29/09/2009

In a recent submission to the Ripoll Review which is looking into the financial planning profession ASIC has proposed that financial planners be deemed fiduciaries.

 

A fiduciary is a person who has a special relationship with another person – a relationship that imposes very high standards of behaviour on the fiduciary.  The most basic duty of a fiduciary is a duty not to act for their own benefit or for the benefit of any third party but rather to act only in the interests of the beneficiaries for whom they act.   Put simply: the client comes first – totally and completely.

 

ASIC believe that declaring planners to be fiduciaries “would lead to a higher quality of advice and the emergence of a professional advice industry”.  Indeed they go on to say that such a step is one of only two which would be “likely to have the most significant impact on protecting retail investors”.   ASIC want the law to be amended by “clarifying the standard of care for advisers by introducing a legislative, fiduciary-style duty”.

 

Paragraph 137 of the ASIC submission states:

 

“In addition to the current requirement in the Corporations Act that advisers have a reasonable basis for advice, the Corporations Act could be amended to clarify that advisers must act in good faith in the best interests of their clients and, where there is a conflict between their clients’ interest and their own interests, to give priority to their clients’ interests.  Any contract that attempts to exclude the operation of this duty should be deemed void.”

 

ASIC then go on to give some examples, such as where a planner might find three different products appropriate for the client and be required to recommend the one with the lowest fee revenue for the planner because that is in the best interest of the client (a curious example given ASIC’s push to replace commissions with fees-for-service which would presumably mean that all three recommended products would return the same revenue to the planner).

 

A further example suggests that a planner would not be able to move a client to a wrap product if the cost of the move was not outweighed by the benefits of the move to the client.

 

We already have plenty of rules applying to make planners virtually fiduciaries in the most general sense anyway, so will the use of the term simply better describe what already exists or will it bring with it yet more duties that will just further add to planners’ liabilities to clients?

 

Will the introduction of a ‘fiduciary-style’ duty bring with it the added protections that investors need and that would have prevented a Storm Financial-type situation?

 

The argument will simply be now about the relative benefits to clients of competing products so that advisers can justify a self interested result.  The institutions will be providing their tied advisers with the necessary evidence and spin to justify the selection of the in-house product because (they will say) it is the best product and has nothing to do with the self interest of the adviser or the institution.  And at the margins it is really impossible to decide which product could be more beneficial anyway.

 

There appear to be plenty of cases being brought by damaged clients against advisers who recommended Storm Financial based on the appropriateness of the advice and the other existing heads offered in the Corporations Act and the ASIC Act.

 

It needs to be asked whether the addition of another possible head of liability (the ‘clients interest first’ principle) will materially  improve a client’s chances of success or even act as a dissuader to self interested advisers intent on putting their remuneration or other interests first.

 

Or is it just a case of the regulator being seen to be doing something in order to defray criticism?

 

If you have any questions regarding obligations of Financial Planners as Fiduciaries, please contact Peter Townsend at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.