FPA warns on danger zones

The Financial Planning Association (FPA) has warned its members on a number of bad advice hotspots, while expelling one adviser in the last quarter.

The FPA opened 18 new investigations into member activity in the April — June quarter. It has 42 ongoing investigations (as of 30 June), with 10 investigations closed in the last quarter. Out of those investigations only one member was expelled — Rollo Sherriff.

Among the areas of concern were advisers deviating significantly from the asset allocation guidelines set by their licensee, as well as the use of ‘inadequate’ risk tolerance questionnaires and a failure to collect sufficient information about clients to support advice recommendations.

Where asset allocation was concerned, the FPA said it had received complaints regarding advice that revealed a “marked difference” from the asset allocation guidelines recommended by the Principal licensee, in particular where there was overweighting to growth assets at the expense of defensive asset classes.

The association said while licensees’ “recommended asset allocations are generally formulated incorporating financial theory and good judgement for an investor class as opposed to [being] individually tailored, members should be conscious to the dangers of significant moves away from these recommendations”.

The FPA also noted it commonly received complaints from clients about being recommended a product or strategy that was “too risky”. The FPA conducted investigations into the use of risk tolerance questionnaires commonly used by advisers, and found many of them wanting. For example, the FPA highlighted problems such as questionnaires having only a small number of questions (as few as four or five), vague and irrelevant questions as well as inappropriate weighting given to particular questions.

The FPA encouraged members to “examine their risk profiling questionnaires to ensure clear and transparent language”. It also suggested there are compelling arguments for separating the evaluation of a client’s attitude to risk from the capacity of their financial resources to tolerate risk.

“Combining these concepts can lead to confusion.”

The FPA also noted increasing complaints over the past 12 months against advisers who failed to collect sufficient client data to support their recommendations. That included the provision of high-risk changes to investment strategies where the client claims their investment objectives had not been discussed.

The FPA warned advisers to properly document clients’ financial objectives, “rather than relying on simplistic objectives such as ‘retire comfortably’ or ‘to live with financial freedom in retirement’.”

The FPA’s Quarterly Complaints and Discipline Report for the April to June quarter was published in the August edition of Financial Planning Magazine.