The drive to improve the quality, standing and credibility of Australian financial advisers did not end with the federal government’s Future of Financial Advice (FoFA) legislation, according to a leading adviser in Tasmania.
Identifying and managing risk is one area where many planners come up short, says Adjunct Professor Wesley McMaster. Another is the need for deeper awareness of ethical issues in managing conflict beyond the now legislated best interests duty and other controls.
With that in mind, the Financial Planning Association’s Tasmanian chapter has joined with the University of Tasmania to provide a professional development session on the ethical resolution of conflicts in financial advice.
McMaster, one of the moving forces behind the three-hour session next month, says it would be a mistake for the advice industry to see the introduction of the FoFA reforms as marking the end of its responsibilities to raise professional standards.
“With the endless debates around FoFA and the failure of financial advice, no-one has addressed the failure of financial advisers to identify, understand and quantify risk,” McMaster said.
“I’ve spent about half of my time over the past 15 years analysing and writing expert reports on advice that is the subject of litigation.”
He cited as examples three high-profile failures of advice of recent years in the Westpoint, Basis Yield Fund and Agribusiness scandals.
In the case of the $300 million collapse of the Westpoint property group a decade ago, a scandal that robbed the savings of almost 4,000 people, it turned out that planners advised people to lend large sums of money to companies with no assets.
“Would you lend money to a company with no assets?” McMaster said. “It’s clear to me that the planners did not undertake any due diligence on the investment.”
Another $300 million was lost in the collapse in 2008 of the Basis Yield Fund, a hedge fund that invested in complex and highly risky fixed interest products called collateralised debt obligations.
McMaster said while the Basis product disclosure statement explicitly described the product as high-risk, investing as it did in leveraged non-investment grade assets, one bank described it as capital stable and some research houses did not mention the risk.
“Would you rely on a research report that was silent on the risk in an investment?” McMaster said. “In the examples I examined it appeared the planner had not even read the product disclosure statement.”
A third failure was the pushing of agribusiness investments by some advisers, despite some of the product disclosure statements again explicitly describing them as speculative.
“I have constructed cash flows for eight agribusiness projects by using the data in each product disclosure statement and they show that in each case, a client would have been better off after tax by investing in a risk-free 10 year Commonwealth Bond,” McMaster said.
“Identifying and managing risk is a key element in delivering a successful investment experience and I see many examples where this is absent from financial advice”
The FPA Tasmanian ethics seminar is scheduled to be held on Wednesday, 28 October at the University of Tasmania. Wesley McMaster owns Tasmanian advice firm Asset Class Financial Planning and is an Adjunct Professor, College of Business, Victoria University.
