Less than one-in-three chance of defending 'know your client' complaint

Failure to ensure clients understand risk profile questionnaires can mean advisers fail the ‘know the client’ obligation and leave them open to a complaint, according to a report.

Risk management firm, Fourth Line, conducted a survey of 1,100 complaints to the Australian Financial Complaints Authority (AFCA) between 2012 and 2020, around 12% of total complaints.

Total complaints paid rose to $14.6 million in 2020, up from $8.6 million in the previous year.

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One such complaint pertained to a complainant describing how they were advised to change super fund to a higher-cost fund but the risk profile questionnaire used was deemed too complicated by the complainants, who lacked the necessary financial literacy to understand certain questions.

The firm argued that the tool had taken their investment experience into consideration and had categorised them as balanced investors, therefore it allocated them 50% exposure to growth assets.

Upon examination of the questions, AFCA found the answers were an unreliable indicator of the complainants’ risk tolerance, particularly as they had answered having ‘limited knowledge’ of investing.

It said: “Given the inadequacies of the risk profile questionnaire, it is up to a prudent adviser to assist the complainants understand and comprehend the questions to identify and understand their relevant circumstances. In this instance, the adviser has not discharged his ‘know their client’ obligation”.

The complaint was found in favour of the complainants who received $13,734.

AFCA recommended advisers considered previous investment experience, capacity and tolerance for risk, time horizon for investing, age and personal objectives and had a legal obligation to identify clients’ objectives as part of their duty to act in a client’s best interest.

In total, 18% of complaints related to ‘know your client’ but this was down from 70% in 2017 and total complaint claims paid totalled $23,315,121. There was a 32% chance of an adviser successfully defending a claim in this space, which included incomplete fact finds, incomplete risk profiles or failure to investigate clients’ circumstances.

For incomplete fact finds, there was a 0% change of an adviser defending this type of complaint.

“There has been a reduction in complaints determined related to ‘know your client’ issues in recent years suggesting advisers have improved their investigations into their client’s relevant circumstances,” the report said.

“It is worth noting that most of the high-risk and illiquid product [Global Financial Crisis] GFC-related complaints were determined or closed by 2017, when the majority of investment-related complaints related to failure in the adequacy of risk profiling and the fact-finding processes.”

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We just can't win can we.

Yes, it is also subjective and therefore whenever it gets to a complaint stage the blame will always be placed at the professionals feet. You could even have file notes around the discussion and education, but still they will find the client just didn't have enough experience to understand what they were saying - so you simply can't win. It dovetails with the other article, just give advice to the wholesales.

"We just cant win"... I agree! But we cant give up either. Lets ask our associations to work with the necessary regulatory authorities to get a solution.

ha ha sarcasm?

thought so.

OK so according to AFCA anyone who answers a Risk Profile question that says they are an inexperienced investor the adviser has to put them in cash or term deposits? But hang on, if I do that and then model out their long term income needs the client runs out of capital within 5 years of retirement. It's called a trade-off and regardless of the level of investor education it is actually our responsibility to advise on a suitable risk profile to meet their needs. And yet a Super Fund Trustee can "decide" for the same inexperieced investor that they default to a ahem "Balanced" Fund with 80+% Growth Assets? What if the adviser in question recommended that the client not to sell out of their Balanced fund during the market down turn but the client went against this advice and incurred the loss themselves which is just at a specific point in time? What if the "Balanced Fund" had fully recovered by the time the case is heard at AFCA and the adviser can demonstrate that they would have lost no money if the client had of actually followed their advice but because they didnt and sold out they incurred a loss for which now the adviser has to pay because the cient did not follow the advice provided! Just seems like a free kick to clients to have all the benefits of markets on the way up but at the first downturn they can get out without any personal risk what so ever because the adviser will wear it. Outrageous.

that's exactly right it's an unwinnable situation. so the risk is assumed by the adviser at all times. the client is only happy when the market is up, when the market goes down which it always does when you have an allocation to growth assets it's the adviser's fault and AFCA is the main determinant as to whether the client understood or not.

good luck trying to get AFCA on your side. this is why the most astute advisers have largely departed with those remaining either refusing to accept the reality of the operating environment or not having a better option or both.

The issue here is that the authorities have allowed a situation where no one takes responsibility for their own actions and decisions. Unfortunately it is a societal epidemic and is not limited to financial services. For example, 40 years ago, when you purchased a new vehicle, it came with a service manual that explained how to adjust the valves in the engine. Now those manuals warn individuals not to drink the contents of the battery! Something needs to change and fast!

Here's one. Maybe the reason complaints have dropped regarding the "know your client obligation" is that this obligation was repealed with the introduction of the best interests duty.

This is all happening under a Liberal government. They have been in power for the last 8 years, and 19 of the last 25 years.

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