A crucial phase of the financial adviser-client relationship remains unregulated by both the Coalition’s and Labor's version of the Future of Financial Advice (FOFA) legislation and continues to represent a risk for consumers, UNSW research shows.
“The current debate focuses on the duties owed by the financial adviser to the client within a range of defined conduct: in the language of the statute this is when providing financial product advice. However important interactions occur between the financial adviser and client prior to this stage in their relationship, and these interactions are not caught by the legislative regime,” say UNSW Law academics Professor Simone Degeling and Jessica Hudson.
The pair’s study, ‘Fiduciary obligations, financial advisers and FOFA’, published in the Company & Securities Law Journal, argues a key distinction must be drawn between substantive advice and advice that is given much earlier in the relationship, which the researchers label advice about advice.
Substantive advice concerns recommendations by the financial adviser about actual investment decisions and strategies, which are capable of implementation by the client. Substantive advice is regulated by the statutory regime as financial product advice.
Advice about advice on the other hand is early guidance by the adviser about the selection of topic areas on which the client will later receive substantive advice. Advice about advice is not financial product advice.
The researchers say an example of ‘advice about advice’ could be a client who seeks guidance as to the potential topic areas on which they should receive substantive financial advice – be that superannuation, life insurance or debt consolidation – when they can only afford to receive substantive advice on one of these topic areas.
“There are no doubt strong reasons of policy why we should care about the standards expected of financial advisers. However, our research shows that irrespective of the standards imposed by statute, the ‘advice about advice’ phase of the adviser client relationship is unregulated by statute and comprises an important area of risk for many consumers. This risk has not been met by either version of FOFA,” the researchers said.
Media contact: Steve Offner, UNSW Media, 02 9385 1583