Suing financial planners:
‘Misleading advice can land planners in dock’, The Australian, 29 July 2009
by Sara Rich.
Lawyers say legal redress is available for investors in some cases.
Across the country, lawyers are preparing for a spike in cases against financial planners in the wake of the global financial crisis.
But they suspect there are also many investors out there who are not aware that they may have received misleading or inappropriate financial advice and could be entitled to restitution.
As a starting point, North Sydney-based lawyer Leigh Adams says losing money in a falling stock-market of itself does not mean an investor has a case.
“That the market goes up and down does not mean that five million Australians can sue their financial planners,” says Adams, principal of Leigh Adams Lawyers. “It is an issue of: ‘What was I told or what did I understand I was getting, and is what I got different?’”
Damian Scattini a lawyer with Slater & Gordon, the law firm representing 1300 former clients of collapsed financial planning group Storm Financial, says whenever he hears the words “risk-free, high return investment” from a new client, he starts reaching for court documents to prepare.
“They need to think about what they were told and what they took from their meeting with their adviser,” he says.
“Were they advised truly that it was a risky venture they were getting into, were they advised to get independent advice, did the person who was advising them have a vested interest in them buying that product?”
His last point refers to the payment of commissions, which he and Adams believe can lead to potential conflicts of interest.
“To what extent does a conflict of interest arise in advice? In relation to commission-led packages I think it arises all the time,” Adams says.
“How can you possibly be independent when you are being paid by the bank?”
He says the courts will also look at whether the adviser exercised independent discretion when providing advice on an investment product, or did they just rely on the findings and opinions of a research house. “The courts have said a financial planner can’t stand behind a Standard & Poor’s, for example, they can’t hide behind that research,” he says.
The most important thing though is to act early. Adams says your legal rights are like muscles; if you do not use them, you eventually lose them.
“But not only that, it is a question of recollection of conversations: diaries get lost and notes disappear,” he adds.
Provided an investor has evidence to support their claim, cases against financial planners – which typically take 18 months to complete – are easier to get off the ground than before.
Since 2001 there have been changes to the Trade Practices Act and the Australian Securities and Investments Commission Act as well as recent court decisions that have made this possible.
Whereas in the past investors had six years after receiving the advice to make a claim – not much help in a rising market where bad advice is often masked by easy returns – they now have six years after the loss or damage occurred to lodge a complaint.
Disclaimers that used to get advisers off the hook also no longer are standing up in court and failure to explain all the risks involved in a product is increasingly falling under the category of misleading advice.
In terms of restitution, Scattini says the aim of the law is to make the investors whole again.
“[That is,] put them back in the position they would have been but for the negligent advice,” he says.
Unfortunately, there is no compensation for the stress and pain many investors suffer as a result of bad advice, nor are punitive damages imposed on the adviser.
“Really it should be that if you rip someone off, you pay a premium for being caught whereas the worst that happens to you is you have to pay what you owe, which is really not that much of a disincentive to cheat,” Scattini says.
His other gripe is the proportionate liability regime that was introduced by the Howard government, which states that if there were two parties involved in providing the bad advice, each is liable for, say, 50 per cent of the investor’s losses.
Scattini’s concern is that if one of the parties fell into bankruptcy, the investor would receive only a proportion of the damages.
Denys Pearce, managing director of financial planning company Plan B, says there are many good advisers out there and problems can be avoided by asking the right questions in the initial interview.
He recommends investors ask their adviser what it means to be a fiduciary and whether they always act as a fiduciary when managing clients’ financial affairs.
“Sadly, most won’t be able to answer the first question and fewer still will be able to demonstrate that the systematisation and documentation of processes within their practice meets world’s best practice standards,” he says.
“You may still decide to use them as your prudent expert, but at least they’ll know that you are watching and will hold them accountable if they fail to always act in your best interests.”