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3 statements to be wary of when receiving financial advice

in Business Law, Financial Negligence by Andrew Young on

Is your financial advisor providing you with appropriate advice or just trying to make a quick sale to generate fees and commissions?

Under Australian law, financial advisors are required to provide retail clients with advice which is appropriate. This means the advisor must carry out reasonable enquiries about the client’s personal circumstances, goals and tolerance for risk, and provide advice which is tailored for each individual client’s situation.

Because everyone is different, this all takes time.

A good financial advisor will not rush you, but will take the time to properly understand your situation, discuss the pros and cons of various investment strategies and alternatives available to you, educate you about the relevant issues and make sure you appreciate the implications of your proposed course of action, so you can make an informed decision.

Unfortunately of late, the financial advice industry has been frequently criticised for its ‘sales culture’ with certain unscrupulous advisers more interested in making quick (and substantial) fees and commissions than providing appropriate advice.  Here are three statements from your financial advisor which should sound warning bells.

“I am invested in the same thing.” (a.k.a “My mother/brother/relative is invested in the same thing”)

Remember, the advisor is required to give you advice in relation to your individual situation. Just because the advisor says he/she has invested in a particular financial product, or has advised his relatives to do likewise, does not mean that you should too, or that it is a financial product which is appropriate for you.

Disregard, and ask the advisor to explain why what they are recommending is appropriate for you. 

“This document just covers what we talked about.”

Financial advisors are generally required to provide their clients with a written Statement of Advice (“SOA”). This is supposed to be a document which explains the advice in plain English so the client can decide whether to rely on it and proceed with the investment.

Many clients feel overwhelmed by the length and complexity of the SOA they receive, so when an advisor tells them there is no need to read it because it just covers what was previously discussed, they gladly agree. 

In reality, the SOA may contain a lot more including:

  • assumptions which the advisor has made, which may be incorrect  (e.g. “We assume there has been no change to your personal circumstances since the last time we gave you advice”);
  • warnings  and disclaimers which may be inconsistent with what the advisor has told you in prior discussions (e.g. the investment will not be capital secure or that there is significant risk involved);
  • statements which give a false account of your instructions (for example “You instructed us you wanted to engage in a gearing strategy (borrowing to invest)”, when in reality it was the advisor, not the client, who brought up the idea of gearing).

No matter how long it is, investors should read their SOA thoroughly before signing to ensure they fully understand its contents. Ask questions about any parts you do not understand and, if in doubt, get a second opinion.

“You need to sign this urgently.”

We have all experienced high pressure sales tactics in one form or another. The same can occur when receiving financial advice, particularly when it comes time to sign the necessary documents to proceed with the investment.

Clients may be told by their advisor that an offer for a particular investment is only open to a certain number of investors, or until a certain date. They may be rushed through the investment process without properly understanding what they are doing or the risks involved. The advisor may give you the impression that they are very busy and you are holding them up.

There may, in fact, be no real reason to hurry through the process. You are probably investing thousands of dollars. Maybe even your life savings. You owe it to yourself to take the time to understand the proposed investment. If you feel pressured, ask for time to read the documents and schedule a follow up meeting. The advisor with their busy schedule can wait. 

Find our more about our Financial Negligence services.

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