Advisers shouldn't be responsible for product failure

Advisers should not be held accountable for product failure, and product and advice should remain separate, according to the Association of Independently Owned Financial Professionals (AIOFP).

Speaking to a Senate Committee on submissions to the Better Advice Bill, the AIOFP argued it was important to have this distinction legislated so it would be considered by the Financial Services and Credit Panel (FSCP).

Phil Osborne, AIOFP compliance expert, said just because a product had failed does not mean the adviser did not uphold their responsibilities.

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“An adviser puts in the research, they will go through a due diligence process and that’s why we have approved product lists, and there is a certain amount of research that goes into that,” Osborne said.

“If the product provider has been shielding things from the research process… unfortunately what has happened in the past is that the adviser has been held accountable.”

Osborne said advisers had been held responsible for lack of disclosures by product makers, which the Australian Securities and Investments Commission (ASIC) failed to pick up on.

“It’s something that needs to be taken into account, simply because a product actually failed it does not mean the adviser has failed in their attempts to work in a client’s best interest and perform their due diligence,” Osborne said.

“Our concern is this has happened quite a bit and we’d like to see that aspect covered by the FSCP.”

Peter Johnston, AIOFP executive director, said one of the problems with product failure was that consumers mistakenly believed a product was safe just because it was on the market.

“Consumers think because a product is released on the market, ASIC has actually looked at the business model and the directors, etc. and they don’t,” Johnston said.

“This product which hits the market has been tested if it complies with four or five legal requirements, but ‘mum and dad’ think it’s been looked at and it hasn’t.

“This product hits the market and then you have conflicts out there in the research industry and they can go buy a favourable rating.

“Then they go onto the internet and advertise, and ‘mum and dad’ buy it, thinking it’s got a five-star rating and has been approved by ASIC but it hasn’t.

“What has happened in the past is we have $40 billion worth of funds failed since 1980 and what has happened is ASIC has run for cover, the product managers have run for cover, so the advisers get the blame.

“Advisers are just consumers like every other consumer. We’re relying on other parties to do the right thing and manage the product properly and unfortunately what happens is we get blamed while the others run away and avoid accountability.”

Johnston said the association believed product and advice should be totally separate, like it was pre-1990.

“During the ‘90s is when the banks got involved with the industry and set up vertically integrated models, which is internal advisers selling their own products; this is where the industry went backwards which was a huge conflict for consumers,” Johnston said.

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Hey, wasn't that what the RC and all the rubbish heaped upon us over the last decade was all about, separating advice from product? Sorry if Duke sounds a little confused here.

This product failure issue was 99% of the reason during the GFC that advisers were labelled as miscreants and untrustworthy. In a prior AFSL I had exposure to numerous high level compliance insights due to issues that they were seeing develop at that time which they shared as learning experiences.

The predecessor to AFCA, FOS (Effing Outstanding Stupidity) in their infinite wisdom repeatedly kept finding advisers liable for product failures. In each case, stating that it was the FP's responsibility to assess the product as fit for purpose. This included doing forensic accounting pre-work, such as establishing if there was any secondary level mezzanine funding that wasn't disclosed in the PDS, the inter-entity relationships if there were several products offered by the same provider, if a structured product whether the floor and ceilings were sufficient to withstand 'cataclysmic' level financial events - all regardless if the client was a highly aggressive investor.

The product providers by and large were let off scot free and several reincarnated themselves and happily jumped into the next financial product development, with no penalties.

Glad to see it has only taken 13 years for this to hit the headlines.

Thx Peter, it may be stating the bleeding obvious but unfortunately someone has to do it. Good on you for keeping all of this in the public eye! If politicians don't understand whats gone wrong, it will repeat all over again with "roboadvice"!

all I want to know is whether or not the mince that my local butcher sells with chemicals in it to make it look really red is also my fault as am a licensed financial planner and should know better.

PMSL - spot on

It is great this is being reported here in an industry Communication. But where in the Public Media is this being reported until the public is made aware of this nothing will change as this Industry is too small to significantly affect the government.
I applaud that is being presented to the Senate Committee and Keep up the work Mr Johnston and Mr. Osborne.
My question to you all is to think this over, is this going to make a difference.
We are the easy target, we are at the bottom of the rung of responsibility, we are majority small businesses, Fragmented representation due to conflict of interest.
Should we give up? No.
But we should be realistic about the outcome, ASIC won't take responsibility, and the Product providers ahve connections and means to make this our problem.

Phil, haven't you and Peter worked it out yet? Don't you realize that every adviser in Australia has unwittingly been forced by the regulators and the legislation as it stands, to write a put option on every client portfolio so the client no longer has any risk to worry about when investing? And surely by now you would have obtained your very own personalized crystal ball, allowing you to look into the future and sidestep all the dud and crooked offerings that have been showered on the public? I really do appreciate your efforts - someone from the coalface has to say it as it is - but when you live in Bizarroland, where the inmates run the asylum, what hope do we have? After 40 years of giving advice, I'm out within the next 2 years (oh, and I passed my FASEA exam).

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