Speaking to InvestorDaily, Minter Ellison partner Richard Batten said ‘understanding’ per se is not a legal obligation, but there is definitely a “gloss on the law” about the need for clients to understand the advice they receive.
“It is possible to read in elements of that from the more general duties, such as ‘best interests’ and the fact that statements of advice must be clear, concise and effective,” said Mr Batten.
The Australian Securities and Investments Commission’s (ASIC’s) Regulatory Guide 175 Licensing: Financial product advisers–Conduct and disclosure states that statements of advice should be designed to help the client understand the advice they’re receiving, he said.
In addition, the recently released Report 362 Review of financial advice industry practice: Phase 2 says that advisers must “adequately inform clients about the risks and returns” associated with alternative strategies “to ensure that clients understand the advice and how it is appropriate to their circumstances”, said Mr Batten.
While planners are not obliged to ‘educate’ their clients, multiple examples of clients who do not understand what they’re being advised to do would raise a red flag for ASIC, he said.
If none of an adviser’s clients understand what they are doing, then it suggests the adviser either isn’t very good at their job or is putting clients into extremely complex strategies, said Mr Batten.
“From a professional level, you should at least endeavour to attempt to explain what you’re doing – even if you run the risk of oversimplifying, which is a risk the other way,” he said.
In that respect, financial planners walk a “tightrope”, said Mr Batten – “but that’s the nature of professional advice”.
“Merely because one particular client doesn’t understand a strategy wouldn’t necessarily be a problem. But I think any good adviser would feel uncomfortable about even that,” he said.
