Retirement 12/10 – Avoiding legal action with dissatisfied clients

Educated investors are no longer willing to put up with financial plans which don't meet their needs but advisers have ways to protect themselves asJohn Wilkinsondiscovered.

As more financial advisers write plans, the trend for clients to sue them will also increase according to the head of commercial litigation, Rob Lees from the legal firm Slater Gordon.

However Lees statement is more often being confirmed by a number of planners who work in the retirement advice area.

At the recent FPA Principal's conference a source of much discussion was how assessing risk and giving advice for events many years ahead will lead to problems if the client's expectations are not met.

Further confirmation of this negative trend is echoed in the number of claims by planners under their professional indemnity insurance

According to HIH Insurance, the insurance industry expects to receive 13 claims per 100 planners at an average value of $30,000 each.

The Financial Industry Complaints Service (FICS) is designed to handle these smaller claims, but its limit of $100,000 pushes complaints seeking higher amounts into the litigation arena.

Lees agrees that a small claim of a few thousand dollars should not go to litigation but says the higher amounts are being claimed as clients become more financially aware and move into a stage where court action is viable.

Lees says there are four areas of law that could affect planners if they make mistakes with the first area being the breach of contract.

"If a retained planner enters into a contract and receives some remuneration, a mistake could be seen a as breach of contract," he says.

Lees says another area is negligence. "If the planner doesn't take into account something that will affect the return, or makes a mistake with the taxation or pensions laws, they could be seen by the courts as being negligent," he says.

This could be especially true with retirement planning where the adviser is

planning somebody's future and there are clear expectations of what the figures will be when the client is ready to retire..

The third area of law that affects planners in this area is the Trade Practices Act.

Lees says Section 52 covers misleading conduct in trade and business and Section 53 deals with representation.

"Both of these sections can relate to planning a client's future if the advice is wrong. Financial planners have been sued in relation to tax-minimisation schemes, especially if they don't explain the investment side of the scheme," he says.

"As the need for these types of services increase and people seek more sophisticated investments, it is definitely an area that will lead to an increase in litigation."

The final area of legislation that may come into play in a debate over advice to clients is the breach of fiduciary duty that deals with proper disclosure.

"If the disclosures are true, they must stand up. They must make the client aware of types of fees and if they are tied to an organisation, this must be disclosed as well," Lees says.

This area would also cover informing the client of the downside of an investment, according to Lees, as planners are good at talking about the positives.

Acting FPA chief executive officer Ken Breakspear says though there may be problems, most of which are adequately covered by the complaints resolution scheme.

"Client's don't have to run to the lawyers every time there is a problem," he says.

However, he believes that planners can avoid ever becoming involved in the scheme if they are more careful on their disclosure and are willing to settle disputes outside the scheme.

"There are obvious incentives to settle the case outside the scheme and this is particularly true when talking about court case," he says.

Regardless of these efforts planners may still face court action for some of the larger claims as a precedent may not exist on which to base any out of court settlement.

Breakspear says another area planners are worried about is class actions. This type of action has been used in some tax-effective scheme cases where a group of investors have lost their money.

"These are the type of things planners dread, but more will happen with high-profile law firms involved. We are in an environment where people are aware of their rights," Breakspear says.

As someone involved with the law at a close level Lees says this is a trend and adviser need to be careful in how they position themselves.

"People are aware of their legal rights if they lose their money and might decide to use the courts to recover it," he says.

"The trouble might actually be with advisers linked to some products, yet claiming to be an independent adviser."

If there is a method to ensure lawyers remain as sources of referrals instead of legal aid Breakspear says the solution to any potential dispute is record keeping.

"Getting the client to properly understand what they are buying, and putting the risks in writing will help in a dispute. Any conflict of interest must be visible and the fees and charges must be stated as that will assist in any dispute," Breakspear says.

"The worse thing a client can have is an enhanced hindsight memory which comes down to the client's word versus that of the adviser. Proper record keeping is the best defence."