her investment portfolio, Mary hesitated and deferred to Jason. This shift in behaviour was alarming to David, as it was clear that Mary’s financial autonomy was being undermined.

Because of his concerns, David took the following actions:

• He arranged a separate meeting with Mary, without Jason’s presence, to discuss her financial decisions and ensure that she was making them freely and independently. During this conversation, David gently asked Mary about her comfort level with the recent changes and her reasons for trusting Jason with her financial matters. Mary revealed that she felt increasingly dependent on Jason for support as she didn’t want to retire alone; however, she admitted that she wasn’t fully comfortable with some of the decisions Jason had made on her behalf.
• He reassured Mary that she had the right to make decisions about her finances independently and that she should feel empowered to do so. He suggested that Mary review her financial accounts and estate plan with an objective third party, such as a lawyer, to ensure that her wishes were being accurately reflected and that she was not being unduly influenced by Jason or anyone else.
• Concerned that Mary might be vulnerable to financial exploitation, David recommended that she seek assistance from a local financial abuse support service. This service could help Mary understand her rights and provide her with resources for protecting her assets and making decisions free from coercion.
• After his conversation with Mary, David referred her to a trusted estate planning lawyer to review her will and ensure that any changes were made voluntarily and without undue influence.

David’s actions put Mary front and centre, and he upheld the Code of Ethics. Had he not followed up his concerns, he would have potentially breached the following standards:

When it comes to identifying and helping clients manage financial abuse, advisers play a crucial role, serving as a frontline defence against exploitation. Your expertise in financial matters and close relationships with clients means you are uniquely positioned to recognise red flags.

By remaining vigilant, educating clients and following appropriate reporting protocols, you can help protect vulnerable individuals from financial harm. Your proactive involvement not only safeguards clients’ financial well-being but also reinforces trust and integrity within the financial advice profession.

———

Notes:
[1] The cost of financial abuse in Australia, Commonwealth Bank of Australia & Deloitte Access Economics, 2022
[2] Australian Institute of Health and Welfare, Coercive Control, updated 19 July 2024
[3] Parliamentary Joint Committee on Corporations and Financial Services, Financial abuse: an insidious form of domestic violence, 2024
[4] World Health Organisation, 2022

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What are the factors that can help you build trust with your clients and the important role trust plays in running an ethical advice practice?

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.

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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

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Fiduciary duty in ethical financial planning safeguards clients’ best interests.

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.

———-

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

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AI can be implemented in an advice practice while still adhering to obligations under the Financial Planner and Adviser Code of Ethics.

The integration of tools driven by artificial intelligence (AI) into financial advice practices will transform the industry. This article, proudly sponsored by GSFM, explores the ethical implications of using AI in financial advice and offers some practical strategies to maintain professional and ethical standards and safeguard client trust in a rapidly evolving digital landscape.

AI is set to revolutionise just about every industry on the planet, from+ manufacturing and health through to tech and finance. Financial advice is no different. The integration of AI into advice practices will enable the automation of routine tasks and forever change how advisers analyse data, generate insights, provide personalised recommendations and manage client data.

The tools powered by AI promise enhanced efficiency and productivity, deeper analytical capabilities and client solutions tailored to each individual. Its benefits include freedom from routine tasks to focus on conversations with clients, meeting their objectives and other business building activities. However, alongside the advancements that can be delivered by AI come ethical considerations that advisers must address to maintain trust, transparency and professional integrity.

AI’s ability to process vast amounts of financial and behavioural data offers unprecedented opportunities for improving client outcomes. Yet, questions remain about bias, accountability and data security; the role of human oversight remain central to its responsible use. Financial advisers, bound by fiduciary duties and a strong code of ethics, face a unique challenge: leveraging AI’s potential while, at the same time, ensuring that its application aligns with the principles of fairness, honesty and client best interests.

To fully realise the benefits of AI, ASIC comments that it’s important for licensees and advisers to balance innovation and protection. The integrity of our financial system – and the safety of the consumers who interact with it – relies on finding that right balance, as detailed in a report^[1] published in October 2024. ASIC also notes that it has been reminding licensees that existing obligations apply to their use of AI. Current licensee obligations, consumer protection laws and director duties are technology neutral, and licensees must ensure that their use of AI does not breach any of these provisions.

“As the race to maximise the benefits of AI intensifies, it is critical that safeguards match the sophistication of the technology and how it is deployed. All entities who use AI have a responsibility to do so safely and ethically.”
ASIC, Beware the gap: Governance arrangements in the face of AI innovations

ASIC has stated its intention to engage with and monitor licensees’ AI use on an ongoing basis, particularly as the regulator considers how licensees and practices embed the requirements of any future AI-specific regulatory obligations.

AI in the advice process

Firstly, a quick recap on artificial intelligence. AI is an all-encompassing term that refers to the simulation of human intelligence in machines that are programmed to think, learn and make decisions. It incorporates a wide range of technologies, ranging from rule-based systems to advanced machine learning models. This enables machines to perform tasks that typically require human thought process. Examples include problem-solving, pattern recognition, understanding language and synthesising information to make predictions.

At its core, AI uses algorithms and large datasets to process information, identify trends and generate insights. Examples of AI include virtual assistants like Apple’s Siri, chatbots used by banks, telcos and airlines, recommendation systems like those used by Spotify or Netflix, as well as autonomous systems such as self-driving cars. Versatility and adaptability will make AI a transformative force to our personal and professional lives.

Generative AI focuses on creating or generating original content such as images, text, music, video, designs or recommendations. Unlike traditional AI techniques that produce output programmed or copied from existing data, generative AI techniques are designed to generate output based on patterns, structures and examples learned from large data sets during the training process.

AI will impact the end-to-end advice process, especially those more time consuming activities. Licensees and advice practices are introducing AI solutions to record and summarise client meetings, produce Statements of Advice, create and manage portfolios, handle back office administration and support compliance. As well as delivering significant cost savings, AI frees up advisers to focus on building long-term client relationships.

Generative AI – such as Microsoft’s Copilot, ChatGPT or Napkin – may help to provide more relatable content for presentations and advice documents, with plain English and visual representations of complex information.

An increasing number of licensees and practices recognise the potential provided by AI’s to progress and improve processes. The opportunities for AI in advice practices are many and include:

Enhanced efficiency and productivity

• Automation of routine tasks: AI can automate tasks such as data entry, note taking and compliance checks, which in turn frees up time for advisers to focus on client relationships, business development and strategic decision making.
• Faster analysis: AI accelerates the processing and analysis of large datasets, enabling quicker insights and recommendations.
• Servicing more clients: AI enables advisers to manage a larger client base efficiently, including those clients with lower net wealth or less complex needs.
• Cost reduction: Automation and streamlined processes reduce operational costs, making financial advice more affordable and firms more profitable.
• Marketing: AI can be used to create written and visual content, target prospective clients and optimise digital advertising.
• Advice: AI can be harnessed to create a financial plan, statements of advice and deliver regular client reviews.
• Investments: AI tools can provide portfolio construction and management which spans investment research, investment selection and ongoing portfolio monitoring.

Improved personalisation

• Tailored solutions: AI can analyse individual client preferences, risk tolerance and financial goals to generate personalised advice.
• Dynamic adjustments: Machine learning algorithms can adapt to market conditions and client circumstances in real-time, flagging where and when a review of a client’s plan might be required.

Behavioural insights

• Investor behaviour: AI tools can assess client behaviour and spending patterns to offer proactive financial insights and strategies.

Enhanced risk management

• Fraud detection: AI systems can identify unusual patterns and flag potential fraud or security concerns.
• Portfolio optimisation: AI tools can help mitigate investment risk by balancing portfolios and forecasting market volatility.

Regulatory compliance

• Automated monitoring: AI tools can ensure compliance with regulations by identifying discrepancies and generating necessary reports.
• Audit trails: AI systems provide detailed records of decisions, aiding transparency and accountability.

Challenges integrating AI into the advice process

As with all new technologies, the advancements promised by the integration of AI come with challenges. As noted by ASIC, licensees and advisers using AI platforms could experience compliance issues and face regulatory consequences in the event of a breach.

While the use of AI in an advice practice can provide significant benefits to both the business and its clients, it can magnify existing risks and create new risks for both business and clients. As highlighted in the above quote from ASIC’s 2024 report, all entities who use AI have a responsibility to do so safely and ethically. When implementing AI solutions, licensees and advisers must ensure the outcome will uphold the twelve standards of the Financial Planners and Advisers Code of Ethics 2019 (Code) (figure one).

Generative AI models have certain characteristics that make them particularly prone to risks of harm. For example, they tend to use large amounts of data in the training of the model. The presence of incomplete data in training sets mean that models have the potential to provide biased or inappropriate results, can generate outputs that are false or inaccurate, can use complex techniques that are not easily interpretable or explainable, and can be subject to cyber-attacks.

Some of the challenges inherent in AI – and the Code’s standards they could potentially breach – are as follows.

Bias and fairness

AI systems, particularly generative AI, use a huge amount of data. Consequently, it can inherit or amplify biases present in the data used to ‘train’ the AI or create its algorithms. Algorithmic bias describes systematic and repeatable errors in a computer system that create unfair outcomes, such as privileging one category over another in ways different from the intended function of the algorithm^[2].

Because AI platforms will increasingly be used for roles traditionally undertaken by humans – such as assessing client risk profiles, recommending financial products or considering a client’s long term requirements – the question of best interests comes into play.

Bias in AI can lead to unfair outcomes, such as:

• Marginalisation of specific groups; for example, where data predominantly represents male clients, the AI might overlook or undervalue the needs of female clients.
• Privileging of other groups; for example, a greater focus on servicing clients in the accumulation rather than decumulation phase.
• Disproportionate or negative impacts on specific clients or groups of clients, such as a specific cohort being denied access to insurance or having to pay a higher price for it.

ASIC’s research found that few licensees proactively identified risks of algorithmic bias or indicated that they actively tested for bias in AI deployed in their business. However, licensees and advisers must ensure that their AI systems don’t unfairly discriminate against particular clients or client groups. To do so could breach the following standards:

Informed consent

AI systems can make decisions that impact individuals without their direct involvement or consent which can remove human agency. ASIC describes it as “a crucial compliance aspect that should not be ignored.” Further, ASIC is advising licensees and advisers that if AI is being used in an advice practice, explicit client consent is required. Clients need to understand how their data will be used and stored, and they should affirmatively acknowledge and consent to this.

A failure to obtain informed consent for the use of AI could breach the following standards:

Transparency and accountability

Many AI systems, particularly those based on deep machine learning, can make decisions in ways that are difficult to understand or explain to clients. This raises concerns about:

• Accountability – who is responsible for information generated or decisions made by AI? Clients need to understand this.
• Trust – clients may be uncomfortable with AI systems they don’t understand and that their adviser has trouble explaining.
• Transparency – clients must be informed when they are interacting with AI and AI generated information or AI has been used to make decisions that impact them.
• Incorrect information – AI models can provide information or advice that appears correct but contains factual errors and exposes clients to the risk of harm arising from relying upon misleading or false information.
• Contestability – clients need to be provided with a process and the necessary information to contest the outcome of a decision facilitated by AI. Contestability is undermined if clients are unaware that AI is being used.

Failing to be transparent and accountable could breach the following standards:

Privacy

AI often relies on vast amounts of data, including personal information, to function effectively. Consequently, the use of AI can lead to data breaches and unauthorised access, the use of personal data without informed consent and the erosion of privacy.

The use of AI in financial advice practices presents significant challenges related to privacy and data security. Financial advisers handle sensitive client information which makes practices attractive targets for cyberattacks. Because AI systems generally require access to large datasets to provide accurate and personalised advice, the risk of data breaches or unauthorised access is increased, particularly where robust security measures are not in place. Additionally, compliance with data protection regulations can be complex, especially when AI systems process and store data across multiple jurisdictions.

Under the Notifiable Data Breaches (NDB) scheme, a business must notify affected individuals and the Office of the Australian Information Commission^[3] when a data breach is likely to result in serious harm to an individual whose personal information is involved. A data breach occurs when your clients’ personal information is lost or subjected to unauthorised access or disclosure. ASIC advises that advisers using AI tools could face serious compliance issues if a breach occurs.

It is also important to understand and be transparent as to how AI algorithms handle client data; this is critical to maintain clients’ trust, as clients may fear misuse or exploitation of their information. Addressing these challenges requires a combination of advanced cybersecurity protocols, strict data governance policies and ongoing monitoring to safeguard both personal information (PI) and personally identifiable information (PII).

Although ASIC’s report found licensees generally had documented policies or procedures for managing risks relevant to those associated with privacy, security and data quality, most had not considered these risks through the lens of AI.

Inadequate management of client privacy could breach the following standards:

Regulatory obligations

ASIC observed instances where AI use cases could have potential implications for licensees’ compliance with existing conduct and consumer protection obligations. For example, customer segmentation by AI models in a marketing program could potentially identify prospective or existing clients not in a product’s target market and lead to breaches of the design and distribution obligations.

Failure to consider the impact on regulatory obligations is particularly a risk where decisions about AI models or use cases are made without input or oversight by risk and compliance functions. ASIC noted that the effectiveness of governance and risk management frameworks in relation to AI is a key factor in determining what risks a licensee’s AI use poses. The regulator also stated that licensees should regularly review and update their governance and risk management arrangements to ensure the arrangements do not fall behind their evolving AI use.

A failure to meet regulatory obligations could breach the following standards:

Strategies to ensure AI does not compromise ethical obligations for advisers

It is evident that the regulatory framework around AI in Australia is still evolving. The Australian government’s AI Ethics Principles outline a set of guidelines that aim to make certain AI systems are safe, fair and reliable (figure two).

In the absence of enforceable regulations specific to the use AI in the financial advice industry, advisers and licensees should proactively align with these principles and the Code of Ethics. This will enable the delivery of positive client outcomes and avoid the scrutiny of the regulator. Licensees and advisers using AI tools are best placed to uphold the Code of Ethics through adherence to best practice, which include:

Understand the AI tools and how they meet your needs

• Develop a strategy: It’s important not to implement AI tools just because you can; you should identify clear business objectives before you do your due diligence on the available tools.

• Due diligence: Fully understand how the AI tool works. This includes its inputs, outputs and decision-making processes. What data does it use and how is it protected?
• Limitations awareness: Recognise the limitations of each AI tool, including potential biases in data or algorithms. Have strategies in place to monitor and mitigate any limitations and the impact of those on both the business and clients.

• Audit AI providers: Ensure your AI tools meet global cybersecurity standards and review the providers’ policies on data storage and encryption protocols to verify their claims.

• Regular evaluation: Periodically review the AI tool’s performance to ensure it aligns with ethical and professional standards and ensures positive client outcomes.

Client-centric approach

• Prioritise client interests: Ensure the recommendations made by AI serve the best interests of the client, not the financial adviser, licensee or AI provider.
• Customisation: Avoid relying solely on generic AI outputs; tailor financial plans and financial product recommendations to the unique circumstances, needs and objectives of each client.
• Transparency: Clearly explain how AI tools are used in the planning process and obtain client consent before applying them.

Maintain human oversight

• Final responsibility: Advisers must always remain accountable for financial advice provided, even when it is informed by AI tools.
• Validation of outputs: Maintain a balance between AI automation and human judgment to verify and validate any recommendations made by AI tools before presenting them to clients.
• Ethical judgment: Use professional judgment to override AI recommendations when they conflict with ethical or fiduciary responsibilities.

Foster transparency and explainability

• Disclose AI usage: Inform clients when and where AI tools are used in the planning process and explain the role of each.
• Simplify explanations: Utilise AI to translate complex financial ideas and outputs into clear, understandable language for clients. Consider using AI tools to create visual explanations that may work better to educate some clients.
• Audit trail: Maintain detailed records of how AI tools were used in formulating financial advice.

Ensure data privacy and security

• Client consent: Obtain explicit consent before using client data in AI tools; clients need to understand how their data will be used and stored. They should affirmatively acknowledge and consent to this.

• Data governance: Implement robust data security protocols and ensure compliance with privacy regulations.

• Minimal data use: Use only the data necessary for the AI tool to function effectively and ethically.

Avoid conflicts of interest

• AI vendor independence: Ensure that any AI tool used in the practice is not biased toward promoting specific products or services due to financial arrangements between the vendor and licensee.
• Unbiased recommendations: Regularly audit the AI tool to ensure its outputs are impartial and unbiased.

Stay informed about ethical standards

• Ongoing education: Stay up to date with developments in AI ethics, data governance and financial regulations. It’s likely that more explicit regulatory requirements will be introduced as AI becomes more embedded in the advice process.
• Adopt industry best practices: Follow ethical guidelines and standards from professional bodies such as the FAAA or CFP Board.

Monitor and mitigate bias

• Diverse data sources: Use AI tools trained on diverse, representative datasets to reduce bias.
• Regular testing: Periodically test the AI tool for biases or inaccuracies and address them promptly.
• Inclusive practices: Ensure recommendations account for the diverse financial circumstances and backgrounds of clients.

Plan for errors and discrepancies

• Error handling: Have a process in place to address errors in AI outputs and mitigate their impact on clients.
• Communicate with clients: Be proactive in informing clients if an AI tool’s recommendation is found to be flawed.

Regulatory compliance

• Adhere to laws: Ensure the AI tools comply with all relevant financial regulations and ethical standards.
• Regular audits: Conduct periodic compliance audits of the AI tools to ensure accuracy and reliability, and confirm they meet legal and ethical requirements.
• Independent reviews: Engage third-party experts to evaluate the AI tools for alignment with ethical and regulatory standards.

The potential of AI is immense. However, without due diligence and safeguards, the risks can also be considerable. By combining AI’s capabilities with ethical diligence and professional judgment, financial advisers can enhance their practice while maintaining the trust, accountability and integrity important for an ethical approach to business.

Advisers who proactively align their practices with the highest ethical and compliance standards will not only protect themselves but also build a stronger, more trusted relationship with their clients – something AI, for all its power, cannot replicate.

As artificial intelligence continues to reshape the financial advice industry, advisers must strike a delicate balance between leveraging innovation and adhering to their ethical obligations. While AI tools can enhance decision-making, improve efficiency and deliver personalised insights, their use comes with inherent risks that must be carefully managed.

By prioritising transparency, accountability and fairness, financial advisers can integrate AI into their practices in ways that uphold their professional and ethical standards and safeguard client trust. This involves maintaining human oversight, ensuring data privacy and remaining vigilant against biases or conflicts of interest embedded in AI systems.

Ultimately, the ethical use of AI in financial advice is not just about compliance with regulations but also about fostering long-term relationships built on integrity and trust. By embracing a client-first approach and staying informed about the evolving AI landscape, financial advisers can harness the power of AI responsibly, ensuring its benefits serve both their practice and their clients effectively.

———-

Notes:
[1] Beware the gap: Governance arrangements in the face of AI innovation, ASIC, October 2024
[2] Ibid.
[3] https://www.oaic.gov.au/privacy/notifiable-data-breaches

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AFCA’s top 10 tips for advisers examined through the lens of the Code’s ethical standards.

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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What is the interplay between the Code of Ethics and advice given to clients in the establishment and operation of SMSFs?

At $3.9 trillion^[1], Australia’s superannuation sector is one of the world’s largest. Representing approximately 25 percent of this are SMSFs, which are subject to many rules and regulations. This article, proudly sponsored by GSFM, examines the growing SMSF sector and the ethical considerations relevant to advisers recommending SMSFs to their clients.

This year marks the 25th anniversary of self-managed super funds (SMSFs) in Australia. Over that time, SMSFs have broadened their appeal. In the early days, SMSFs were used by high net wealth investors, business owners and the self-employed; today they are just as likely to be established by non-business owning younger generations.

To illustrate, a 2019 report^[2] found that the average age of members establishing SMSFs was 48.9 years. By 2023, Generation X (ages 45-59) represented 53 percent of new fund establishments, with Millennials (aged 28-43) following at 24 percent. Another recent report^[3] also noted the propensity for younger Australians to take up SMSFs, with 48 percent of those surveyed aged 44 years or younger.

It’s not just the younger generations; more broadly, Australians’ interest in managing their own super continues to grow (figure one), despite the ongoing challenges of inflation, rates, market volatility and geopolitical uncertainty.

While the appeal to a broader cross section of investing Australians opens up a myriad of opportunities for advisers, it is important to remember that SMSFs are not appropriate for all investors and recommending an SMSF and advising its trustees requires that you meet regulatory obligations, including the Code of Ethics (Code).

Ethics and SMSFs

A self-managed superannuation fund (SMSF) is a privately run superannuation fund established for the sole purpose of providing retirement benefits to its members. An SMSF can have between one and six members, and – as any adviser who has worked with SMSFs knows all too well – are subject to numerous rules and regulations, subject to regular change.

ASIC Information Sheet 274 (INFO 274)^[4] provides guidance to Australian financial services (AFS) licensees and their representatives who provide personal advice to retail clients about SMSFs. INFO 274 provides tips to help advisers comply with their legal obligations when giving advice about SMSFs, including:

• Understanding obligations when giving SMSF advice
• Using professional judgement to assess whether an SMSF is appropriate for the client
• Consideration of the risks associated with an SMSF
• Consideration of the costs associated with running an SMSF
• Factors to consider when advising a client to withdraw their superannuation from a fund regulated by the Australian Prudential Regulation Authority (APRA) to set up an SMSF.

For each of the subject matter areas included in INFO 274, this article will review the recommendations through the lens of the Code and the 12 standards that comprise it (figure two).

ASIC has a specific role in regulating SMSFs. The regulator considers contraventions of the Corporations Act, the SIS Act and the ASIC Act, and is responsible for regulating the following harms:

• Dishonest conduct and fraud (section 1041G of the Corporations Act)
• Misleading and deceptive conduct (sections 769C, 1041E, 1041F and 1041H of the Corporations Act; sections 12DA–12DC, 12DF–12DG and 12BB of the ASIC Act)
• Unlicensed advice (section 911A of the Corporations Act)
• Contraventions of the relevant conduct and disclosure obligations, including the best interests duty and related obligations (sections 961B, 961G–961H and 961J of the Corporations Act)
• Contraventions of the Code of Ethics (section 921E of the Corporations Act), and
• Contraventions relating to SMSF auditors (sections 128D–128H and 130F of the SIS Act).

Understand obligations when giving SMSF advice

Any adviser providing SMSF advice to their clients must comply with numerous laws, including:

• The conduct and disclosure obligations in Parts 7.7 and 7.7A of the Corporations Act 2001 (Corporations Act)
• The Financial Planners and Advisers Code of Ethics
• The Superannuation Industry (Supervision) Act 1993 (SIS Act).

Importantly, when providing personal advice to clients – including advice about establishing and managing an SMSF – advice providers must meet the best interests duty and related obligations:

• Act in the best interests of the client (section 961B)
• Provide appropriate personal advice (section 961G)
• Warn the client if advice is based on incomplete or inaccurate information (section 961H)
• Prioritise the interests of the client (section 961J).

The first standard of the Code requires advisers to comply with all relevant laws including the Code. While acting in accordance with all laws applies to all areas of financial advice, there are additional regulations specific to SMSFs that advisers must comply with.

ASIC also has requirements of AFS licensees. The regulator expects licensees to consider how their compliance processes and systems are relevant to providing personal advice about SMSFs, including in complying with:

• General obligations under section 912A of the Corporations Act
• Other obligations under section 961K or 961L of the Corporations Act.

ASIC also expects AFS licensees to ensure compliance processes and systems detect and address:

• Potential dishonest conduct and fraud or misleading and deceptive conduct
• The risk of providing unlicensed advice, including whether authorised representatives act outside the scope of the AFS licence authorisations or conditions.

Use professional judgement to assess suitability of SMSF

When determining whether an SMSF is appropriate or not for a client, you need to consider the client’s existing super fund/s and whether that or other retail or industry super funds may be better placed to meet their long term retirement funding goals.

You need to consider your client’s relevant circumstances and be sure that your client understands the implications of your SMSF advice recommendations. Establishing an SMSF may have serious consequences for your client, their retirement savings as well as their insurance cover. When providing clients with SMSF advice you should consider a range of factors, including the following:

What types of professional advice are appropriate?

Clients considering the suitability of an SMSF may benefit from advice from various professionals. When referring clients to SMSF specialists, it is important to comply with standard three and avoid any conflicts of interest that could arise as a result of the referral.

When referring to a third party SMSF professional, compliance with standard seven requires that you do not derive any benefits from that referral.

Providing personal advice to clients about SMSFs requires specialist knowledge. Before providing SMSF advice it’s important that you have and maintain SMSF knowledge and expertise, as required by standards nine and ten.

 Is an SMSF suitable for your client?

Before your client transfers their retirement savings from an APRA-regulated superannuation fund to an SMSF, you must ascertain that the SMSF is the right retirement savings vehicle for that client based on their circumstances.

By doing this, you will ensure that you meet the requirements of standards two, five and six:

• to ensure the SMSF is in your client’s best interests
• that you have reasonable grounds to be satisfied your client understands your advice, the benefits and risks of using an SMSF and the costs
• in making the recommendation to establish an SMSF, you have taken into account the client’s longer-term interests and likely circumstances.

Suitability is important for many reasons, not least because without it, you would not be acting in the client’s best interests. As well as being in breach of the Corporations Act (and therefore standard one), acting in a client’s best interests is explicit in standards two and five, as well as implicit in a number of other standards in the Code.

ASIC provides the following as factors to consider when determining the suitability of an SMSF for your client:

• Your client must understand and accept that although they may outsource their SMSF responsibilities to professional advisers (such as accountants or audit specialists), as the SMSF trustee your client is responsible for ensuring compliance with superannuation, corporations and tax laws
• Your client must have the time, skills, general interest, and experience to meet their trustee responsibilities
• The cost-effectiveness of an SMSF considering your client’s existing arrangements, relevant circumstances and other SMSF members
• Any relevant vulnerabilities your client may be experiencing, such as cognitive impairment, accessibility constraints or coercion/elder abuse
• Other arrangements that may provide some of the benefits of an SMSF, such as ‘a member directed investment facility’ within an APRA-regulated superannuation fund.

Finally, you must be satisfied that your client understands the advice, as well as the benefits, costs and risks of establishing and running an SMSF, and you must have reasonable grounds to be satisfied.

An area of concern for ASIC is where an SMSF has been recommended to a client and there’s been no consideration of whether the client has the time, skills and knowledge to operate an SMSF, or whether they are able to appropriately develop their skills and knowledge to operate an SMSF.

SMSF versus an APRA-regulated superannuation fund

ASIC requires you to consider whether your client understands and accepts the risks and differences of an SMSF when compared to an APRA-regulated fund. As well as helping meet the best interests duty and related standards, this will ensure you meet standard four – without an understanding of the differences between an SMSF and APRA regulated fund, as well as the somewhat onerous obligations of SMSF trustees, it could be argued that informed consent was not obtained.

When comparing an SMSF and an APRA-regulated fund, there are numerous differences that clients need to be aware of and understand. This needs to occur prior to the establishment of an SMSF.

Prior to the establishment of an SMSF, you need to ensure that your client understands their obligations as an SMSF trustee and the penalties that can apply for non-compliance. For example, a failure to follow SMSF regulations can result in your client breaching one or more of the myriad of requirements set down by the ATO. A failure to ensure your client is fully informed could result in a breach of standard six, that you fail to consider the client’s broader, long-term interests.

Some of the differences between SMSFs and APRA-regulated funds that you should discuss with clients include:

Protections in the event of theft or fraud

• Access to statutory compensation will differ; an SMSF does not have the same protections as an APRA-regulated fund and is not eligible for government compensation.
• While the client may have legal options in the event of theft or fraud, there is no certainty that compensation will be awarded. However, members of APRA-regulated funds are generally eligible for compensation in the event of theft or fraud.

Trustee complaints and resolution

• SMSF trustees (and members) may be required to resolve their own complaints.
• Clients should be aware of situations where disputes may arise, including:
  • in the event of trustee relationship breakdown
  • where member death benefits must be paid
  • if a trustee/s considers that they have received unsuitable professional advice.
• Access to AFCA is only available to SMSF investors in certain circumstances, such as if they received advice from a licensed financial adviser and their complaint relates to the financial advice about the suitability of an SMSF, the SMSF investments or insurance products.

Client’s legal responsibilities as trustee

• You must be confident your client understands and accepts that as trustee, they are personally responsible for running their SMSF according to its trust deed and must ensure the fund complies with superannuation, corporations and tax laws.
• Your client must understand that:
  • while trustees can use professionals or rely on other trustees to help run their SMSF, responsibility for SMSF compliance remains with the trustees
  • all trustees share responsibility equally
  • SMSFs are regulated by the ATO
  • professionals who provide tax agent services must be on the Tax Practitioners Board register
  • SMSF auditors must be registered with ASIC as an ‘approved SMSF auditor’ on the SMSF auditor register before they can sign off on SMSF audit reports
  • all financial advisers who provide personal advice on SMSFs must be licensed by an AFS licence and registered with ASIC.
• Clients need to understand that a failure to comply with their obligations under superannuation and taxation laws can have significant consequences, such as the loss of tax concessions. All trustees are equally required to comply with trustee responsibilities and obligations and are liable for the actions of other trustees.

Your clients also need to be aware of the penalties they can face for non-compliance with superannuation, corporations or tax laws, including:

1. Tax consequences, such as their SMSF losing its concessional tax treatment.
2. Being disqualified from their role as trustee – this means they can no longer be members of the SMSF, and they are unable to start a new one.
3. Civil or criminal penalties, depending on the seriousness of the breach.

The ATO can disqualify an SMSF trustee, or director of a corporate trustee, if:

• The trustee has contravened the rules.
• The ATO considers the trustee not to be a ‘fit and proper’ person for the role, having regard to the trustee’s personal character and circumstances.

SMSF costs

It is crucial that your client understands the costs of an SMSF throughout its lifecycle. These costs will vary based on your client’s relevant circumstances; examples are set out in figure three.

The second part of standard five requires you to be satisfied that your client understands the costs, risks and benefits associated with your advice. With an SMSF, there can be a cost-benefit trade-off between the time taken to appropriately administer the SMSF versus the expected returns and benefits. To comply with this standard, you need to have reasonable grounds to be satisfied with respect to this cost-benefit trade off.

The starting balance of an SMSF is one of several factors you should consider when recommending an SMSF, as this is relevant to its cost-effectiveness (and compliance with standard five). Statistical data^[5] shows that fund expenses are proportionally higher, and net returns lower, for lower balance funds.

However, it’s important to note that there may be circumstances when an SMSF with a higher starting balance is not in your client’s best interests. This may be because it does not meet your client’s objectives, financial situation or needs, or requires time and/or knowledge that the client does not have.

Neither situation would be in the client’s best interest and a potential breach of standards two and five.

Suitable trustee structure

Appropriate advice that’s in your client’s best interests should include discussion about the trustee structure most suitable for their circumstances. Selecting the most appropriate structure – a corporate or individual trustee structure – can have tax and succession planning implications for clients. It can be costly to change structures, ownership of assets and trustees once the SMSF has been established.

ASIC takes a keen interest in whether clients have been adequately advised about SMSF structures and are likely to be concerned where:

• there’s no evidence the advice considered the appropriateness of the SMSF structure
• the client has been directed to a particular SMSF structure without consideration of its appropriateness.

This should include providing your client with a comparison of the risks and benefits of each structure; this will demonstrate compliance with a number of ethical standards, including those related to best interests (two and five), consideration of the client’s long term outlook (six) and competent advice (nine).

Factors to consider during the client discussion about a suitable trustee structure may include:

• cost, including the potential cost of changing the trustee structure in the future
• compliance with the SMSF trust deed, superannuation, corporations and taxation laws, the company’s constitution and the Corporations Act
• administration and reporting requirements
• trustee succession planning
• SMSF asset ownership considerations.

Trustee succession planning and exit strategy should be considered at establishment; this can help to reduce the impact of ‘unexpected’ events. They also need to understand the steps required to wind up an SMSF. This is relevant to standard six of the Code.

It can be helpful for clients to understand the reasons why they may need to wind up their SMSF, which can include:

• the SMSF proves not to be cost-effective
• trustee responsibilities become too onerous or too costly
• a trustee dies or becomes incapacitated
• disputes between trustees.

The investment strategy

SMSF trustees must develop an investment strategy to provide the basis for the SMSF’s investment decisions and ensure the SMSF is likely to meet members’ retirement needs. The trustees are responsible for their fund’s investment strategy and make all investment decisions, even if those decisions are premised on advice from professionals.

An SMSF can have a maximum of six members, which can limit the number or types of assets the fund can invest in. For example, a public super fund with hundreds of members has the scale to invest in private equity or direct infrastructure, investments that generally require significant investment capital to access.

It is important for your client to understand:

• they must have an investment strategy before they make any investments
• the investment strategy must be reviewed regularly
• they should consider whether to hold insurance cover
• the investment strategy should be in writing and all changes must be documented.

While you can assist your client to develop appropriate investment objectives and investment strategy for their SMSF, the client must understand that as trustee, they are responsible for managing the investments in the best financial interests of the SMSF members and in accordance with the law.

When documenting the SMSF’s investment strategy, the following points should be considered and discussed with your client:

• the fund’s investment objectives
• investment strategy and whether it is consistent with the trust deed
• members’ risk tolerance
• the types of investments the fund can make, including the likely risk/return profile of these investments
• implementation of investment decisions
• diversification
• death benefit nominations
• liquidity requirements to meet fund expenses, including retirement benefits.

ASIC’s guidance notes the importance to adequately consider and inform your clients about:

• the benefits associated with diversification
• the restrictions that apply to SMSF investments
• whether to hold insurance cover
• prohibited transactions, including lending the fund’s money or providing financial assistance to a member of the fund or their relatives.

Importantly, you ought to ensure your clients understand the costs associated with implementing your SMSF advice recommendations, including ongoing fees. As well as best practice, standard five explicitly requires you to be satisfied your client understands the costs associated with your advice.

In an audit situation, ASIC is likely to examine the advice clients receive about their SMSF investment strategy and whether this advice was appropriate to the clients’ risk appetite and investment goals.

A failure to provide appropriate advice about the SMSF’s investment strategy will likely breach a number of ethical standards including: a failure to meet best interests (standards two and five), the broad, long-term effects of the client acting on your advice (standard six) and financial product advice must be offered in good faith and with competence (standard nine).

Death benefit nomination

It is important to ensure your client has a valid death benefit nomination in place and that they understand the implications of not having a valid death benefit nomination in place. The death benefit nomination should be reviewed regularly, particularly where the client’s circumstances change.

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 or AFCA and for each, potential breaches of the Code of Ethics are identified.

Case study one: Inappropriate SMSF establishment

Betty and Paul complained to AFCA in their personal capacities and on behalf of the corporate trustee of a self-managed superannuation fund. The complainants had been referred to Sam, an authorised representative of ACME SMSFs in 2019. Betty and Paul complained that the advice they received to establish an SMSF and use it as a vehicle to make a geared investment in a residential property was not in their best interests and inappropriate. The complainants want to be compensated for $205,050 for the losses related to the SMSF to resolve this case.

However, ACME SMSFs denies responsibility for the claimed losses as its representative Sam did not make a specific property recommendation.  It also claims:

• the advice was in the complainant’s best interests and was appropriate
• Betty and Paul would have proceeded with the geared property investment strategy in any event.

AFCA determined that ACME SMSFs did not demonstrate that the advice to establish an SMSF and a property investment strategy was in the best interests of the complainants, as objectives and financial goals were inadequately investigated. Because the SMSF establishment was the core element of Sam’s advice, AFCA determined the advice fees should be refunded.

However, Betty and Paul were unable to establish that they would not have proceeded with the property investment irrespective of the establishment of the SMSF. Sam’s notes recorded that the couple articulated their wish to make this investment, hence his recommendation to establish the SMSF.

Accordingly, AFCA’s recommendation took the view that the complainants should be compensated $22,816.55, representing the advice fees paid by the SMSF between the 2019 SOA and the end of the advice relationship in 2023. However, the other aspects of the 2019 SOA were deemed to be appropriate and therefore no other refund or compensation was required.

From the details provided in the case study, Sam and ACME SMSFs potentially breached the following standards in the Code of Ethics.

Case study two: Inappropriate SMSF advice

The complainants, Melissa and Craig, lodged a complaint with AFCA both personally and as directors of the corporate trustee of their SMSF. Melissa and Craig received personal financial advice from Amber, an authorised representative of ACME Advice. The complainants made the following claims:

• Amber’s advice to establish a SMSF, roll over their superannuation balances from regulated superannuation funds into the SMSF, and enter into a limited recourse borrowing arrangement (LRBA), was inappropriate and not in their best interests
• Amber is responsible for Craig overpaying insurance premiums
• Amber is responsible for the complainants’ overpaying ongoing advice fees
• Amber is responsible for the complainants’ SMSF closure fees.

Melissa and Craig are seeking compensation from ACME Advice for their total losses of $343,911.88.

AFCA’s investigation found that the personal financial advice providing by Amber to the complainants was not appropriate and not in their best interests. The limited personal financial advice she later provided to the complainants was also found not appropriate, not sufficient and not in the complainants’ best interests. Further, AFCA determined that it was inappropriate for Amber not to reconsider the complainants’ circumstances at the time of the SMSF’s proposed property purchase (at the time the limited personal financial advice was provided). Finally, AFCA was satisfied that Amber’s failure to update Craig’s insurance details meant he overpaid insurance premiums.

In summarising its findings, AFCA noted the best interests’ duty is the obligation imposed on financial firms and their advisers to act in the best interests of a client when providing personal financial advice. The principle guiding the application of the best interests’ obligation is that meeting the objectives, financial situation and needs of the client must be the paramount consideration when providing advice. ​Clients seeking financial advice expect their adviser will act in their best interests and that, as a result, the advice provided will leave them in a better position. Section 916G says the provider must only provide the advice to the client if it would be reasonable to conclude that the resulting advice is appropriate to the client, assuming the provider satisfied the best interests duty.

AFCA’s findings included:

• Melissa and Craig had insufficient funds to warrant the establishment of an SMSF
• Melissa and Craig did not understand the establishment and ongoing costs of an SMSF
• the complainants did not have financial capacity to meet the competing financial goals established by the SOA
• Melissa and Craig did not understand the complexities and costs associated with purchasing a property and using limited recourse borrowing within an SMSF
• the recommended asset allocation was inappropriate
• the complainants were not suitable to be directors of the SMSF corporate trustee.

From the details provided in the case study, Amber potentially breached the following standards in the Code of Ethics.

Case study three: Failure to prioritise clients’ best interests

Paul referred a number of his clients to an SMSF administration business to facilitate the establishment of an SMSF without providing any advice or ascertaining their suitability or capability to act as trustees. Paul then advised those clients to rollover their existing APRA-regulated super funds into their recently established SMSFs.

An ASIC investigation found that Paul failed to prioritise his clients’ interests and failed to act in the best interests of his clients because he:

• provided cookie cutter advice – he failed to provide personalised advice that was consistent with his clients’ circumstances, objectives and the subject matter of the advice sought by his clients
• failed to make reasonable inquiries to obtain complete and accurate information about his clients’ relevant circumstances
• focused the advice to his clients on rolling over to SMSFs without adequately considering alternative options, such as whether his clients would be better off retaining their existing APRA-regulated super funds
• failed to adequately consider and provide information about the risks, costs and obligations of taking on the role of SMSF trustee
• was told by his licensee that he did not have the required expertise to advise on SMSFs generally, but still proceeded to provide SMSF advice to his clients.

Consequently, ASIC banned Paul from providing financial services for seven years. From the details provided in the case study, Paul potentially breached the following standards in the Code of Ethics.

It’s anticipated that more than five million Australian baby boomers will retire over the next decade.  The importance of robust retirement planning has never been more critical. While SMSFs can be a powerful tool for individuals who seek greater control over their retirement savings and investment choices, the associated time, cost, and expertise required to manage such a fund can often outweigh the perceived benefits.

The regulatory obligations tied to SMSFs impose significant responsibilities and liabilities on trustees, which may not be suitable for everyone. This complexity can make SMSFs a less viable option for individuals without the necessary financial knowledge or the capacity to dedicate substantial time to compliance and ongoing management.

For financial advisers, recommending the establishment of an SMSF requires a deep understanding of the client’s unique circumstances, financial situation, long-term goals and risk tolerance. It’s essential to thoroughly assess whether the flexibility and control of an SMSF truly align with the client’s best interests, both today and into their retirement years.

Ultimately, the decision to establish an SMSF should not be taken lightly. It is not a one-size-fits-all solution, and what may work for one individual could be unsuitable for another. The role of professional advice is paramount in ensuring that clients are fully informed about the responsibilities, risks, and potential rewards associated with managing their own superannuation. In the end, the focus should always be on delivering a tailored retirement strategy that safeguards the client’s financial wellbeing, ensuring they are positioned to enjoy a secure and comfortable retirement.

———

Notes:
[1] APRA, Quarterly Superannuation Statistics Report, June 2024
[2] Class, Quarterly Benchmark Report, March 2019
[3] Stake, The Ambition Report, 2024
[4] https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/tips-for-giving-self-managed-superannuation-fund-advice/
[5] https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics

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What is the intersection between meeting clients’ best interests obligations and running an ethical advice practice?

When providing financial advice, acting in a client’s best interests isn’t just a regulatory requirement, it is the cornerstone of a trusting and successful advisory relationship. This article, proudly sponsored by GSFM, examines the strong links between clients’ best interests and running an ethical advice practice.

Consumers seek financial guidance from professional financial advisers to navigate complex decisions that can significantly impact their ability to meet their shorter and longer term financial and lifestyle goals. They rely on the expertise and integrity of their advisers to provide advice that aligns with their unique objectives, values and circumstances, and establishes them to thrive in future years. Prioritising each client’s best interests builds trust, fosters long-term relationships and enhances the adviser’s reputation. In an industry where trust and confidence are crucial, putting clients first is not only the ethical thing to do but also the foundation for client satisfaction and sustainable business growth.

The best interests duty, as defined by the Australian Corporations Act 2001, requires financial advisers to act in the best interests of their clients when providing personal financial advice. This duty is enshrined in Section 961B of the Act and requires that advisers must take reasonable steps to ensure that the advice they provide is appropriate to the client’s individual circumstances, including their financial situation, needs, and objectives.

The best interests duty is designed to ensure that financial advisers provide advice that is objective, unbiased and is tailored to the client’s needs. This fosters trust and confidence in the financial advisory industry and is of critical importance in the regulatory framework that governs the delivery of financial advice.

Best interests obligations

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.”

In financial planning, it can be distilled into acting in the client’s best interests at all times, acting with competence, honesty, integrity and fairness. In summary, the way any one of us would expect to be treated by a professional service provider.

The Future of Financial Advice Reforms (FOFA) introduced an amendment to the Corporations Act 2001, one which enshrined the best interest duty into law. It was an extension of the existing fiduciary duty owed to clients by financial advisers, 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.

This amendment included that the ultimate responsibility for complying with the duty to act in the client’s best interests falls to the licensee, who will be financially responsible for any breaches. Individual authorised representatives of that licensee may be subject to administrative penalties, such as banning and disqualification orders.

Section 961B of the Corporations Act 2001 (as amended) lists the steps an adviser must take 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 be made if gaps or inconsistencies are apparent.
5. To assess whether you have the expertise required to provide the client advice on the subject matter sought and, if not, declined 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 last catch-all statement that encapsulates the spirit of the legislation; regardless 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 obligations under section 961B of the Corporations Act 2001, is indisputably 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 of standards in the Financial Planners and Advisers Code of Ethics (Code) notably:

Best interests and the ethical practice

In any profession, most people set out to act ethically. And while ethical practice is not always black and white, putting the client first and acting in their best interests is generally clear cut.

The best interests duty is a fundamental ethical obligation for financial advisers and is enshrined in the Code of Ethics (figure one). It requires advisers to prioritise their clients’ needs and interests above their own or those of their practice or licensee. This duty ensures that any advice given is appropriate, tailored to the client’s financial situation, goals, preferences, and is devoid of conflicts of interest.

Acting in the best interests of clients is a cornerstone of ethical financial advice. This legal requirement ensures that financial advisers prioritise the needs and goals of their clients above all else when providing advice. Financial decisions often have long-term impacts on individuals’ lives, so clients rely on their advisers to provide guidance that genuinely benefits their financial wellbeing.

The importance of the best interests duty also extends to protecting clients from conflicts of interest and potential exploitation. The obligation to act in the client’s best interests ensures that recommendations are made based solely on what is most appropriate for the client’s situation. This protection fosters confidence in the financial advice industry and ensures that clients can make informed decisions based on unbiased recommendations.

Acting ethically and in every client’s best interests strengthens the integrity of the financial services industry as a whole. When advisers consistently put their clients’ interests first, it reduces the risk of misconduct and enhances the reputation of the profession. It also ensures that the advice provided is aligned with broader regulatory goals of consumer protection, fairness and transparency.

Simply, acting in clients’ best interests means being transparent, honest and diligent in all interactions with clients, thoroughly understanding their circumstances and recommending strategies and where appropriate, financial products, that genuinely benefit them. It also involves advisers continuously educating themselves to provide competent advice and adhering to regulatory standards and professional guidelines.

While enshrined in law and in the Code of Ethics, there are actions all advisers can take to support practice-wide ethical behaviour, maintain a strong ethical business culture and ensure client’s best interests always come first. These include:

1. Establish a practice-wide code of conduct, one which encapsulates your business’s values and the Code of Ethics. Your code of conduct should set clear expectations about your employees’ behaviour when carrying out their duties, including a focus on putting each client’s best interests first, always. You need to ensure all staff understand each of the twelve standards in the Code of Ethics and how each standard may specifically intersect their role – and how each may affect the way they put their clients’ interests first.
2. Lead by example. Employees will look to the key individuals in the practice to understand what conduct is and isn’t acceptable. Senior advisers and personnel will set the tone for ethics in the practice; accordingly, they need to demonstrate your business’s code of conduct in all they say and do. When the team sees you putting your clients’ best interests first, they are more likely to do the same.
3. Workplace training is a positive way to ensure all staff understand both the practice’s values and the obligations of the Code. Provide regular training sessions on ethical behaviour, regulatory compliance, conflict of interest and integrity. Training should cover both theoretical aspects and practical, real-world scenarios. The use of case studies to discuss scenarios where a client’s best interests may be compromised reinforce the practice’s standards of conduct and clarify behaviours and practices that do and don’t work within your code of conduct. Workshops and role-playing exercises can be used to simulate situations where ethical dilemmas may arise and guide employees on how to resolve them according to the Code of Ethics. Training could also be incorporated as part of regular team meeting and incorporate a variety of case studies that could address common issues that arise across the financial planning industry. The AFCA website^[2] is a good source of cases and decisions made by AFCA to form the basis of discussion. You can search specifically for decisions related to failing to act in a client’s best interests, as well as other issues not aligned with ethical behaviour. It’s important that ethics training is not a one off; ideally, training should teach team members to make good decisions that are compliant with the law and consistent with your practice’s values.
4. Ethical behaviour should be a key performance indicator (KPI); by reinforcing and potentially rewarding staff for embodying your values, adhering to your practice’s code of conduct and behaving in a way that makes ethical behaviour central to their work will create an ethical practice. Although a values driven KPI can be harder to quantify than one with specific and measurable outcomes, it will highlight to staff the importance of values and ethics to your business.
5. Ensure clear communication channels within your practice. Encourage open dialogue to create a culture of transparency where employees can discuss ethical concerns without fear of retaliation. Create regular feedback loops, whereby employees provide honest feedback about the processes, conversations and client interactions to ensure you are aware of all issues as they arise. Surprises can potentially compromise your business. Bringing your peers on the ethical journey is important. The licensee and adviser will carry the responsibility of any breach of the Code, but by implementing strategies such as those outlined above can help mitigate the risk of a breaching ethical standards.
6. Enforce a zero-tolerance policy for ethical violations to demonstrate they are taken seriously. Consider relevant disciplinary actions for employees who engage in unethical behaviour and apply it consistently across all levels of the practice to maintain credibility and fairness.

By fostering a culture of integrity, education, transparency, and accountability, you can create an environment where all colleagues are aligned with the ethical standards needed to run a successful and trustworthy financial advice business, one where each and every client’s best interests always come first.

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 or AFCA (or its predecessor organisation). For each, potential breaches of the Code of Ethics are identified. These case studies represent examples of those that would be of value for the business to discuss as part of its workplace training.

Case study one: Failure to act in clients’ best interests #1

The complainants are corporate trustees of a self-managed superannuation fund (SMSF), directors Joan and Peter. The couple sought and received personal advice from the financial firm ACME Super. They were a client of ACME Super from March 2011 to January 2022, during which time the couple received advice on managing the SMSF’s investments.

Joan and Peter claimed that ACME Super’s advice was not appropriate because the financial firm was conflicted in making its investment recommendations; the SMSF has suffered significant losses as a result.

An AFCA investigation found that ACME Super did not provide appropriate advice, nor did it act in the complainant’s best interests. Further, the firm:

• failed to provide advice within the risk parameters it set
• failed to diversify the portfolio’s “growth” assets, with the portfolio too heavily weighted towards property
• recommended an overly high proportion of related entity investments without justification.

Further, ACME Super failed to establish that it prioritised the complainant’s interests over its own. The proportion of related entity investments compared to non-related entity investments was excessive. These related entity investments recommended by the firm carried more risk than the complainant understood or needed. Finally, the fees were also excessive when compared to alternative investment products.

AFCA found that the financial firm’s failure to provide appropriate advice and act in the complainant’s best interests resulted in Joan and Peter’s SMSF being $875,435 worse off.

Accordingly, AFCA’s determination was that in the circumstances, ACME Super should compensate the complainants for the losses incurred because of its advisers’ inappropriate advice and was required to pay them $542,500 in compensation, plus interest. Note: this reparation represents the maximum AFCA can award for this complaint.

It was noted in the determination that ACME Super failed to act in the best interests of their clients and breached the following sections of the Corporations Act 2001 – 961B(1) best interests duty; 961B(2) failure to demonstrate best interests by following ‘safe harbour’ steps; 961G that it would be reasonable to conclude that the advice is appropriate to the client had the provider satisfied the best interests duty.

The adviser and ACME Super potentially breached the following standards in the code.

Case study two: Failure to act in clients’ best interests #2

Following several client complaints, ASIC commenced an investigation into adviser Michelle, an authorised representative of ACME Financial Advice. An ASIC investigation found Michelle had breached her best interests obligations by providing clients with inappropriate advice and failing to put her clients’ interests first.

Michelle’s case was heard in the Federal Court, where it was found that ACME Financial Advice failed to take reasonable steps to ensure that Michelle provided appropriate advice to clients, acted in the clients’ best interests and put the clients’ interests ahead of her own. The Court found ACME Financial Advice did not have adequate processes to monitor the advice provided by their authorised representative. They could not identify when these advisers avoided advice quality checks or recommended non-approved financial products. The Court described these as ‘serious flaws’ that should have been apparent to the licensee.

Commenting on the case, an ASIC representative stated: ‘Financial advice licensees need to understand that they can be liable if their advisers do not act in the best interests of their clients and do not prioritise their clients’ interests over their own.’

In this case, the licensee ACME Financial Advice was potentially in breach of the following FASEA standards:

Case study three – inappropriate trading of client MDA

Linda and Terry had been clients of ACME Advice for 15 years. They are in their late 50s, both work, and had planned their retirement for when Terry reached age 65 and Linda age 63. In 2019, their adviser retired and was replaced by Finn, a new graduate with an impressive set of academic qualifications.

Linda and Terry were advised to establish a Managed Discretionary Account (MDA) for their investments. Finn explained the benefits of an MDA to their financial situation and life stage, and they agreed to take his advice.

Over the following years, they witnessed periods of market volatility but were not too concerned. Although they had a significant equity portfolio, they were prepared to wear a high degree of risk and were confident their equity portfolio would gain ground before they retired. However, they kept an eye on it and were in regular telephone and email contact with Finn.

During a period of sustained market volatility and portfolio drawdowns, Terry expressed mild concern that the portfolio might not recover before they retired and needed to draw on the capital.

Several days later, Terry looked at the account and saw some trades – and a significant deficit – that concerned him. In an attempt to build up the portfolio, without consulting with his clients, licensee or fellow advisers, Finn conducted trades in breach of the MDA’s investment policy, namely:

• trades in naked options (naked trades); and
• trades which exceed 5% of the complainant’s trading capital in any one trade (excess capital trades).

The excess capital trades caused a portfolio loss of $127,000. The portfolio also suffered a loss of $53,000 because of the trades in naked options.

Linda and Terry stated they would not have approved the investment strategy implemented by Finn. From the details provided in the case study, Finn potentially breached the following of the Code’s standards.

Case study four: Referral fees

Paul and Luke had been to school together and then attended the same NSW university. Paul completed a Financial Planning degree and became an authorised representative of ACME Financial Advice. Luke studied business and decided to move into insurance broking. Once Paul and Luke completed their respective degrees, they decided to set up business together and benefit from the synergies of financial advice and insurance.

The two worked from the same office in Sydney’s eastern suburbs but operated completely separate businesses. Paul’s business was fee for service, whereas Luke was compensated by upfront and ongoing commissions from the insurance companies with which he wrote business. Both operated within the bounds of the respective laws governing their professions.

Both Paul and Luke were believers in the value of advice and the importance of adequate insurance cover and as such, had an arrangement whereby they would refer clients to one another. They decided such referrals would attract a scaled fee, based on the estimated worth of each individual client over a forward ten year period. Low value clients would be referred at a basic fee of $100 and this fee would scale up to $1,000 for a higher value client.

Paul and Luke each saw an increase in clients – and revenue – as a result of this arrangement. Paul spent more time talking to his clients about the importance of a range of insurance policies, making Luke’s job much easier; it tended to result in clients being more open to a broader range of insurance policies which, in turn, meant more commission for Luke and a higher referral fee for Paul.

While both parties were providing advice and financial product recommendations that were in their client’s best interests, referral paperwork was not updated to include the fee, and clients were not informed verbally. As a result, Paul – bound by the Code of Ethics – potentially breached the following standards.

Acting in a client’s best interests is the cornerstone of any ethical financial advice practice. It fosters trust, builds long-lasting relationships and safeguards the integrity of the profession. An ethical approach ensures that clients are empowered to make informed financial decisions, which ultimately leads to sustainable success for both the client and the business. In a competitive industry, placing client interests first sets ethical financial advisers apart and solidifies their reputation as trusted professionals.

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Notes:
[1] http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s961b.html
[2] https://my.afca.org.au/searchpublisheddecisions/

The post Client first – ethics and best interests appeared first on AdviserVoice.

Although financial advisers can outsource some of their business processes or refer their clients to other specialist practitioners, they cannot outsource or refer their ethical obligations.

Most financial advice practices have referral partners they send business to or receive business from. You may also use a number of third party outsource providers for non-client facing elements of your service offering. This article, proudly sponsored by GSFM, examines your obligations with respect to managing those relationships and upholding the Code of Ethics.

Ethics and trust are deeply interconnected, each strengthening the other. When one is enhanced, the other naturally improves…but when one is compromised, so is the other.

A key component of creating a thriving financial advisory business is to establish a strong client base and earn the trust of each client. After all, people are less likely to share their personal financial information or depend on someone to act in their best interests if they don’t trust them. Trust should be the foundation of every client relationship. While it takes time to build, trust can be shattered in an instant.

Building trust

Trustworthiness is one of the five values that underpin the Code of Ethics and its twelve ethical standards. The legislative instrument defines trustworthiness as follows^[1]:

Acting to demonstrate, realise and promote the value of trustworthiness requires that you act in good faith in your relationships with other people. Trust is earned by good conduct. It is easily broken by unethical conduct. Trust requires you act with integrity and honesty in all your professional dealings, and these values are interrelated.

Acting ethically, with trustworthiness, promotes trust in the profession of financial advice by consumers, enabling the community to feel confidence in accessing and utilising professional financial services.

There are a number of models that examine the attributes that create a trust relationship. One of these models^[2] discusses four elements – or the four Cs – of trust. These are:

• Competency: your client trusts you to provide your advice in the right way to help them achieve their long-term goals.
• Consistency: your client trusts you to provide appropriate advice over time.
• Character (Integrity): you client trusts you to do the right thing and act in their best interests at all times.
• Compassion: your client trusts you to do the right thing for them because you care about them, you value your relationship and want to nurture it over the long term.

This model suggests that trust is dependent on the way humans behave, individually and collectively.

A second trust model, the Integrative Model of Organisational Trust, was designed by Roger Mayer, professor of leadership. It identifies three pillars of trust in business and everyday life: these are benevolence, integrity and competence (figure one). This model can assist advisers to understand how to build trust with their clients and, in the case where trust has been broken, it can also help to rebuild trust. Any rebuild will, of course, take longer to than the original establishment of the trust relationship.

The Integrative Model of Organisational Trust postulates that trust is comprised of three key components, each of which is:

• relevant to the delivery of finance advice
• relates to one or more of the core values that underpin the Code of Ethics
• relates to one of more of the twelve standards that comprise the Code of Ethics.

Capability

Do you have the skills, competencies, and other relevant abilities to deliver quality advice to your clients? Does this extend to your staff and beyond? Do your referral partners have the essential capabilities in their field of expertise? Likewise, does each outsource partner have the appropriate capabilities to meet your clients’ needs, rather than simply providing a cheaper option? After all, you won’t be measured solely on your personal capabilities, you’ll be judged on the sum of the parts.

Competence is one of the core values that underpins the Code of Ethics. The legislation describes this value as:

Acting to demonstrate, realise and promote the value of competence requires you to have regard to the knowledge, skills and experience necessary to perform your professional obligations to each of your clients. It requires you to assess the professional services required by each client with regard to their individual needs, priorities, circumstances and preferences, expressed or implicitly identified as the subject matter of the financial advisory engagement. While it may be possible to supplement your professional competence by accessing the expertise of others, the duty of competence is ultimately personal and cannot be outsourced to others.

While capability is implicit in several of the twelve standards that comprise the Code of Ethics, it is directly linked to two standards:

Benevolence

Benevolence is defined by Mayer et. al. as ‘the perception of a positive orientation of the trustee (financial adviser) toward the trustor’ (client). Or to put this another way, your client believes you are working in their best interest, working to help them meet their financial and lifestyle objectives. Clients would reasonably expect any person or business you referred them to would deliver the same degree of benevolence. Likewise, any outsource providers you use would be expected to display benevolence in their actions.

Benevolence is consistent with fairness, another of the values integral to the Code of Ethics and defined as:

Acting to demonstrate, realise and promote the value of fairness requires that you bring professional objectivity to the task of engaging with clients professionally, and when recommending financial products and professional services. It requires you to properly investigate, evaluate and diagnose a client’s need for professional services, and to self-reflect on the limits of your professional competency.

Benevolence permeates many of the standards in the Code of Ethics, but is explicitly captured in those that reference acting in your clients’ best interests:

Character

Character and integrity are used interchangeably in Mayer’s model and are consistent with the remaining values of honesty and diligence. The relationship between integrity and trust involves your client’s perception that you adhere to a set of principles – or ethics – that the client finds acceptable.

The value of honesty references integrity:

Acting to demonstrate, realise and promote the value of honesty requires that you conduct yourself with complete integrity in all your professional dealings with your clients and with all others that you engage with in a professional setting. It requires transparency, frankness and fairness to each of your clients, even where this may cause you personal detriment.

Again, integrity is implicit in many of the standards that make up the Code of Ethics and is explicitly required in standard two:

When a client develops a trust relationship with you and believes your company is ethical and is committed to ethical business practices, a higher level of trust is likely to develop. Building trust with your clients is important for your business; it’s imperative for client retention and it’s a requisite for attaining referral business from your clients. While you control those elements of your business where you’re providing the services, you can’t always control the services provided by others.

What happens when you refer business to other finance specialists: accountants, stockbrokers, risk advisers, mortgage brokers and others? Actions by outsource providers such as administrators, IT specialists or paraplanners can also impact your trust relationships. A misstep by any one of these providers can undermine trust in you and your business, and potentially breach one or more of the standards that make up the Code of Ethics.

Referral partners

Each of your clients will have a range of needs. Some may provide competency and specialisation that you can’t provide. As such, it’s not unusual for advisers to refer clients to other finance specialists, either within the same practice or outside of it.

These referral relationships are often established at the licensee level, and the adviser may simply be told who to deal with for risk advice, tax and accounting services, SMSF administration…the list goes on.

If a client has a negative experience with a referral partner, it might not just reflect badly on that partner, it can damage your relationship with your client. At its worst, the interaction can result in a breach of an ethical standard and come back on you if you fail to act on an issue.

When dealing with referral partners, standard three is important. While it primarily focuses on conflicts of interest, it also encompasses referral arrangements.

Standard three of the Code of Ethics requires that you must not advise, refer or act in any other manner where you have a conflict of interest or duty.

According to guidance^[4], you will breach Standard 3 if “a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income (e.g. brokerage fees, asset-based fees or commissions) could induce an adviser to act in a manner inconsistent with the best interests of the client or the other provisions of the Code.”

While debate about aspects of the standards enumerated in Code of Ethics (notably around standard three) have played out for some years, they remain enforceable by law as they stand.

In its current form, standard three refers to actual conflict of interest between the duties you owe your client and any personal interest or duty you owe another individual or organisation. According to guidance provided to advisers upon the launch of the Code of Ethics (and as yet to be updated), you would not breach standard three merely by being a duly remunerated employee of an entity that lawfully provides retail financial advice and services and referring to a specialist within that practice. This extends to profit sharing. You are, of course, required to ensure the provision of advice and services are in the best interests of your client and comply with the other provisions of the Code.

Accountants

It’s one of the most common referral arrangements in the industry. Many a business has taken advantage of the natural synergies between accounting and financial advice to build a business where an accounting practice acquires and embeds financial advice businesses – or vice versa.

As well as being synergistic, there are also areas of overlap. For years, accountants have advised clients about investment strategies to manage and mitigate tax and have been advocates of self-managed super funds (SMSFs). While in many cases an SMSF may be an appropriate strategy for a client, there may be times where you question its validity as an appropriate approach for your mutual client. Irrespective of the relationship with the referral partner, your client and their best interests must always come first.

If there’s a scenario where a client’s accountant makes a recommendation about an investment or a strategy, even if it’s tax related, you have the right to question it, particularly if you don’t believe it to be in the client’s best interest. While there’s a case for making enquiries of a strategy even if the accountant isn’t a referral partner, if it is a formal referral relationship it’s even more important.

You may query a recommendation because you have a better understanding of an asset class or financial product, or because of your in-depth knowledge about the client’s financial objectives and their risk profile. An accountant’s product or strategy recommendation may be too risky for that client or inappropriate when you consider their total portfolio.

In such cases it is important to call it out and discuss the holistic view with the referral partner; that way, you can agree on what’s best for the client, what will help them achieve their financial objectives (including tax management) and what works within the agreed risk parameters.

Risk advice

Risk advice is a specialist area. Some financial planning practices may have an in-house risk expert, others refer to a specialist business. It would be expected that in-house risk advisers would adhere to your practices’ approach to managing ethics in a way that’s consistent with your firm’s code, as well as the Code of Ethics. That, however, needs to stipulated and not assumed; a failure to act accordingly can have negative repercussions not only for your client, but for the broader practice and its staff.

Where you refer to a specialist risk practice, it is important to have an agreement with respect to the service provided. You need to ensure that it’s appropriate for each client and will meet their needs over time.

Mortgage brokers

Its less common for advice practices to have in-house mortgage brokers. They have a particular skill set and there may be times you need to refer a client for loan assistance. Renumeration for mortgage brokers typically comes from the financial institution where they place the business and, in most cases, they are paid an upfront commission and a trail or ongoing commission for the business. These commissions are paid out once the loan settles and are based on a percentage of the loan amount. It is important your client understands this, and you both need to be confident that the loan has been placed with the most appropriate institution for the client, not that which offers the most handsome remuneration.

In January 2020, at the same time as the Code of Ethics became law, the Federal Government passed legislation to create a duty for mortgage brokers to act in the best interests of consumers. The legislation requires mortgage brokers to prioritise consumers’ interests when providing credit assistance (known as the conflict priority rule)^5]

These obligations came into effect from 1 January 2021 (note: they were delayed by six months because of the COVID-19 pandemic).

Stockbrokers

Not all financial advisers are licensed to recommend direct investments, while others may have limitations on what they can recommend. A number of broking firms have ‘intermediary desks’ established to work with financial advisers.

Other advisers may have the necessary licence but lack the time to keep up with the research to ensure they meet their obligations under standards five and nine, to understand the intricacies of each security they recommend. Other advisers may do the research and simply use a broker to implement trades.

Irrespective of the level of service, the trust connection between adviser and broker is important. It’s imperative for your relationship with the client that the broker acts in their best interest at all times and does not make recommendations or implementations that contravene the Code of Ethics. Abiding by the Code of Ethics is also a requirement of the Stockbrokers and Investment Advisers Association.

If the referral comes from you, whether the broker is providing advice or implementation only, you need to ensure it’s appropriate for your client. Referring a client to a business or individual where their best interests are not met, and ethical standards are not adhered to, can have negative repercussions for your client and for you.

Legal professionals

Legal professionals play a crucial role in estate planning. They are responsible for advising and assisting clients with the legal aspects of planning and administering their estates. Some of the key roles and responsibilities of legal professionals in estate planning in Australia include advice, the preparation of legal documents such as wills, trusts and powers of attorney and administering estates.

While legal advice in estate planning should ensure that clients’ wishes are carried out in accordance with the law and in a manner that protects their assets, if it’s a referral you have made you need to ensure the legal advice and implementation is aligned with the client’s objectives and in their best interests.

Managing referral agreements

Referral agreements with specialists should include a service level agreement (SLA) that includes your requirements with respect to their conduct. If a formal SLA is not already in place, or if it does not cover the requirements stipulated in the Code of Ethics, it needs to be established (or amended) as a matter of priority. You know how you expect your clients to be treated and the quality of advice you expect them to receive – don’t assume that’s what will be provided.

It is important to review the advice provided by any third party to whom you have referred a client. Should you have any doubts or queries about the appropriateness of the advice provided, you need to have a conversation with that referral partner. It may be a difficult conversation, particularly if the referral partner considers you’re questioning their professionalism. However, if you believe that a recommendation is not in that client’s best interest, you need to act.

Explain your concern in the context of the client’s financial objectives, risk profile, estate plan or existing portfolio, whichever is the most relevant for the conversation. By making the client and their best interests central to the discussion, it becomes less personal and more focused on achieving positive outcomes for your mutual client.

Outsource partners

Many advice practices outsource some of their business processes. Typically, the more administrative and support activities tend to be outsourced, while client facing and revenue generating actions are kept in-house.

A Google search of outsource businesses servicing the advice community shows that you can engage other businesses to undertake a myriad of business processes, including:

• document preparation, including SOAs and regular reviews
• data input, management and presentation
• paraplanning
• portfolio management
• general administration, including virtual assistants
• e-commerce
• CRM management
• client service functions, including correspondence and reporting
• business functions such as finance, marketing, IT and compliance.

There most common outsourced business models available to advice practices are as follows:

Freelancers – generally a lower cost option but can be higher risk. Through a variety of online service providers, you can get freelance individuals on a project base or on an ongoing basis. While there’s no doubt you can find some excellent people who provide freelance services, you need to undertake background checks as you would for an employee, to ensure they have the appropriate experience and credentials for the role. The greatest risk is continuity if they stop working with you.

Staff leasing – often used by an outsource partner to provide a range of services for your business, whether in Australia or offshore. The outsource provider handles the specified business processes and you retain full control of the staff and work quality. On the plus-side, it allows you to build your own remote team dedicated to your business and gives you greater control.

Fully managed services – this is where the outsource provider handles everything for you. You provide a list of requirements and key performance indicators; they do the rest. If you’re looking for a hands off solution, this is ideal; on the downside, the outsource provider will control your business processes.

Outsourced staff, whether based in Australia or offshore, represent your business and your brand. You want the work they do for you to reflect your business and its values, which should include adherence to the Code of Ethics. Therefore, when choosing an outsource provider, it’s important to choose one that aligns with your business vision and values and enshrine this in the SLA.

Offshoring services

Offshore outsourcing can be a cost effective measure for scaling an advice practice, which can reduce your control over the quality of services delivered. Some of things to be aware of include:

• Navigating time zones can sometimes be challenging, and staff may not be available to answer questions when you most need them to be.
• Language barriers and cultural differences can present a challenge in some circumstances, especially when it comes to discussing values and the importance of the work they do for you supporting the Code of Ethics.

Ultimately, an offshored outsourced provider is an extension of your business and a representative of your brand. The work not only needs to be of a high quality, but needs to meet all elements of your SLA, which should include supporting those standards of the Code of Ethics relevant to their service.

For example, if you were outsourcing some elements of your administration, you’d need to ensure the provider managed and maintained client records in a form that is complete and accurate to ensure compliance with standard eight.

Questions to ask a prospective outsource provider

Once you have determined which parts of your business you’d like to outsource, using the Code of Ethics as a framework, you should ask the provider how they will conform to each relevant standard. One way to test the provider’s approach to managing compliance and dealing with any breaches is to provide scenarios and ask how they would deal with each.

Further, ensuring that each standard of the Code is encapsulated in the provider’s SLA and key performance indicators can support the outsource provider’s adherence to the Code. Compliance should form part of the outsource provider’s regular reporting to you.

Governance practices should also be reviewed. How is the personal information of each client protected? Given the prevalence of data theft, what checks and balances are in place to ensure there’s no identity theft or exposure to cyber-attack?

You should also ask about staff retention. A firm that experiences high staff turnover is less likely to be able to consistently align to your values and lead to increased risk of breaching the Code.

Staff training is also an importantly element. You need to ensure there is support for appropriate ongoing training to ensure the work they do for you meets not only your standards, but those requirements applied by law.

Finally, it would be useful to include relevant staff from your outsource partner in the ethics training sessions you run for your staff.

Case studies

The following case studies are based on real events, but some details have been amended to make them relevant to the article’s topic. Names of people and organisations have been changed. The case studies have been drawn from the Australian Financial Complaints Authority (AFCA) or ASIC. For each, potential breaches of the Code of Ethics are identified.

Case study one: The FX Dealer

Tom is an adviser with ACME Advice in Sydney’s eastern suburbs. His client base is primarily comprised of professional millennials; high earning and engaged investors. Tom introduced his clients to several external parties offering specialist investment opportunities, including FX trader Edward, the principal of SimplyFX.

SimplyFX offered retail clients access to over-the-counter (OTC) derivative products issued, including contracts-for-difference (CFDs). A number of his clients subsequently invested in products offered by SimplyFX. Because Tom was not licensed to advise on derivatives, clients entered into a direct relationship with SimplyFX.

After a number of complaints about SimplyFX, ASIC found that Edward:

• exercised very little oversight of SimplyFX’s operation and did not take steps to mitigate or address any problems within the operation of the business
• abrogated his responsibilities for supervision and oversight to persons offshore, without any organised and proper monitoring structures in place
• failed to maintain proper client records
• failed to address or take adequate steps to investigate issues that arose particularly in relation to client complaints
• did not cooperate with ASIC’s investigation.

Further, ASIC found it has reason to believe Edward is not competent to act as an officer of a financial services business, nor a fit and proper person in this respect and should be banned from performing this function for a period of five years.

The failures exhibited by Edward and SimplyFX will have reflected badly on Tom, as the person who referred his clients. Tom’s referral partner potentially breached the following standards in the Code of Ethics:

Case study two: The mortgage broker

Alex was a mortgage broker with Brisbane-based ACME Mortgage Broking. She provided mortgage broking services to a number of financial advice practices in the Brisbane area from 2013 to 2022. Between 2015 and 2021, Alex dishonestly obtained funds from her employees, clients and people purchasing goods on Facebook Marketplace.

She was convicted of 17 counts of dishonestly obtaining a financial advantage by deception, three counts of dealing with identity information to commit an indictable offence, and one count of dishonestly obtaining property by deception. She was sentenced to four years’ imprisonment.

Under the Corporations Act and the National Consumer Credit Protection Act, ASIC may permanently ban a person from the financial services and credit industries if they are convicted of fraud. Consequently, based on her convictions, Alex has been banned permanently, which means she cannot:

• provide any financial services or engage in any credit activities,
• control an entity that carries on a financial services business or engages in credit activities
• perform any function for an entity carrying on a financial services business or engaging in credit activities, including as an officer, manager, employee or contractor.

Kate and Rosa from AAA Advice referred a number of clients to Alex; five were among those she defrauded. While Kate and Rosa had conducted due diligence before forming a referral relationship with Alex, her actions reflected badly on them. It affected their client relationships and sullied their reputation to be associated with Alex.

By defrauding clients, Alex would have potentially breached the following standards in the Code of Ethics:

 Case study three – the outsourced paraplanner

ACME Financial & Investment Planners was a new office in Melbourne. The firm planned for rapid growth and the business principals, Callum and Lola, decided to outsource a number of business processes, including paraplanning, to quickly scale the business.

Lola interviewed a range of potential outsource providers, some of which had been recommended by industry peers. After discussions with four potential outsourcer providers, Callum and Lola appointed ABC Paraplanners to meet their paraplanning needs. The firm also provided ongoing client reporting as part of this service.,

As part of their due diligence process Callum and Lola made sure that the paraplanners provided by ABC Paraplanners had appropriate Australian-equivalent accreditation and qualifications, were RG146 compliant and that there were processes in place to ensure ongoing professional development. The couple also ensured that conduct consistent with the Code of Ethics comprised part of the Service Level Agreement (SLA) the outsourcing company had to meet.

At their six month review, Callum and Lola expressed their satisfaction with ABC Paraplanners. It had met all requirements of the SLA and provided a quality and timely service. However, several months later, they noticed a sudden decline in the quality of the service and documentation. Some of the more recent SOAs included inappropriate recommendations, as well as a number that had evidently been cut and paste from earlier clients with different risk profiles.

The advisers were undertaking their biannual client reviews and the information being received from ABC Paraplanners was incomplete and inaccurate. After making enquiries of the outsource provider, they discovered the initial high quality paraplanners had been replaced by less experienced and underqualified staff; staff that evidently were paid a lower rate by ABC Paraplanners.

Because they had used the Code of Ethics to frame the specific SLA agreed with ABC Paraplanners, they were able to refer to the standards when detailing with specific issues arising from the change in paraplanning staff. In particular, Lola and Callum were able to draw on the following standards:

Case study four: The lawyer’s investment advice

Blake is an experienced financial adviser working in Melbourne’s eastern suburbs. His advice practice ACME Financial Planning has a referral arrangement with a local legal firm, AAA Law, which provides estate planning advice and documentation.

One of Blake’s clients is a successful businesswoman; Liza had run a successful fashion boutique for many years and was approaching retirement. Blake and Liza were discussing the impending sale of the business and agreed Liza’s estate plan should be updated.

Following Liza’s appointment with AAA Law several weeks later, Blake discovered that one of the firm’s senior partners had recommended Liza invest the proceeds of her business sale into an unregistered Managed Investment Scheme being operated by the firm.

When Blake quizzed Liza about the MIS, she admitted she didn’t really understand it, however, it was offering attractive double digit returns each year. Blake contacted the legal firm to discuss the investment scheme into which Liza had invested, to learn how the money was invested, the liquidity of the investment and obtain more information about fees and charges.

The solicitor who recommended it was unable to clearly articulate how the investment worked, what it invested in or how the returns were generated. He was cagey about the fees and did not disclose, until specially asked, the financial incentive he received to place the investment. He had not informed Liza of this incentive.

Blake explained to the solicitor how his advice could impact Liza’s retirement plans and also took him through the Code of Ethics, to explain how his advice had potentially breached it. Having referred Liza to him, the lawyer’s actions could reflect badly on Blake, or as a worst case, see him face a formal complaint. The standards the solicitor potentially breached are as follows:

In the world of financial advice, trust is the cornerstone upon which successful client relationships are built. An adviser’s credibility and the confidence clients place in them are hard-earned and should be protected. When a referral partner breaches this trust, it doesn’t just tarnish their own reputation, it directly undermines the adviser’s relationship with their client, potentially causing irreparable damage.

Advisers must be vigilant to choose referral or outsource partners that share their commitment to integrity and transparency and importantly, an ethical framework that encapsulates the twelve standards that comprise the Code of Ethics. By carefully selecting and regularly reassessing these partnerships, advisers can safeguard the trust they’ve cultivated with their clients, ensuring that their relationships remain strong. After all, the foundation of any prosperous financial advisory practice lies in the unwavering trust between adviser and client, a trust that must be protected at all costs.

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Notes:
[1] https://www.legislation.gov.au/Details/F2019L00117
[2] https://theattributes.com/blog/how-to-develop-the-4-elements-of-trust
[3] An Integrative Model of Organizational Trust, Roger C. Mayer, James H. Davis and F. David Schoorman, 1995
[4] Financial Planners & Advisers Code of Ethics 2019 Guide, October 2020

The post Ethics and referrals appeared first on AdviserVoice.

Pause for a moment and ask yourself: do you consider yourself ethical? Most people reading this article would confidently say yes. However, it’s important to recognise that different value systems mean one person’s moral code—and their concept of ethics—may not align with another’s. While most individuals act ethically most of the time, challenges may arise when a client requests something outside your ethical boundaries.

For the majority of advisers, ethical practice has always underpinned their service offering. Since 1 January 2020, this has been enshrined in law within an ethical framework that includes five values (figure one) and twelve standards. Even though advisers may understand and appreciate this framework when providing financial advice, their clients might sometimes have different perspectives.

Take the case of Jim (not his real name). He was approached by a friend wanting financial advice. He didn’t want to do a fact find, he didn’t want to pay for an SOA and ‘all that compliance stuff’ – he just wanted some investment advice. This friend would expect Jim to adhere to these values – be trustworthy, competent, honest, fair and diligent – yet he asked him to act in a way contrary to the regulatory and ethical codes that Jim is bound to. Further, Jim’s friend wanted investment advice that would help him avoid paying tax…so, not simply asking Jim to operate outside of his compliance requirements, but to advise in a way contrary to tax laws, the Corporations Act 2001 and the Code of Ethics.

Encountering ethical dilemmas with clients is not uncommon. The best defence against this situation is a good offense…by being aware of foreseeable conflicts and discussing them frankly with your colleagues and clients, you can avoid the misunderstandings and challenging situations that lead to greater problems.

Understanding your clients’ attitudes and beliefs is important – after all, everyone has different value systems. While aligning your values and beliefs with those held by a client is not a prerequisite for working with them, the proper handling of any ethical dilemmas that arise is a requirement. No adviser wants to face enforcement action by ASIC for breaching any of the twelve standards (figure two) in the Code of Ethics (the Code).

The standards within the Code are not meant to provide definitive guidance. Individual circumstances will vary, and the Code allows for differences in professional opinions on applying the profession’s ethical rules in specific cases. Ultimately, it’s important to remember:

“Doing what is right will depend on the particular circumstances and requires you to exercise your professional judgement in the best interests of each of your clients.

Ethics, morals and values – same, same or different?

The terms ethics, morals and values are sometimes used interchangeably; while they are closely related concepts, they differ in significant ways.

Ethics are the principles and standards that govern behaviour within a specific context, such as a profession or society. They provide a framework for determining what is considered right or wrong in various situations, often derived from philosophical theories, legal guidelines or professional codes of conduct. Ethics help to maintain order and ensure that individuals act in ways that are consistent with the expectations of their community or profession.

Morals are the personal beliefs and values that an individual holds regarding what is right and wrong. These are typically shaped by cultural, religious and familial influences and are deeply ingrained in an individual’s conscience. Morals guide personal behaviour and decisions, reflecting one’s sense of integrity and ethical convictions on a more personal level.

Values are the core principles and standards that an individual deems important and worthwhile. They influence attitudes, behaviours and choices, and serve as a personal compass for what is meaningful in life. Values are fundamental beliefs that guide how people live and interact with the world, shaping priorities and motivations in various aspects of life.

In essence, ethics are more about external guidelines and frameworks, morals are internal beliefs, and values are the core principles that drive one’s actions and choices.

Client directed unethical behaviour

Ethical dilemmas arise in situations where there’s a difficult choice to be made between two or more options. Where this dilemma arises because of a client’s request or action, the adviser is often faced with an option that doesn’t align with the Code and/or societal norms, including codes of law. This often negatively impacts the adviser’s moral code and values.

In financial advice, ethical behaviour can be distilled into acting in the client’s best interests at all times, acting with competence, honesty, integrity and fairness. In short, upholding the values that underpin the Code and in the way any one of us would like ourselves and our family members and friends to be treated by any professional service provider.

The unethical client will generally reveal themselves to you by what they say. While some unethical clients may be quite direct, others may take a more subtle approach, such as talking in hypotheticals. For example: “I have information that ABC Limited is subject to a takeover at $X per share; I’d like to buy shares in it to benefit from the anticipated share price increase” versus “If I was to come into information that would impact a company’s share price, could we use that to add value to my portfolio?”.

If a client asked you to do something unethical (which might also be illegal) you may face one of the most challenging dilemmas of your career. This can be an extremely difficult situation, one which could have serious consequences for you and your licensee (and potentially, other authorised representatives working under that licence). Some actions – such as the insider trading example used above – can also have serious consequences for the client.

Repercussions for advisers that can arise from acting on an unethical client request might include:

• a breach of the law
• a breach of one or more ethical standards
• damage to your reputation and credibility
• losing your right to practice – and, if independently licenced, your AFSL
• the potential for your licensee to lose their AFSL or have conditions imposed
• the risk of being charged, incurring a fine and/or imprisonment.

Such repercussions won’t necessary be limited to you – they can impact:

• your colleagues, who may need to find a new licensee and whose reputations may be damaged by your actions
• your Licensee, which might be subject to a range of penalties
• your family, as they lose an income and have to deal with the added impact of financial penalties and potential incarceration
• your other clients, who will need to transition to a new financial adviser/licensee.

How to respond to a client’s unethical directive

Not every situation is clear-cut; ethical dilemmas often present themselves in various shades of grey, so it can be a challenge to discern the right course of action.

Some client requests are overtly suspicious and immediately raise red flags. However, other requests might be more subtle and not as immediately alarming. When confronted with an ethical dilemma, it’s common to feel overwhelmed by emotions, making it challenging to think clearly.

Examples might include:

Clear ethical concern: A client asks you to establish a managed account in his wife’s name (using her maiden name) so he can trade his company’s shares.

Subtle ethical concern: After some poor decision making by SMSF trustees, the trustee client requests that you slightly overstate the projected returns on their SMSF to make the poor decisions less apparent.

An overwhelming situation: A colleague asks you to sign off a friend as meeting the sophisticated investor requirements so they can get access to a particular wholesale investment. This request puts you in a difficult position as such a move compromises your professional integrity.

In such scenarios, it’s crucial to pause, reflect and seek guidance to navigate the ethical complexities. The following ‘do’s and don’ts’ are based on insights from Amy Gallo of the Harvard Business Review^[3]:

Do…

• Question your assumptions because fear of confrontation or retaliation can result in rationalising an action you know isn’t right.
• Gain perspective and try to understand what is motivating the request; this can help form a response, particularly when there’s an ethical way to achieve the same goal.
• Have a conversation: With the exception of extreme ethics violations, confronting the individual directly first is often the best way to manage a situation. Provide an opportunity for the person to explain his actions or to correct the behaviour first. If a direct conversation doesn’t resolve the issue, you may need to inform your manager, HR department or a company ethics hotline.

Don’t…

• Forge ahead without a plan – a planned approach is important to adequately address the situation.
• Make accusations, rather maintain a focus on understanding the situation and request.

It is critical that you maintain your ethical awareness, particularly in the context of the twelve standards that comprise your Code, while also practicing sound judgment as you determine the appropriate steps to deal with ethical dilemmas.

The following can assist you to make better-informed decisions, ones that align with your values and enable you to provide an ethical example to the other members of your team. When all team members are aligned with respect to ethics and values, your advice practice will be more effective.

1. Clarify the client’s request

Make sure you understand exactly what the client is asking you to do. What is their desired outcome from this action? How exactly do they want this to play out and what is their role?

Examining the client’s intent with probing questions is sometimes enough for a client to recognise they have asked you to do something unethical. Some clients may ask you to do something unethical because they don’t know better. Others may know all too well what they’re asking and may be less than honest; it is a good habit to ask probing questions and take detailed notes.

Use questions such as “Can you help me understand?” or “Can you see an issue with that approach?” can help establish whether your client is open to a productive discussion.

2. Reaffirm their request

Repeat back what you think the request is to ensure you have complete clarity. This may resolve the issue, either because you’ve misunderstood or because the newfound perspective has made the client rethink their request. If the client wishes to persevere with the course of action, you can ideally deliver a strong and immediate response.

However, there may times you are blindsided by a request and need some time to consider the issues and formulate an appropriate response. In such a case, it’s best to advise the client that you’ll need to defer the discussion.

If simply reaffirming the request aloud does not work, probing the client with questions about the reason and motivation behind the request can help to create a more transparent dialogue and also help deter them.

3. Consider the big picture

You’re clear on what the client has asked you to do, the client is clear that you understand what they want to do, but the client has not had a ‘light bulb’ moment and has not recognised they have put you a position that could range from difficult through to untenable.

Note down the issues you have with their directive:

• How does it sit within your moral code and values? How will it affect the ethical code and standards you’re obliged to follow?
• Consider each of the twelve ethical standards and how actioning your client’s request might beach them.
• Give thought to the Corporations Law and any potential breaches of that too.
• How might this impact your licensee, colleagues and family – and how might it reflect on the broader advice profession

4. Articulate your concerns

A client directed ethical conundrum presents a complex challenge. While your goal is to help each client achieve their financial objectives, it’s crucial to address any request that conflicts with the ethical principles and standards you’re bound to uphold, as well as your own values. In discussing this with your client, you could explain:

• How their request would violate your personal ethical and moral boundaries.
• How their request would contravene the Code and legal standards of your profession.
• The potential consequences for both of you, including damage to your reputations, possible job loss and broader impacts on family and others.
• The potential legal and financial penalties you could both for engaging in unethical and illegal actions.

Ultimately, you need to ensure that you can live with the final decision…even if it means losing a client.

5. Offer an alternative solution

At this point it’s important to keep your cool; being faced with an ethical dilemma can see emotion take front seat.

If you can find an alternative that does not result in you having to compromise your principles or the Code, explain that to your client as tactfully as you can.

Let your client know that you’re uncomfortable with their request by articulating your concerns (step four), but if possible, offer an alternative solution. If your alternative approach is rejected – or there is no alternative approach – the best thing for you and your practice is to walk away.

Importantly, if you do decide not to have any further dealings with the client, you need to offboard them and be sure to keep a detailed file note, lest they return, or some issue arises in the future.

Case studies

The following case studies are based on real events, but some details have been amended to make them relevant to the article’s topic. Names of people and organisations have been changed. The case studies have been drawn from the Australian Financial Complaints Authority (AFCA) or ASIC. For each, potential breaches of the Code of Ethics are identified.

Case study one: Faking it

Queensland based financial adviser Alexander worked with three colleagues at ACME Advice on the Gold Coast. He had a number of friends to whom he provided personal advice, but without fulfilling the required compliance paperwork. This was at the friends’ behest as they wanted advice without the associated paperwork and cost burden.

In its investigation, ASIC found that as the general manager of ACME Advice, Alexander had asked a subordinate, an authorised representative of the licensee who was on maternity leave, to sign documents that stated that personal advice had been provided by the authorised representative when it had not been.

In this way, Alexander felt he was able to provide the advice his friends sought, while on face value meeting his compliance requirements. However, ASIC took a dim view of his actions and permanently banned Alexander from:

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

ASIC claimed that Alexander’s conduct gave reason to believe that he lacks the fitness and propriety to provide financial services or manage or control those who do.

By meeting his friends’ request, Alexander’s actions saw him potentially breach the following standards in the Code:

Case study two: Elder abuse

Jack and Rose are a married couple in their mid-80s. They are not separated, but due to the different levels of care each requires, the couple resides in different aged care facilities. Rose has dementia and needs a higher level of care than Jack, who retains a high degree of autonomy and independence. Their retirement funds are held in a joint account, and their financial adviser, Elizabeth – an authorised representative of ACME Retirement Advice – oversees their financial affairs.

Jack and Rose did not have children together. However, each had been previously married and had children from their first marriages. Several years before entering residential aged care, Jack and Rose signed a power of attorney that provided Jack’s daughter and Rose’s son with an authority to view financial statements online and pay their bills, but no authority to withdraw or transfer funds.

An issue arose when Jack’s daughter contacted ACME Retirement Advice to report what she believed to be an unauthorised transaction with respect to the joint account.

Rose’s son took his mother to see Elizabeth. Rose instructed the financial adviser to close the joint investment account she held with Jack, redeem the investments and transfer the funds into a bank account in her name only. These funds totalled nearly $200,000 and 75 percent of the funds were subsequently transferred to Rose’s son.

Jack, with the assistance of his daughter, said Elizabeth should not have allowed Rose to close their joint investment account and transfer the funds into her name without his knowledge or consent.

The dispute was referred to AFCA. Although the findings agreed that Elizabeth’s notes had considered whether Rose had capacity to conduct the transaction, it believes she failed to make enquiries of Rose in the absence of her son before acting on the request. She should also have contacted Jack to ensure he consented to the transaction.

AFCA concluded ACME Retirement Advice did not exercise appropriate care and skill in response to the following ‘red flags’:

• the unusual nature of the disputed transaction
• the wife who conducted the transaction was in her 80s, in a wheelchair and known to have cognitive issues
• the discussion and transaction was conducted in the presence of a third party who may not have had the client’s best interests at heart.

Consequently, AFCA determined ACME Retirement Advice did not comply with good industry practice to protect the applicant from potential financial elder abuse, and Elizabeth was required to transfer half the funds, plus interest, into an account nominated by the applicant.

Case study three: Insider trading

Marc is the Chief Financial Officer of ACME Biotech Limited, a small, ASX listed company in the biotech sector. It had been a beneficiary of the Covid pandemic and in the following years, Marc’s salary and benefits package grew substantially.

Marc made an appointment to see his adviser Josh from ACME Investments, who had been looking after his financial advice needs for several years. Josh was curious…Marc usually stuck to his biannual appointment cycle; this appointment was out of the blue and he’d requested to see Josh as soon as possible.

When the two sat down, Josh could see Marc was excited. He told Josh that ACME Biotech had hit the big time and been awarded two large government contracts worth many tens of millions each. As soon as the contracts were signed, the Australian Securities Exchange would be advised, and the market would respond accordingly. A significant jump in the company’s share price was anticipated.

Marc wanted to make money from this anticipated rise in the share price. He asked Josh how he could structure things so he and his family could invest and benefit. He had hopes of buying a holiday home with the profits and wanted to benefit from his hard work on negotiating the contracts.

Josh has two choices.

1. He explains to Marc that this is insider trading and in contravention of both the law and the Code of Ethics to which he is bound, or
2. He finds a way to help Marc buy shares in the company and works out a post announcement sales plan to realise the anticipated profit and purchase his holiday home.

Josh chooses the first option. If he had chosen option two, he would have potentially breached the following standards in the Code:

Case study four: When divorce turns two clients to one

Julie and Carl have been married for 22 years and have two children. As a partner in a law firm, Carl works long hours; Julie was a stay home wife and mother. Carl was able to take advantage of income splitting with Julie and paid her an annual ‘salary’ of $42,000.

Carl and Julie’s financial adviser, Simon, worked with ACME Financial Planning. Simon and Carl had been at school together and played football for the ‘old boys’ school team for many years. Their sons now continue the tradition, and both Carl and Simon remain heavily involved with the club.

Most of the meetings with Simon were attended solely by Carl; while Julie occasionally attended a meeting, she had little to do with the financial decisions and typically signed what she was asked to.

When it became apparent that he and Julie were going to separate, Carl instructed Simon to set up a managed account in his name only. Carl realised that Julie would be likely to be awarded a larger than 50 percent portion of their family home, so he withdrew $650,000 of equity from the home and deposited it into his managed account. He and Simon then worked out the best way of investing the money, so it was as inaccessible as possible.

While Simon was acting per Carl’s instructions and in what he believed was his friend’s best interests, Julie was also his client until such time she was advised otherwise. Facilitating transactions and investments without her knowledge (and to her detriment) potentially breached the following standards of the Code:

Financial advisers are required to act ethically and in the best interests of their clients at all times. The decisions and recommendations they make daily impact their clients’ lives, both today and in the future. Ethics in financial advice is an integral part of a complex system, involving regulation, education, professional bodies and the integrity of each adviser and licensee working in the industry.

When faced with an improper request from a client or prospect, two key principles will serve you well. Firstly, always present a professional image that reflects your integrity and the values of both you and your company. Secondly, respond clearly and confidently to improper or unethical requests.

Dealing with ethical dilemmas can be challenging. Seek advice from your peers, practice manager or licensee. Maintain your ethical awareness and practice sound judgment as you decide on the best course of action. By doing so, you ensure that you uphold the highest standards of professionalism and protect the trust placed in you by your clients.

———

Notes:
[1]https://www.legislation.gov.au/Details/F2019L00117
[2] Ibid.
[3] https://www.michiganstateuniversityonline.com/resources/leadership/how-to-respond-to-an-ethical-dilemma/

The post When your client lacks ethics appeared first on AdviserVoice.

What are the current challenges in ethics and professionalism ensuring advisers act in clients’ best interests at all times?

Businesses across all industries are beset with challenges. This article, proudly sponsored by GSFM, investigates a range of contemporary challenges that financial advice businesses and how those challenges might impact ethical practice.

Ethics in financial advice is important. It underpins some of the basic tenets of advice practice, such as acting in clients’ best interest always, avoiding conflicts of interest and acting with transparency and integrity in all dealings with clients.

Financial advisers are entrusted to guide clients through intricate financial planning and decision making, and their role necessitates a high level of ethical conduct and professionalism. For this reason, the Financial Planners and Advisers Code of Ethics 2019 (Code of Ethics) was introduced to provide a set of principles and core values in the areas of ethical behaviour, client care, quality process and professional commitment.

Advisers (and licensees) have to ensure ongoing compliance with the Code of Ethics amid a continually evolving business landscape…regulatory change, technological developments and educational requirements (to name but a few) can keep businesses on their toes. Irrespective of change, keeping up to date and delivering advice services that uphold the ethical standards that make up the Code of Ethics is essential.

Ethics and advice

The Code of Ethics imposes ethical duties on financial advisers and is designed to encourage higher standards of behaviour and professionalism in the financial services industry, aiming to build consumer trust and deliver better outcomes for all. These ethical duties exceed the requirements outlined in law.

The Code of Ethics is comprised of twelve standards (figure one); these are grouped under four ethical competencies:

• Ethical Behaviour (standards one to three)
• Client Care (standards four to six)
• Quality Process (standards seven to nine)
• Professional Commitment (standards ten to twelve)

It is expected that advisers will exercise professional judgement against the ethical principles in each standard, depending on the particular circumstance. The Code of Ethics mandates that financial advisers must consistently act in a manner that aligns with its twelve ethical standards, with compliance monitored by ASIC-approved schemes.

Licensees play a crucial role under the Act; they must monitor and enforce adherence to the Code among all advisers operating under their authority. Licensees are expected to structure their business operations to facilitate ethical behaviour and ensure that advisers meet each of the twelve standards of the Code of Ethics.

While ethics may be defined in different ways, at its broadest, it can be distilled as a system of moral principles concerned with what is good for individuals and society. The term is derived from the Greek word ethos, which can mean custom, habit, character or disposition.

In the world of financial advice, it means treating your clients fairly, always acting in their best interests and acting with honesty, integrity and competence. In short, embodying the values upon which the Code of Ethics is based. These values are: trustworthiness, competence, honesty, fairness and diligence.

Contemporary Challenges

Regulatory compliance

Financial advisers operate within a complex regulatory environment designed to protect consumers and uphold the integrity of the financial system. Regulations establish standards for transparency, fiduciary duty and ethical conduct, aiming to mitigate conflicts of interest and protect investors.

The importance of regulatory compliance is highlighted by it being the subject of standard one in the Code of Ethics.

This standard requires that:

• advisers will take steps to understand their legal obligations, under both the law and the Code of Ethics
• advisers must ensure the advice they provide is not intended to circumvent the intent of financial services laws or the Code of Ethics
• advisers must not establish business structures to circumvent their ethical obligations
• advisers must always act in the best interests of their clients.

Importantly, standard one encourages advisers to consider both the legalities and ethics of each course of action they take. Because the Code is enshrined in legislation, a breach of the code will result in a breach of the law.

However, regulatory compliance is often a challenging and ongoing process. The financial industry is dynamic, and regulations continually evolve to address new market realities and emerging risks. Advisers must stay abreast of these changes, ensuring that their practices are always in alignment with current laws and standards, including the Code of Ethics. Non-compliance not only exposes advisers to regulatory scrutiny and in some cases, legal repercussions, but also erodes client trust and tarnishes the adviser’s reputation and that of the profession.

Best interests duty

Best interests is the subject of Section 961B of the Corporations Act 2001. 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 advisers act in the best interests of their clients when providing advice.

Acting a client’s best interests also underpins two standards in the Code of Ethics: standards two and five.

This standard requires that:

• advisers consider each client – and their needs – individually
• advisers are honest, open and frank in all dealings with clients
• advisers prioritise clients’ interests over their own or their licensees’ interests
• advisers honour commitments made to their clients.

The main premise of standard two is putting each and every client’s interests first. This requires that advisers ensure that the advice, products and services recommended are appropriate to meet the client’s objectives, financial situation and needs. This needs to include consideration of the client’s longer-term interests and expected future circumstances.

The standard requires that all advice and financial product recommendations given to a client must be in the best interests of the client and appropriate to their individual circumstances. Further, advisers must be satisfied – and have reasonable grounds to be satisfied – that the client understands the advice and the benefits, the costs and risks of the financial products recommended.

This standard requires that:

• advisers ensure that financial advice and product recommendations are appropriate to each client’s individual circumstances
• advisers are aware of, and knowledgeable about, available financial products that would meet each client’s needs
• advisers focus on each client’s individual circumstances and do not apply a ‘one size fits all’ approach to advice and recommendations
• advisers provide the advice and information in a way that ensures client understanding; this may mean a different approach for different clients, depending on their sophistication and understanding
• advisers must be satisfied that each client understands the advice received and the products recommended – this includes benefits, risks and costs associated with each product or service.

In the current market, advisers may face a number of challenges when acting in a client’s best interests. Global economic uncertainties and market volatility can make it challenging to provide advice that consistently aligns with clients’ best interests, especially in predicting and managing risks.

At the same time, clients may have unrealistic expectations or exhibit behaviours influenced by market trends, media and word of mouth. Advisers must manage these expectations while providing advice that aligns with clients’ best interests. Balancing ethical considerations with client satisfaction (and sometimes, their best interests) can be challenging.

Conflicts of interest

One of the most pressing ethical challenges in financial advice is managing conflicts of interest. Standard three – one of the most contentious standards in the Code of Ethics – focuses on an actual conflict that might arise between the duty an adviser owes to a client and any personal interest they have or duties they owe another individual or organisation, such as their practice or licensee.

Avoiding conflicts by putting client interests first demonstrates the five values that underpin the Code of Ethics and also links to that pivotal requirement of always acting in the clients’ best interests.

This standard requires that:

• advisers make an assessment as to whether their personal interests are compatible with the best interests of their client
• advisers must ensure the advice they provide is not in conflict with personal interest
• advisers must remain aware of changing circumstances and whether than can result in conflicts of interest with some or all clients.

Despite regulations, conflicts of interest can arise, and it is incumbent on advisers to manage them to always put the client first.

Transparency

Transparency is a cornerstone of ethical advice and a value that spans several of the standards in the Code of Ethics.

Clients must be fully informed about the fees they are being charged (standard seven) and the risks associated with various financial products (standard five). The complexity of financial products can make it difficult for clients to fully grasp the advice they receive. Financial advisers, therefore, have a duty to communicate clearly and effectively, ensuring that their clients have a thorough understanding of the financial strategies being recommended (standard five).

Advisers should disclose all relevant information in a straightforward manner; it’s important to avoid jargon that could confuse or mislead clients. This includes being upfront about all fees, the potential risks and benefits of proposed investments, and any affiliations or relationships with product providers that could influence recommendations. By fostering a culture of transparency, advisers not only build trust but also empower clients to make informed decisions about their financial futures.

The continual changes in financial markets, regulations, compliance requirements and the increasing complexity of financial products can significantly impact a financial adviser’s ability to provide transparency to clients. This environment creates challenges such as information overload, a heavy compliance burden and difficulties in explaining complex products clearly. Advisers must continuously update their knowledge, which competes with the time needed for client communication.

Limited resources, especially for smaller practices, can affect the quality of transparency, and integrating new technologies requires investment and training. Increased documentation demands can detract from client interactions, and rapid changes heighten the risk of miscommunication. Additionally, maintaining client trust becomes more challenging, as advisers may focus more on short-term compliance rather than long-term client education and understanding. These factors can complicate the delivery of clear, transparent advice to clients.

Continuing education

A commitment to continuing education is a requirement of financial advice in Australia. Financial advisers must comply with CPD requirements by completing 40 hours of CPD each year, with minimum hours across the following mandatory categories:

• Technical competence (five hours)
• Client care and practice (five hours)
• Regulatory compliance and consumer protection (five hours)
• Professionalism and ethics (nine hours)

Continuing education also supports advisers to meet standard ten, which requires that financial advisers have and maintain an appropriate level of relevant knowledge and skill to provide competent financial advice that is in the best interests of their clients.

Continuing education involves more than just fulfilling regulatory requirements. It means actively seeking out opportunities to expand expertise, such as attending industry conferences, participating in training programs and pursuing advanced certification.

By staying informed and educated, financial advisers can offer relevant, up-to-date advice and adapt to the changing needs of their clients, putting themselves in the best position to uphold their ethical obligations.

Impact of technology

Technology has revolutionised the financial advice industry, bringing both opportunity and challenge.

It has changed administration and record keeping, moving from paper based files to sophisticated software and digital platforms. Record keeping is the subject of standard eight and requires financial advisers to maintain complete and accurate records of advice and services provided to clients. It also requires that:

• advisers meet legislative requirements relating to the secure storage of client records
• client records must be both complete and accurate for both current and former clients
• records should include file notes of discussions
• client records must be easily accessible.

One of the contemporary challenges that comes with technology is cybersecurity. As advisers increasingly rely on digital tools and platforms to store and manage client information, the risk of cyberattacks and data breaches grows. Unauthorised access to client data can lead to data corruption, loss, or theft, jeopardising the accuracy and integrity of these records.

Advisers must implement robust cybersecurity measures, such as encryption, multi-factor authentication, and regular security audits, to protect client information. However, these measures can be resource-intensive and may require continuous updates to address emerging threats. Additionally, the need for secure backup systems and disaster recovery plans adds another layer of complexity. Ensuring the confidentiality, accuracy, and availability of client records amidst these cybersecurity challenges is essential for maintaining trust and compliance with regulatory standards.

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

Case study one – failure to maintain knowledge and act in client best interests

ACME Advice was operated by brothers and business partners Greg and Michael on Queensland’s Gold Coast between 2014 and 2021. The business model was centred around two key strategies: a managed discretionary account service and a superannuation rollover business. ASIC cancelled ACME Advice’s AFSL following concerns that Greg and Michael had breached a number of their legal obligations.

A hearing before the Administrative Appeals Tribunal (AAT) in 2023, found that the brothers’ contraventions included:

• recommending products without adequate knowledge or education
• failure to maintain educational standards
• misleading and deceptive conduct
• failing to provide appropriate advice
• failing to act in the best interests of clients

The AAT upheld ASIC’s decision to cancel ACME’s Australian financial services licence.

Greg and Michael potentially breached the following standards of the Code of Ethics:

Case study two – conflict of interest

Candice was the sole director of CC Advice and an authorised representative of an AFS licence holder, ACME Financial Planning. She recommended her clients invest in the ACME Income Opportunity Fund, a registered managed investment scheme operated by her licensee.

An ASIC investigation found that over a three year period, Candice recommended that the majority of her clients invest in the ACME Income Opportunity Fund; although it was positioned as a fixed income fund, it was in fact invested in high risk structured credit vehicles, such as collateralised debt obligations. As such, it was considered to be a high-risk financial product. Candice had a specific interest in the Fund via personal borrowings that she invested in the Fund and ASIC found that she failed to prioritise her clients’ interests above her own when recommending they invest in the Fund.

Further, the high-risk nature of the investment did not match her clients’ risk profiles or experience, and Candice was found to have failed to conduct a reasonable investigation into alternative financial products that would have better met her clients’ needs.

ASIC banned Candice from providing financial services for three years.

Candice’s actions potentially breached the following standards of the Code of Ethics:

Case study three – product knowledge

Anthony is a financial planner who is meeting with a new client, Callum, aged 38. Callum holds an executive role and earns $275,000 per annum. He wants to establish a financial plan with the key objective to retire by age 50. Anthony understands Callum’s financial objectives and personal situation and is providing personal advice.

The adviser and client discuss a range of financial products that might be appropriate for Callum. Callum has friends who, in his words, are ‘big in investment’ and he wants to take on board some of their recommendations. As Anthony was not familiar with some of the investments Callum wanted to include in his portfolio, he asked Callum for a list of proposed investments and said he would need to undertake some research and due diligence before they proceeded.

At their next meeting, Anthony explained the high risk nature of the investments Callum had identified and explained why he believed they should not form part of Callum’s investment portfolio. Although Callum followed Anthony’s advice, he separately followed his friend’s recommendations also, with mixed results.

Although Callum’s total outcome was not as good as it may have been, Anthony did the right thing by doing his due diligence on products he was unfamiliar with. Had he blindly accepted Callum’s request, he may have breached several standards in the Code of Ethics including:
Case study four – regulatory compliance

Jacinta has been a financial adviser for many years and operates under her own AFSL. Business in the southeastern suburbs of Melbourne was booming and she took on a younger financial adviser to work with her. Lisa had completed her professional year, passed her Financial Adviser Exam and had two years’ experience with another practice.

At a client event, Jacinta heard in passing from a new client that they had not received a Statement of Advice from Lisa, but that they were very happy with the plan she had developed for them. Jacinta followed up with Lisa post the event. She discovered that Lisa believed the Statement of Advice was a waste of her and the clients’ time, that she believed they were rarely read and that she could provide a better outline of her service to clients.

Jacinta reviewed the number of clients this related to (10). She explained to Lisa that an SOA is required when providing personal advice, making a recommendation to acquire or dispose of a financial product, when there is a change in a client’s circumstances, or when recommending a new product or strategy. Further, the provision of an SOA is a regulatory requirement and therefore not negotiable. She gave Lisa seven days within which to produce and provide SOAs to the affected clients, with a letter of apology and explanation of next steps. Jacinta also informed Lisa that her action was reportable to ASIC and would have to be done within 30 days – however, she wanted to be able to report that the situation had been remedied with no adverse consequences to clients.

Had Jacinta not taken the actions she did, as licensee she would have potentially breached the following standards:

The field of financial advice can be fraught with ethical challenges that demand a high level of professionalism and integrity. Conflicts of interest, transparency, regulatory compliance, continuing education, and the impact of technology are all critical areas where ethical dilemmas frequently arise. Financial advisors must navigate these challenges with a steadfast commitment to ethical conduct, placing their clients’ interests at the forefront of their practice.

By fostering a culture of transparency, adhering to regulatory standards, continuously educating themselves, and responsibly integrating technology, financial advisers can uphold the principles of ethics and professionalism. This not only enhances the trust and confidence clients place in them but also contributes to the overall health and integrity of the profession. As the financial landscape continues to evolve, a commitment to ethical practice will remain a cornerstone of effective and responsible financial advice.

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