Pressure from clients and regulators for advisers to deliver better portfolio management and monitoring is increasing, she said, adding that FOS data shows that clients are often successful in complaints brought to FOS concerning these areas.
“In the direct aftermath of the GFC, the public eye was on the appropriateness of financial products recommended by advisers. Now there are signs the spotlight has shifted to advisers’ ongoing service obligations for monitoring and managing investments,” she said.
“Ongoing monitoring of clients’ investments is likely to be the subject of increased scrutiny going forward – by both clients and corporate regulators.
“The Financial Ombudsman Service’s archives abound with successful complaints against advisers who failed to warn clients about underperformance in their portfolios,” she said.
“These determinations make it clear that advisers who offer to provide an ongoing monitoring service will be liable if their client suffers a loss as a result of their failure to do so.”
To protect themselves, Ms Wivell Plater suggests advisers describe their monitoring services “very carefully” to clients.
“They may be contractually obliged to provide continuous monitoring unless their agreement specifically states otherwise, i.e. on a quarterly basis,” she said.
“Regardless of the wording of service agreements, it is not unreasonable for clients who pay an ongoing fee to expect their adviser will tell them if the market is dropping. Failure to do so could result in hefty compensation payments.”
Ms Wivell Plater added that there is technology available to help advisers with portfolio monitoring.
“Using these systems, financial advisers can quickly access portfolios to ensure they are within required asset allocations, and adjust if necessary,” she said.
“While specific technologies are unlikely to become mandatory, the standard expected of financial advisers is likely to reflect technological advancements. Advisers who are unable to demonstrate that they are proactively monitoring client portfolios could find it difficult to satisfy the regulator that they have appropriate systems in place.”
The heart of the problem is that planners who rely on ‘policy portfolios’ where a static and typically ‘long-only’ allocation is made to a fixed and limited number of traditional asset classes (in the deluded idea that this will eventually achieve the clients goals and objectives) simply build for their client a ticking time-bomb that history reveals eventually and inevitably results in the client’s goals and objectives being permanently compromised.
The adherence by planners to methods where the foundation is dependent on easily disprovable logic, false assumptions and flawed implementation is what creates a legal risk that extends far beyond mere monitoring, especially since such failed methods continue to be represented by planners as a way to reliably achieve goals.
This is the real legal risk that is yet to be fully tested in Australian courts.