The risk of legal liabilities for financial planners was easily preventable, yet advisers were leaving themselves exposed due to a lack of record keeping, a legal expert in financial services said yesterday.
"In our experience, financial planners expose themselves to being successfully sued when they don't properly document the advice that they give in conference," Minter Ellison partner Chern Tan told InvestorDaily.
"It's the very fundamental litigation problem that we run into when someone says something but has nothing recorded in writing to support or corroborate that story."
Tan said more claims were emerging, but he was now seeing litigated claims going to the Supreme Court due to their size.
"The claims we're seeing from late 2009 to 2010 and more recently are strategies that were put in place in 2006 and 2007, so these losses are still related and connected to pre-GFC (global financial crisis) advice," he said.
"A previous client will say they weren't advised about the risks associated with being a growth investor or the risks associated with gearing.
"The adviser will say he did, but when we ask if they made notes, put it in their statement of advice (SOA) or have it recorded in writing, invariably the answer to those is no."
In addition, the adviser would have to declare that they saw 10 clients a week, for example, and therefore would not specifically have a recollection of that particular instance, he said.
Advisers can avoid such cases by making typed notes in their files for every client meeting and ensuring these are stored away.
Advisory firms should also have a standard script for clients to describe and explain stock market risk as the clients who sued were generally not sophisticated investors, Tan said.
Client claims have also included allegations of a conflict of interest where a trail commission was not disclosed, for example.
When that became part of a claim, it could trigger an exclusion for cover in a professional indemnity (PI) policy, so advisers must look carefully at the fine print and the terms and conditions, Tan said.
"It's quite common - at least half [of cases], and while PI cover is a priority, there's been insufficient focus on that sort of exclusion," he said.
He said that problem would become less of a dilemma with the removal of commissions and the implementation of the best practice regulation, but there would still be a lag period.
