8 Common Warning Signs in Financial Advisors

Choosing the right financial advisor can be pivotal in improving your financial position. However, not all financial advisors are created equal. Some financial advisors do not have your best interests at heart or provide inadequate financial advice which does not fit your situation and risk appetite. As experts in representing clients who have received poor or negligent financial advice, we’ve compiled a list of warning signs to look out for when assessing your current, or potential, financial advisor.

1. Your Financial Advisor Doesn’t Act in Your Best Interest

Financial advisors are legally obligated to act in the “best interests” of their clients. This includes providing “appropriate advice”, “warning the client if advice is based on incomplete or inaccurate information” and “prioritising the interests of the client”. Financial advisors who don’t provide advice in your best interest can be banned from providing financial advice by ASIC.  

2. Your Financial Advisor Lacks Professionalism

Financial advisors are beholden to a Code of Ethics – a set of principles and core values that has laid the foundation for advice to be seen as a ‘true profession’. Financial advisors are required to act in a way that demonstrates, realises, and promotes trustworthiness, competence, honesty, fairness, and diligence. This Code of Ethics is intended to shape every aspect of their professional conduct. Financial advisors who do not act ethically can be banned by ASIC.

3. Your Financial Advisor Advises You To Take High-Risk Investments

Everyone has a risk appetite. Some investors are willing to take on high risk for the possibility of a high reward, while other investors prefer to make safer investments over a longer period of time. If your financial investor is pushing you to invest in something outside of your risk appetite, this could be a sign that they’re not offering you appropriate advice.

4. Your Financial Advisor Is Not Clear About Their Fees

Your financial advisor should be clear and upfront about how they’ll be charging you for their services. If your financial advisor doesn’t disclose their fees, including referral fees, contribution fees, or ongoing fees, they could be engaging in misleading or deceptive conduct.

There are two main fee types financial advisors charge: fixed fees and percentage-based fees. Most financial advisors charge fixed fees for a particular service, such as a fixed fees to:

• Prepare a Statement of Advice (SoA);
• Implement financial advice;
• Give ongoing financial advice.

Other advisers charge percentage-based fees. This can include:

• Asset-based fees that are a percentage of the total value of your portfolio.
• Investment management fees are based on the performance of your investments.

Financial advisors are banned from charging commissions on most new investment products, including superannuation and ordinary investments. Advisors can receive commissions on life insurance, but it is capped.

5. Your Financial Advisor Provides Inappropriate Advice

Your financial advisor may be providing inappropriate advice if they’re:

• Failing to assess your needs and tolerance for risk.
• Pushing a financial product they do not know enough about.
• Not providing financial advice relevant to your situation.
• Failing to make required disclosures, such as a Financial Services Guide or a Product Disclosure Statement.
• Recommending a financial strategy that is inappropriate for you and your situation.
• Failing to explain the interest payable on any margin loans you take out to make an investment.
• Recommending an investment that offers them a personal gain over one that is more appropriate for you.
• Failing to review your financial plan at regular intervals or when your circumstances change.

6. Your Financial Advisor Acts in Their Own Self-Interest

When a financial advisor recommends an investment that they stand to benefit from, they may be acting in their own self-interest. This is especially true when they choose this investment over a different investment that would have better met their objectives, financial situation, risk appetite, and needs. Financial advisors who act in their own self-interest can be banned by ASIC.

7. Your Financial Advisor Has Conflicts of Interest

A conflict of interest is a conflict between the private interests and the official responsibilities of a person in a position of trust, such as a financial advisor. This can include, but is not limited to:

• Personal Account Trading in Financial Services
• Market Abuse
• Employee Remuneration Practices
• Close Personal Relationships
• Outside Business Interests
• Insider List Management
• Gifts and Entertainment
• Conflicts between the employee and the client or firm and the client

8. Your Financial Advisor Engages in Misleading or Deceptive Conduct

There are many ways your financial advisor may engage in misleading or deceptive conduct.

For instance, if your financial advisor deliberately keeps quiet or fails to provide information to you that would have influenced your decisions, this can be misleading or deceptive conduct.

If your financial advisor distributes advertising material that contains incomplete or missing information, this can be misleading or deceptive conduct.

If your financial advisor knew a client mistakenly believed that they were entitled to certain rights or benefits and the advisor did not take steps to correct the mistaken belief, this can be misleading or deceptive conduct.

How To Protect Yourself From Bad Financial Advice

One of the best ways to protect yourself from bad financial advice is to verify your financial advisor holds the right licences and has been properly trained

The Financial Advisors Register is a public record of financial advisors who provide personal advice on complex financial products to consumers. It allows consumers to:

• check that a financial advisor is authorised to provide financial advice
• and find information about an advisor before getting financial advice from them.

The Financial Advisors Register is managed by ASIC.

The Banned and Disqualified Register provides information about people and organisations that ASIC has disqualified or banned. The ‘Banned and Disqualified’ search provides information about people who have been:

• disqualified from involvement in the management of a corporation;
• disqualified from auditing self-managed superannuation funds (SMSFs); and
• banned from practising in the Australian financial services (AFS) or credit industry.

Getting Help With Your Financial Advisor

If you suspect your financial advisor is not acting in your best interest or causing losses, consider contacting FD Legal. We are a law firm which pursues compensation claims against financial advisors. We represent investors who have suffered financially as a consequence of receiving poor financial advice.

People place trust in financial advisors to counsel and safeguard their financial future. Bad financial advice can lead to consequences that are often difficult to recover from. If you believe you may have received poor financial advice, Financial Dispute Legal are available to discuss your options and help you obtain compensation for your losses.

All of our financial advice claims are personally handled by partners and senior lawyers who offer extensive experience in a wide range of investment strategies. We aim to help investors understand their legal rights and options in recovering losses acquired as a result of receiving negligent financial advice.

FAQs

What Questions Should I Ask My Financial Advisor?

There are many questions you might want to ask a financial advisor, but many of them depend on your specific situation, the kind of financial advice you’re looking for, and whether you’re a current or potential client. We’ve included a list of questions for you to pick and choose based on your particular circumstances:

• What are your credentials?
• How do you get paid for your services?
• How do you measure success?

• How long have you been giving financial advice to people in my position?
• How much is this advice likely to cost me?
• How do you deal with conflicts of interest which may prevent me from receiving objective advice?
• What is the risk attached to the products you recommend?
• What’s included vs. what’s extra?
• How will you consider my assets that you don’t directly manage?
• How often will we meet?
• Where will my money be held?
• How will you manage my accounts for taxes?

How To Determine If I Should Take Legal Action Against My Financial Advisor?

You may be entitled to compensation if you have lost money or experienced financial hardship as a result of bad financial advice. Not all financial advice that results in monetary loss can be deemed as financial negligence. The basis for a claim is dependent on your individual circumstances and how or if the advice was appropriate. However, you may have a case to pursue if your financial advisor has engaged in financial negligence, given advice that isn’t in your best interest, given inappropriate advice, or acted in their own self-interest.

Examples of Financial Negligence from a Financial Advisor

Examples of financial negligence from a financial advisor can include, but are not limited to:

• Failing to assess your tolerance for risk
• Failing to assess your current circumstances, financial needs, and objectives.
• Recommending a risky strategy that was not appropriate for you.
• Recommending a high-risk investment without explaining the risks.
• Proceeding with investments when the risks are not fully explained or understood.
• Recommending an investment strategy that lacks diversification and therefore has increased risk.
• Failing to diversify investments and spread risk across different sectors and industries
• Failing to warn you of the risks associated with the investments and investment strategy
• Recommending investments that pay high commissions to the advisor when other investments were more appropriate
• Recommending a strategy when you don’t have a secure source of income or sufficient resources/cash flow to fund repayments for investment loans (without relying on income from the asset that is invested)
• Advising you to accept a loan for an investment that you could not afford.
• Failing to conduct an analysis to see how you’re likely to be affected when markets fall
• Failing to explain the potential risks if the market were to fall.
• Failing to monitor your investments.
• Not providing the relevant documents required as a financial advisor, including a Financial Services Guide, Product Disclosure Statement, and Statements of Advice.
• ‘Churning’: the process when too many trades are made, leading to high fees and commissions.
• Failing to monitor investments and respond to changing economic circumstances
• Failing to explain the interest payable on loans taken out to make investments
• Failing to implement the plan appropriately
• Failing to review and revise the plan at regular intervals.
• Pressures you to sign documents that you haven’t read or don’t understand
• Make you feel intimidated or uncomfortable if you ask questions
• Are not upfront about how they make their money and the costs of the advice
• Leave you in a worse financial position than before you received the advice
• Charge you for advice that they never provide

How Do I Seek Compensation For My Financial Loss Due To Bad Financial Advice?

Before initiating a financial negligence claim, you should lodge a complaint against your financial advisor through the company’s internal dispute resolution services. The company must acknowledge your dispute within 14 days and respond within 45 days. You can still speak to a representative from FD Legal during this process to determine the best course of action to undertake in the future.

If you are unsatisfied with the company’s resolution, you can contact the Australian Financial Complaints Authority (AFCA). There is a compensatory limit of $500,000 when lodging disputes through AFCA. Complaints can be made to AFCA online via their website or by calling the AFCA on 1800 931 678 (free call).

What Is The Cost Of Suing My Financial Advisor? No Win, No Fee

Potentially, nothing. FD Legal offers potential clients a free consultation session in order for us to develop an understanding of your case and individual circumstances. We may offer to represent you on a “no win, no fee” basis (subject to our terms and conditions). We are able to provide client fee estimates before initiating the claim and update these estimates at any stage of the case.