Advisers need to change how they communicate risk

financial-services-industry/financial-advice/financial-advisers/FOFA/investment-advice/

14 November 2014
| By Jason |
image
image
expand image

Advisory firms will need to examine how they communicate risk to clients under the Future of Financial Advice (FOFA) reforms and not trust that old methods will still be suitable in the future.

FinaMetrica co-Founder Paul Resnik said the declaration by the Australian Securities & Investment Commission (ASIC) in its recent Strategic Outlook that the regulator would examine gaps in consumer financial literacy and understanding of risk and return required planning businesses to question how well they communicate risk to clients.

"Advisory firms have been navigating the FOFA reforms over last several years and the largely conflicted remuneration objectives of those reforms and consequently can no longer be regarded as a global role model for client-centric advice," Resnik said.

"For example, the financial services industry as a whole provides risk and return illustrations to prospective investors which often downplay downside risk, particularly the likelihood of outliers or rare events, while focusing on upside potential."

"Financial advisers often rely on these illustrations when explaining risk to clients. The end result is that many clients take on more risk than they are naturally comfortable with, or are over exposed to risk and don't understand the risks they have taken."

Resnik said advisers also needed to do more in the area of identifying the financial needs of consumers to be able to provide suitable investment advice.

He said conflicts of interest and a lack of competence could lead to products being sold to investors which did not take into account their needs and risk preferences and that advisory firms should have policies in place to prevent this type of behaviour.

"A greater cultural change is needed. Consumers' needs must be elevated to a priority if we want Australians to value and take our financial advice," Resnik said.

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

So we are now underwriting criminal scams?...

2 months 3 weeks ago

Glad to see the back of you Steve. You made financial more expensive, not more affordable as you claim, and presided ...

2 months 3 weeks ago

Completely agree Peter. The definition of 'significant change is circumstances relevant to the scope of the advice' is s...

4 months 4 weeks ago

ASIC has suspended the Australian Financial Services Licence of a Melbourne-based financial advice firm....

1 week 4 days ago

The corporate regulator has issued infringement notices to three AFSLs whose financial advisers provided personal advice to a retail client while unregistered....

2 weeks 2 days ago

ASIC has released the results of its first adviser exam to be held in 2025, with 241 candidates attempting the test....

3 weeks ago

TOP PERFORMING FUNDS

ACS FIXED INT - AUSTRALIA/GLOBAL BOND