RISK – Stay focused or face the threat of legal action

As dealer groups and advisers face a spreading threat of legal action from clients, planning sector experts are becoming more concerned about the growing dangers planners face from a lack of focus on risk insurance, writes Anna Fenech.

For financial planners, the riskiest part of risk insurance could well be not securing their clients enough of it.

The evolution of financial planning into a profession in Australia, and consequently a more litigation-conscious clientele, are driving the growth and spread of both threatened and actual lawsuits against financial planners and advisers.

Ten years ago planners were largely securities advisers. But since then their services and product range have expanded to include many other areas, including risk insurance.

That means financial planners, particularly those without a strong background in insurance, face a growing risk of legal action against them if they don't cover their own clients' risk when preparing a comprehensive financial plan.

Peter Bobbin, managing partner of the Argyle Partnership, consults planners on minimising legal risk in their practice. He says the industry "has created the situation where they are liable to make insurance as well as securities recommendations".

"While it is true that to become a proper authority holder, one needs to become licensed under the Corporations Law, the risk for a financial planner is that he or she is not limited by securities recommendations," he says. "Today the financial planner deals with a myriad of laws.

"For securities recommendations it is the Corporations Law, for insurance recommendations it is the insurance laws, for mortgages the credit provider laws, and for superannuation it's the SIS laws."

But despite the presence of risk management as part of the curriculum for the Diploma of Financial Planning, most planning and advisory experts believe there is still a knowledge gap amongst most practitioners where risk insurance products are concerned.

"Traditionally, financial planners were investment advisers and they are often not comfortable with the whole process of risk insurance - which involves a whole lot of paperwork, health checks and so on," said Chris Wren, general manager of Bridges Personal Investment Services.

Andrew Creaser, general manager of Associated Planners, points out that it is unusual for a financial planner to have both securities and risk insurance specialisations, adding that financial planners sometimes tend to be reactive than pro-active.

"Some planners will only do a client's portfolio review when the client reminds them that it is due to be done," he says. "Then the risks are generally highlighted only when something has gone awry.

"When a planner has not dealt with risk insurance and someone dies or becomes incapacitated, it becomes apparent that there is this gaping hole in their financial strategy. Then quite possibly a lawyer could put a good case."

Legal experts such as Peter Bobbin have already warned planners that they now face the same threat of litigation as that faced by other professionals like doctors, lawyers and accountants.

He cites as an example a Sydney case late last year where 48 retirees were awarded damages by the NSW Supreme Court. Their retirement nest-eggs were virtually wiped out by adviser Hans Felden, who invested $4 million in preference shares in the failed EC Consolidated Capital.

And as Bobbin points out, the amounts of money involved in a capital loss on an investment can be far less than those resulting from an absence of insurance.

"Someone could have lost 25 per cent of their $100,000 capital in the stock-market crash of 1987. Then there is a person aged 45 who has a financial plan done but with no recommendations about income protection insurance.

"That man has an accident and is totally and permanently disabled. With a policy in place the client would receive three quarters of his original income indexed every year for 20 years. Without it there is a loss of more than $1 million."

Mike Gourley, compliance manager at Godfrey Pembroke, agrees that the risk of being sued for a gap in the financial plan, particularly for the absence of risk insurance, is now greater than ever.

"We will increasingly see actions against financial planners that will address the non-investment aspects," he says. "Income and asset insurance is a component of a client's financial plan, so in the absence of complete instructions a financial planner should address these issues in his or her plan."

But where does the legal responsibility lie when a client brings a case against a planner who is a member of a larger group?

Bobbin says uncertainty over this has made the large-scale creation of a multi-agent environment in the financial planning industry a potential high-risk area.

Technically the company is responsible for an agent but in a multi-agency arrangement where three companies all have policies on the table, it can get muddled.

He gives an example. "The client comes back and says you - the financial planner - are negligent. You say it is the insurance company's fault as your principal. However, the insurance company might then come back and say it is your fault as they're only responsible for the sales process, not the insurance recommendation."

Bobbin says at present more court cases are coming through in the superannuation area and most have been settled out of court. Typically, he says, employers have been sued themselves and have then looked to the financial planner for indemnity.

"Say I put my employees in a super fund and then someone dies unrelated to work. That person's estate could then sue because the person was a member of a fund with no life cover when I could have put them into a fund with automatic death cover."

And the opportunity for clients to make complaints through industry-provided schemes at no charge will only increase the chances of litigation, Bobbin says. "A complaint is the beginning of a negligence claim," he warns.

But experts believe planners can protect themselves to some extent. Andrew Creaser of Associated Planners says the planning sector "must become much better at defining what they advise on and precluding what they do not. This should be stated clearly in the report that planners provide to their clients."

Gourley of Godfrey Pembroke says a client cannot be forced to pay for the full preparation of a financial plan if that is not what they want. But he adds that if this is the case, the reason for not having a complete financial plan should be fully documented, including an appropriate disclaimer "which is effective depending on how well it is written".

Bobbin advises planners to put in place a full risk management strategy which includes shifting liability for investment decisions onto the clients as well as securing appropriate professional indemnity cover.

But there's also plenty of optimism in the planning sector about how much progress has been made. Bridges' Chris Wren says the whole industry is now educating itself better and getting closer to the provision of what he calls "the totality of services".

And Barry Lambert, managing director of Count Wealth Accountants, believes financial planners "are at the bottom of the list to be sued - those doing a good job, that is."