Boxed in

It is early days, but evidence is emerging of an increase in the number of clients choosing to sue their financial planners as a result of the losses they have incurred in this year’s market meltdown.

Any increase in the level of litigation would hardly be surprising in circumstances where recent data also suggests that the Financial Ombudsman Service has been dealing with higher levels of complaints. Clearly the value of professional indemnity insurance for financial planners is going to be put to the test over the next 12 to 18 months.

What might also be put to the test is the value of the Statements of Advice (SOAs) financial planners have been providing to their clients in circumstances where there has been some evidence of ‘templating’ and ‘tick a boxing’ occurring.

What is meant by ‘templating’, you ask? Quite simply that some financial planners are not going to the trouble of originating SOAs specific to their clients but, rather, utilising a generic document and injecting only minimal amendments to reflect a client’s details.

‘Tick a boxing’ is the circumstance where planners simply tick boxes on a template document or computer program to generate a particular outcome.

By almost any measure, ‘templating’ represents unacceptable behaviour on the part of planners. ‘Tick a boxing’ may have its defenders in the industry, but it would be interesting to see whether that defence would stand up to scrutiny in a court of law.

‘Templating’, while unacceptable, is a practice that probably went largely unnoticed and unremarked in the days when the markets were booming and when achieving double digit returns for clients was not a particular challenge.

Now, when the markets are more challenging and in circumstances where some investments have quite simply tanked, financial planners who have been ‘templating’ their SOAs may face serious difficulties if their clients opt to pursue legal action.

Putting aside the requirements of the Financial Services Reform Act and the attendant regulatory environment, the reality confronting Australian financial planners is that SOAs are not a one-size-fits-all document. Every client is different and planners have an obligation to ‘know their client’.

Equally, computer programs that assist in the development of SOAs should be seen as tools in a process rather than an end in themselves. Planners must ask themselves how a court of law would view being told a planner had simply ticked various boxes on a computer program and, on that basis, delivered a particular SOA to a client.

The good news for planners and for the financial planning industry is that the level of litigation with respect to the provision of allegedly bad advice in Australia has been comparatively low. However, the industry can ill-afford the negative publicity that would attend a court finding a planner had been responsible for a client’s loss in circumstances where he or she had simply ‘templated’ a document.

Of course, none of this will be an issue for those planners who know they have done the right thing.

— Mike Taylor