Obligations include the need to identify to investors the risks of investment, evaluate and quantify those risks, and to clearly describe both the risk and returns of an investment.
“There is no shortage of court decisions and regulatory findings in which financial planners’ failures to disclose to clients fees received for recommendations of certain investment products have been found to be in breach of those financial planners’ statutory and fiduciary duties,” Minter Ellison partner Beverley Newbold told InvestorDaily.
In the LGFS case [see related story NSW councils win landmark case against poorly rated product], the court did not accept that a warning “buried” in the middle of a lengthy paragraph contained in LGFS’s brochures distributed to the councils amounted to sufficient disclosure of the material risks, highlighting to planners the importance of very clearly identifying investment risk.
“Financial planners will need to take care in the future to ensure that commercial interests of this nature are disclosed to clients, consistently with their fiduciary obligations to prefer their clients’ interests over their own,” she said.
A conflict of interest arose because LGFS failed to tell its clients that its own business was being seriously affected by its exposure to CPDOs and other similar products.
LGFS also did not tell its clients that it had acquired $40 million of these products and that it would have to hold these highly risky products on its own balance sheet if it could not on-sell them to councils.
