Liability - an adviser's fear, a dealer's worst nightmare

Financial planners who have advised clients in the past seven years to use a protected loan for margin lending may soon find themselves with some very dis-gruntled clients.

Financial planners who have advised clients in the past seven years to use a protected loan for margin lending may soon find themselves with some very dis-gruntled clients.

As pointed out in this week's front page story, the tax office is to crack down on tax deductions for protected loans used to purchase shares.

While the issue is far from settled, it appears likely there will be some sort of penalty for clients who have taken out margin loans on listed shares under a protected loan offer.

Whatever the case, the issue raises the spectre of one of the perennial concerns of financial planners; that of legal liability. While at this stage it is un-likely clients will consider legal action against advisers over advice on margin loans, some clients may have some substantial liabilities to recover.

Some of you may remember the story of the client who entered a financial plan-ner's office brandishing a gun after the client was financially ruined by a tax deduction which was disallowed and an ensuing penalty. The desperate man blamed the adviser who had recommended the tax effective scheme in the first place. The advisers in the office escaped injury but subsequently left the practice the following week.

While this is an extreme case, the point is that people will often be driven to extreme measures when financial problems emerge. And the first place a person with a financial crisis will look is towards a solicitor's office.

As some recent legal cases have made clear, the ultimate responsibility for an adviser's recommendation lies with the dealer principal. As the Capricorn case featured in Money Management's last issue illustrates, even the most soundly structured recommended list will not exclude a dealer from liability.

The dealer has been deemed ultimately responsible for all advice provided by their proper authority holders even if that involves recommending products out-side the recommended list.

It will be interesting to see how dealer principals react to recent legal and regulatory developments. It would be sad to see advisers stifled by a pedantic compliance regime but, at the same time, it would be equally sad to see a dealer group go to the wall because there had been inadequate supervision of the group's advisers.