A case in which an adviser successfully defended a claim of poor investment advice has ramifications for all financial advisers, according to a prominent financial services law firm.
The plaintiff, a financial advice client who described herself as ‘financially unsophisticated’, brought claims of negligence, and misleading and deceptive conduct against her adviser. According to the client, the products recommended by the adviser were unsuitable for her risk level.
The adviser defended his advice saying he had relied on Lonsec research and the recommendations of an internal review committee that approved a standard portfolio. The court found in favour of the adviser, saying his reliance on the external research house and internal review committee was reasonable.
In handing down the findings, Justice Foster said that the key question before the Court was whether a ‘reasonable adviser’ would have given the same advice. The adviser was not found to be negligent because they had:
- Correctly established the plaintiff’s risk level
- Spent some time and given considerable thought to the mix of products recommended
- Relied on the fact that Lonsec had given a strong recommendation to the products
- Applied a standard model portfolio set by an internal review committee at an investment advising firm (HLB Mann)
“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,” Justice Foster said.
… detailed notes can be the difference between successfully defending a claim, or not
Specialist financial services law firm, Landers & Rogers, said the case was a win for all financial advisers, and that there were key lessons to be taken from the decision.
“It is important to take thorough contemporaneous notes of what was discussed at the pre-advice meeting(s),” said Edward Einfeld, a lawyer with Landers & Rogers. He explained that detailed notes can be the difference between successfully defending a claim, or not. In this particular case, the quality of the notes kept by the adviser meant the client could not put forward an alternate version of what had been discussed in their meetings. “They also helped to establish that the risk profile analysis was properly undertaken and that the adviser had given considerable thought to the advice,” Mr Einfeld said.
He also pointed out that advisers could gain some confidence from the case about the reasonableness of relying on research from external ratings agencies. But he added that this was only one factor which the Court will consider when assessing the reasonableness of an adviser’s conduct, and sole reliance on research may still be a dangerous course to take.
Finally, Mr Einfeld said that 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 recommendation.
