A win for financial advisers

Insurance eBulletin - 4 June 2013

Summary

The Federal Court of Australia has dismissed a claim for negligence against a financial adviser.1 A client had claimed that two products recommended by the adviser were unsuitable for her risk level and were riskier than disclosed in the statement of advice.

In making recommendations to his client, the financial adviser had relied on Lonsec research and on the recommendations of an internal review committee that approved a standard portfolio.

The Court found that the adviser had spent considerable time putting together a portfolio, and that his reliance on the research of Lonsec and the internal review committee was reasonable. The Court also found that it was "highly artificial" to isolate particular investments within a diversified portfolio.

The client also brought a claim for misleading and deceptive conduct in relation to how the products were described in the statement of advice. The Court rejected this claim on the grounds that the client was so financially unsophisticated, she would have proceeded with the investment regardless of the description.

 

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The facts

The financial adviser made recommendations to his client (the plaintiff) regarding $7 million she had received from the settlement of divorce proceedings.

The adviser conducted a risk profile analysis and determined that the plaintiff was a Balanced/Growth investor with a rating of 4.5 on the Lonsec scale.

The plaintiff claimed that two products recommended by the adviser were unsuitable for her risk level and were riskier than disclosed in the statement of advice. The two products (the Basis Yield Fund and the Basis Aust Rim Fund) represented only 10% of the plaintiff's total invested portfolio.

None of the other products recommended by the adviser were challenged as inappropriate.

 

Claim for negligence

The plaintiff accepted that she was financially unsophisticated, completely reliant on the adviser and would have done anything he recommended. Therefore, the question the plaintiff had to make out was whether "no reasonable financial adviser" would have given that advice.

The following facts were central to the Court's finding that the adviser was not negligent. 

  1. The adviser had correctly established the plaintiff's risk level as 4.5 on the Lonsec rating scale, being Balanced/Growth. 
  2. The adviser had spent some time and given considerable thought to the mix of investments recommended. 
  3. The adviser relied on the fact that Lonsec had given a strong recommendation to the products and had also recommended a 5% to 10% allocation within a diversified portfolio for a Balanced/Growth client. 
  4. The adviser applied a standard model portfolio set by an internal review committee at investment advising firm, HLB Mann.

Justice Foster also said that it was "highly artificial" to argue that two products within a diversified portfolio were inappropriate as a result of being too risky when no claim was made in relation to the portfolio as a whole. This is because the level of risk adopted by entering into those investments had to be considered against the risk across the portfolio.

Finally, Justice Foster made the following comments about the process of providing financial advice:

"The provision of investment advice requires a good deal of judgment and, although based upon information which may to some extent be described as objective, is largely a subjective exercise. A critical factor in providing reasonable investment advice is making a reasonably accurate assessment of the goals and objectives of the investor who has come to the adviser for that advice. The process is interactive in the sense that there are no absolutes. What might suit one investor's circumstances, goals and aims may not suit those of another investor."

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Claim for misleading and deceptive conduct

This aspect of the plaintiff's claim had two parts: 

  1. The statement of advice misrepresented that the recommended investments were suitable and appropriate; and 
  2. The statement of advice misdescribed the investment.

The first part was not satisfied when the Court found that the advice was suitable and rejected the negligence claim. The plaintiff failed on the second part of her claim because she could not establish that she would have acted any differently if the investment had been correctly described.

 

Key points to take from this decision

  1. It is important to take thorough contemporaneous notes of what was discussed at the pre-advice meeting(s). Whether you are developing risk-management procedures or assessing the likelihood of a claim, detailed notes can be the difference between successfully defending a claim, or not. In this case, the notes kept by the adviser, importantly, constrained the plaintiff's ability to put forward an alternate (inconsistent) version of what had been discussed in the meeting with the adviser. They also helped to establish that the risk profile analysis was properly undertaken and that the adviser had given considerable thought to the advice. 
  2. Financial advisers can gain some confidence from this decision about the reasonableness of relying on the research from external ratings agencies. However, it is important to note that this is only one factor which the Court will consider when assessing the reasonableness of the adviser's conduct. Sole reliance on ratings agency research may still be a dangerous course to take. 
  3. Evidence that the products (and the companies selling them) are highly regarded can be useful, particularly where such evidence was provided to the client at the time of the recommendations. On the other hand, evidence that the recommended products were under a cloud of suspicion at the time of advice can be damning to a defence when trying to establish that the advice was reasonable.  

Author
Edward Einfeld, Lawyer

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Further information


Jordan v HLB Mann [2013] FCA 315

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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