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.