Speaking on an ifa webcast breaking down the Compensation Scheme of Last Resort (CSLR), managing director of Infocus Wealth Management Darren Steinhardt said the ability for the Australian Financial Complaints Authority (AFCA) to consider not just losses but also the gap between an investment’s performance and what it could have achieved is “wrong”.
“I really don’t like the ‘but for’ case, when I see someone who has not had a capital loss, and they might have actually made some money, but the ‘but for’ is if it was different advice, it could have given them this much, and now they’ve got to get a chunk of money,” Steinhardt said.
“To me, that sounds like a zero-cost option. There is always risk in everything that you do. By putting things in place and taking away that risk, what happens when the return that I get my client is well and truly beyond the ‘but for’? Do I get that paid back to me?
“So, I look at these sorts of settings, and for me, they are wrong.”
Also appearing on the webcast, Lifespan Financial Planning chief executive Eugene Ardino added that limiting what AFCA could award beyond capital losses could be a way to get a handle on the cost of the CSLR.
“If you actually didn’t lose capital, you’re entitled to less. But I also think the way AFCA does that is a bit arbitrary and a bit unfair. They just pick a fund, and often it just so happens that they will … pick a top quartile fund. I don’t think they do it on purpose,” Ardino said.
“If you’re going to do a ‘but for’, and I think for the purpose of working out a loss in inappropriate advice, you probably need some kind of ‘but for’, but it shouldn’t be top quartile. It should be a conscious selection of perhaps a benchmark, an average for that right risk profile. And there should be a little bit of wiggle room, because at the end of the day, it is hypothetical. You don’t know what actually would have happened.”
Steinhardt agreed that the complaints authority is relying on hypothetical scenarios, however, he added that he doesn’t “believe in coincidence”.
“That ‘but for’ is a real problematic thing. When it comes to things where there are unpaid determinations, for me, the unpaid determinations are a consequence of the issues that need to be addressed up the line,” he said.
“One of the challenges I have with AFCA and where there are the failures, there’s no one on the side of the adviser that’s actually supporting and defending and challenging AFCA as they go through those.
“I mean, obviously, running an advice business for certain years, we’ve had cases with AFCA that have been rejected because of jurisdiction, because of certain elements within the advice. There’s no one on the side of the advice that’s happening, so we could have outcomes that come through AFCA … that may be awarded more generously to the client than what they otherwise might be really entitled to if there was a challenge on that other side.”
Phil Anderson, general manager of policy, advocacy and standards at the Financial Advice Association Australia, said that limiting the “but for” case would not solve the issues with Dixon Advisory and its impact on the cost of the CSLR.
“AFCA are looking at the total portfolio that the client has, but we know from the work that the administrator of Dixon Advisory has done is that the URF fund itself, which is where most of the losses were, 4,606 clients lost something like $368 million on a capital loss basis,” Anderson said.
“So, I think the losses are definitely there, and if AFCA had a look at just losses on the URF, they would have still seen substantial losses. Their methodology is looking at the whole portfolio, so I don’t think that solves the Dixon Advisory scale of losses, but it’s obviously a very sensitive issue.”
To hear more from ifa’s CSLR webcast, tune in here.
We had a matter before AFCA where the client did not suffer a loss and we ultimately won the case, however in the early stages the case manager used 2 years of hindsight to show what we should have done differently. I pointed out that we did not have a time machine and if we had the same information that AFCA has 2 years after the event, then we would have made a similar decision.
AFCA must never use hindsight to determine any matter before them as advisers must make decisions based on the information at that time.
Darren,
If the advice is right in the beginning for instance the Risk Profile was done correctly then you wouldn’t be in the “What if” position. So for instance a medical receptionist wanted to buy a house in 2 years.
That was her goals and objectives, then your advisers shouldn’t recommend Gearing into margin lending to potentially increase her wealth. Her financial literacy is limited, she potentially doesn’t understand geared investments nor the margin lending component. Nor investing her into a high growth strategy is appropriate. The whole piece of advice is inappropriate for her situation. In this case: Refund all upfront fee’s, ongoing service fee’s, remediate her losses to initial deposit amount, any interest paid then you develop a hypothetical strategy calculate it’s earnings and pay her out that Aswell.
This is a proper remediation methodology which was applied across the board at institutions and managed by Deloitte/KPMG.
This is a clear case that the advice was wrong, and the calculation of compensation should be based on a conservative portfolio.
This is different to a What If scenario where hindsight is used to produce a better outcome.
As long as the risk matches the client’s goals and risk profile, then that outcome prevails. It is unwise to criticize another adviser without understanding the prevailing conditions impacting those decisions.
I’m simply pointing out that this is the remediation process applied by Deloitte and KPMG across all the institutions.