Revealed: The big mistake that incurs Ombudsman wrath

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There is a common problem that sees many advisers held responsible for investor losses by the Financial Ombudsman Service (FOS). Here’s how to avoid making this crucial mistake

According to the recently released FOS 2011-2012 Annual Review, failing to communicate investment risk issues to your clients can see you end up in seriously hot water.

“It is very common in investment disputes for there to have been poor communication about the topic of risk. This can lead to financial advisers being responsible for investor losses,” said the review.

The elements that fall into investment advice disputes regarding risk include:

  • the risks that need to be taken to achieve the investor’s goals;
  • the risk of not achieving those goals;
  • the level of risk the investor is prepared to take;
  • the level of risk involved in particular strategies;
  • the level of risk inherent in individual financial products.

So how can you avoid being dragged into a FOS dispute? According to the report, it’s vital to have a clear discussion of all aspects of risk, and to clearly document the discussion and subsequent agreements about risk in the SoA.

The primary responsibility for these discussions rests with the financial adviser, noted the FOS, but the report did state that, as in any advice situation, “the investor has a responsibility to ask questions and tell their adviser if they don’t understand something”.

When a client chooses to act against the advice given, FOS advises planners to be very clear in explaining the risks and documenting that the course of action is against their advice. It's important to explain the risks in language the client understands, and to make a contemporaneous file note and have the client sign it.

  • frank smith on 26/11/2012 8:35:56 PM

    Yes that's all well and good but what about the client's "selective memory"? It's never "Mum and Dad's" greed but always the adviser's fault and the ambulance chasing lawyers know an easy target when they see one. A disgrace.

  • Lets get real on 27/11/2012 9:26:11 AM

    And we wonder why it is hard to have advisers producing SoA's that are clear, concise and effective (and advice that is not expensive to produce). Add a compliance department to this mix and you have your answer.

  • GAB on 27/11/2012 9:47:35 AM

    And ASIC says SOAs only need to be a few pages....bahahahah....they need to have a discussion with FOS. Why can't our industry bring out a standard booklet that explains all the elements of risk and the client signed to say they received the booklet and read it before agreeing to the advice, instead of cramming an SOA with it. Here's the strategy, now here's the risk....now read the booklet and see how that applies to you. Do you understand? Too risky for you, ok well change the strategy a bit, how does that suit? What...you can't achieve your objectives now? You want to go back to the original recommendation now?

  • alistair on 27/11/2012 9:52:41 AM

    Inept and incompetant laws with NO understanding in a meaningful manner for the consumer to comprehend advice dispensed by their planner. The adviser is one issue but so is the greed and the acceptance of risk when markets are moving north ( ie the speculative player client steps in ) and then when markets head south, through panic, it is suddenly the advisers fault. I think not. Its time this nonsense was thrown back on the client. My suggestion is to get a client to sign of on their goals and risk tolerance. No dispute there. Then get rid of idiots in ASIC that do not understand the client and needs to have a scapegoat for their incompetance. Thats the planning community or advice community. Meanwhile, government will seek to thieve from our clients by way of taxes and we essentially as advisers need to be silenced. Get it....

  • Spurrier on 27/11/2012 5:41:53 PM

    I agree we should get clients to sign off on the risk, this way there can be no confusion. Unfortunately I have seen the other side of this where the planner has CLEARLY got it wrong and in this case they should suffer the consequences. Like everything there should be a balance and unfortunately the legislation misses the mark here.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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