The Australian Financial Complaints Authority (AFCA) has provided guidance for financial advice firms when recommending a product where it can benefit from.
Speaking at an AFCA member forum session on investments and advice, senior ombudsman Alexandra Sidoti unpacked two key issues the body is observing in the advice sector at the moment: the best interest duty and conflicts priority rule.
“We’ve been looking specifically at the conflicts priority rule, which is that rule that advisers have to give advice that prioritises the interests of the client over those of the financial firm or a related party of the financial firm,” Sidoti said.
AFCA recently announced that overall complaints for investment and advice – excluding Dixon Advisory – fell to an all-time low of 2,709 complaints in FY24, reflecting greater professionalism of the sector.
However, inappropriate advice remains the most complained about issue and accounted for 706 complaints. This was followed by the failure to act in the clients’ best interest at 565 complaints.
Sidoti stated that when an advice practice is recommending an investment product where it receives any type of benefit, it must be made extremely clear why the product is in the best interests of the client.
“A financial firm has to prioritise the best interests of the client over the interests of the financial firm or a related entity of the financial firm. So if a financial firm is recommending a product to its clients that it gets any benefit from, or that a related party of it gets a benefit from, it needs to really show that it’s prioritising the client’s best interests,” she said.
Merely disclosing that there is a conflict present is insufficient, Sidoti explained, meaning advisers must clearly articulate why the product they are recommending provides additional benefits to the client over similar products.
“A good common sense rule of thumb is to think: If this conflict didn’t exist, if me as the financial firm didn’t get a benefit out of a client taking this up, or one of my related entities didn’t get a benefit from taking it up, would I still be recommending this product? If you really think you would still be recommending it, just make it really clear why that is the case and what those additional benefits are.”
Also speaking on the session, Patrick Hartney, senior ombudsman at AFCA, said that many advice practices do not go that step further in a statement of advice (SOA) to explain how they are prioritising the client’s best interests above all else.
He unpacked: “Merely disclosing is not enough. What we’ve seen a lot is a high level disclosure of a related party product through these statements of advice documents. However, it doesn’t go that step further of explaining why the client’s interests are being prioritised and why it’s a good idea for the client.
“The statement of advice is such a key document in terms of making sure everyone is on the same page – the financial firm, the complainant that’s receiving that advice, the regulator such as ASIC, and AFCA – so everyone can understand how that recommendation is being made and why it’s being made in relation to a related party product.”
Sidoti identified Dixon Advisory as a key example of where a financial firm failed to communicate why a certain product was the most beneficial for a client.
“We’ve got a number of [Dixon] determinations issued now where we’re just seeing that isn’t being adequately done. There was no real explanation of why the related party product had any additional benefit to the complainant over a non-related product.”
Dixon’s membership of AFCA was ceased in June 2024 which prevented any new complaints being filed against the provider.
Money Management recently covered that in reviewing three AFCA determinations regarding Dixon, a common denominator was a failure by Dixon to describe the risk of the asset allocation properly.
Namely, Dixon classified its US Masters Residential Property Fund as “mixed assets”, with both defensive and growth characteristics, and that AFCA determined was an inappropriate label. As a result, the recommended asset allocation was not aligned with the risk profile of a complainants’ self-managed superannuation fund, meaning they were worse off by $561,277.
