Four ways conflicts of interest can arise

Alex Burke,  Senior Writer,  No More Practice Education

Conflicts of interest in financial advice are often framed in terms of deliberate misconduct or “bad apples”.

This isn’t always the case, though. Speaking at the 2018 Financial Planning Association Congress, Australian Financial Complaints Authority lead ombudsman – investment, advice and superannuation June Smith said that conflict often arises unintentionally. Which is a problem because, as a recent Royal Commission research report by Professor Sunita Sah explains, “conflicted advisers consistently give poor-quality advice.”

To illustrate how conflict can emerge despite one’s best intentions, she highlighted four examples:

 

The fee for no service

In the first case study, Smith recalled an advice business which had an opt-in fee which was charged to a client automatically. The fee itself was initially approved by the client, but due to a systems error the fee was charged in such a way that it had a tangible effect on the client’s portfolio.

“You have to wonder,” Smith asked, “what should have been done in this case? Should there not have been any automation? Should there have been a fee audit regularly to determine whether this was having a negative impact on the client’s strategy?”

 

Property and SMSFs

In the second example, an advice business was connecting a client with a property developer, as part of an SMSF establishment service.

What wasn’t understood was that a payment would be made as part of a referral arrangement to the tune of $25,000, which changed the valuation of the property and wasn’t disclosed to the client.

As a result of this, Smith said, the “valuation went south and the client couldn’t end up selling.”

 

Cancellation fees

In the third example, a client was sold a life insurance policy and was informed that if they cancelled the policy within the first 12 months, they would have to pay a fee.

However, the client wasn’t told this fee would come to $2,500, and only found this out when they did cancel the policy before the stipulated deadline. The issue here wasn’t the fee itself so much as the client and the adviser not coming to an understanding as to whether the cost of cancellation was commensurate by the advice service provided.

“If the client had known the cost would be $2,500,” Smith said, “they could’ve said it wasn’t for them, or alternatively they could have chose to proceed regardless. Because they didn’t know, though, it could be suggested the adviser wasn’t acting in the client’s best interests.”

 

Gifts and loans

Finally, Smith noted that if you’re an adviser, “everyone’s a client.” What she meant was that even if a family member requested advice, for example, that person would then become a client and you’d be acting in your official capacity as a financial adviser.

This became a problem for our fourth example, who was the trusted adviser to his mother-in-law. Smith said there wasn’t nothing wrong with the advice itself - in fact, she said it was “pitch-perfect,” but the issue came about when the adviser received loans and gifts from the mother-in-law.

Some of these were paid off, others weren’t, but ultimately the mother-in-law was gifting and loaning money to the adviser which she had in her portfolio. This, obviously, had a tangible impact on her strategy.

“Ultimately,” Smith said, “he should have either not taken the money and acted as her adviser, or taken the gifts and loans and not acted as her adviser. It’s an inherent conflict.”

 

Accidental conflict

The point of all of this, Smith explained, was that even if you were doing your absolute best in your role as an adviser, it’s still entirely possible to have conflicts. This isn’t a bad thing; it just needs to be negotiated and managed between you, your clients and your licensee.


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