Advisers need to change how they communicate risk
Advisory firms will need to examine how they communicate risk to clients under the Future of Financial Advice (FOFA) reforms and not trust that old methods will still be suitable in the future.
FinaMetrica co-Founder Paul Resnik said the declaration by the Australian Securities & Investment Commission (ASIC) in its recent Strategic Outlook that the regulator would examine gaps in consumer financial literacy and understanding of risk and return required planning businesses to question how well they communicate risk to clients.
"Advisory firms have been navigating the FOFA reforms over last several years and the largely conflicted remuneration objectives of those reforms and consequently can no longer be regarded as a global role model for client-centric advice," Resnik said.
"For example, the financial services industry as a whole provides risk and return illustrations to prospective investors which often downplay downside risk, particularly the likelihood of outliers or rare events, while focusing on upside potential."
"Financial advisers often rely on these illustrations when explaining risk to clients. The end result is that many clients take on more risk than they are naturally comfortable with, or are over exposed to risk and don't understand the risks they have taken."
Resnik said advisers also needed to do more in the area of identifying the financial needs of consumers to be able to provide suitable investment advice.
He said conflicts of interest and a lack of competence could lead to products being sold to investors which did not take into account their needs and risk preferences and that advisory firms should have policies in place to prevent this type of behaviour.
"A greater cultural change is needed. Consumers' needs must be elevated to a priority if we want Australians to value and take our financial advice," Resnik said.
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