AFCA rules lack of portfolio diversification an ‘advice issue’
The Australian Financial Complaints Authority (AFCA) remains firm on its stance that industry failures occurring in the financial advice sector is fundamentally an advice issue, rather than a product issue.
Speaking at a recent AFCA member forum session, senior ombudsman Alexandra Sidoti weighed up whether product or advice failures are driving problems within the volume of investment and advice complaints.
According to Sidoti, what AFCA is observing at the moment are advice failures borne from a fundamental lack of diversification in a client’s investment portfolio, alongside a disregard for their individual circumstances.
“The issue that we’re really seeing here is a complete lack of diversification and that’s an advice issue,” she said.
“It’s not taking into account the client’s circumstances when they walk in the door. So at the time of providing advice, they’re not thinking, ‘What’s this person’s attitude towards risk? What are their objectives? Are the recommendations that we’re making likely to meet the clients’ objectives?’”
AFCA has observed examples where up to 100 per cent of a client’s investment funds were allocated to a single product, Sidoti stated, meaning they may lose the entirety of those funds if the products fail.
“It’s that fundamental lack of diversification, which is just one of the fundamentals of financial planning,” she added.
AFCA has long held this position regarding advice failures versus product failures, previously stating in its submission to the Senate economics references committee inquiry into wealth management companies that the fault in cases lay with the adviser.
However, AFCA’s lead ombudsman for investments and advice, Shail Singh, recognised that AFCA does not expect advisers to predict the future failures of an investment fund.
Also speaking on the member forum, he unpacked: “For example, if [advisers] put someone into a mortgage fund for 5 per cent, it was suitable to their portfolio and there was no information to show that the fund was not going to perform; the adviser is not responsible for that sort of conduct.”
Agreeing with the lead ombudsman, Sidoti said: “One of the things we consistently say is we don’t expect advisers to have a crystal ball.”
Singh added that advisers are seen as gatekeepers in protecting clients against such misconduct, with most doing a “fantastic job” at this.
“But as we’ve highlighted, there are business models that are problematic. Generally they are vertically integrated, generally it’s conflicted remuneration. These continue to exist,” he continued.
Looking at the 2024 calendar year period, overall investment and advice complaints were up 4 per cent from the previous year to 1,222 in total. Some 32 per cent of these were resolved at the registration and referral stage, down 9 per cent from the previous year.
The number of complaints closed saw a 41 per cent improvement to 1,257 all up, and the average time to close a complaint was 144 days.
Looking at internal dispute resolution (IDR) rates for the first half of FY25, advice issues fell from 17 per cent in the previous period to 15 per cent.
Failure to act in the best interest remained the same at 14 per cent of all issues, while inappropriate advice decreased from 18 per cent to 12 per cent.
AUTHOR
Jasmine Siljic
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