Speaking at a recent event, AFCA acting lead ombudsman, Shail Singh said AFCA is seeing more and more managed discretionary accounts (MDA) and other sorts of strategies being employed.
“When Covid hit we saw a lot strategies which tried to ensure losses were minimised but of course if the market went well these products didn’t do so well,” he said.
“There were also disputes around the parameters of MDAs.”
Mr Singh discussed a recent AFCA decision involving a company that was an authorised representative of a financial firm operating an MDA service.
“The complainants brought the dispute as trustees of their SMSF,” he noted.
“The adviser, an authorised representative of the financial firm, gave the complainants two statements of advice, one in April 2017 and the other in July 2017.”
He recommended that they invest in a number of different MDAs using a variety of strategies, explained Mr Singh.
The complainants stated that the company’s traders churned their accounts, failed to adhere to an agreed stop loss position on one account, and did not adequately disclose the overall costs of the MDA, which were much higher than expected.
“The financial firm acknowledged that due to a rogue adviser’s conduct, there was a small period of churning on one account for a period which they refunded fees for. They said that the fees were adequately disclosed, and they did not engage in any wrongdoing,” he said.
The firm also said that the advice was limited and was suitable.
The statement of advice stated that the firm was required by ASIC to review the client’s personal circumstances to ensure that they were suitable for an investment program.
It also stated that the advice was solely limited to the suitability of their personal risk profile and financial circumstances.
“The SOAs also said that due to the limited nature of the advice, [that the client] should, before acting on the advice, consider the appropriateness of the advice in regard to their objectives, financial situation and needs,” noted Mr Singh.
The financial firm claimed that the MDAs were suitable for the complainants because they were financially stable and employed, they were assertive investors and they wanted to invest for longer than 7 years and achieve a return in excess of 10 per cent per annum.
The complainants complained that the financial firm did not explain how the fees for the MDA worked and were assured that the costs would be no more than 0.5 per cent of their balance per year.
Mr Singh explained that the MDAs in this case were e high risk, highly geared and complex products. All strategies used algorithms to trade in forex and commodity contracts for difference.
The two clients were 56 and 47 at the time of the advice and the investment, being in super, was for retirement purposes. The complainants’ incomes were relatively modest, being $80,000 and $50,000 respectively.
In its decision, the panel found that before recommending any such investments, the adviser should have checked what the complainants’ overall goals were and how taking on the risks inherent in these products, would assist in achieving them. No such analysis was conducted by the firm.
“There was also no evidence the adviser had any regard to the SMSF’s investment strategy, which is a critical document when providing advice to an SMSF,” explained Mr Singh.
“The financial firm did not provide advice in the best interests of the complainants. It failed to adequately understand the clients’ objectives and did not provide any explanation as to why the advice was suitable for the complainants’ overall circumstances. This was particularly important given the funds were for retirement purposes.”
The panel also found that the financial firm did not adequately disclose the overall costs of the investments in a clear, concise and effective manner.
The complainants in this case were awarded for their loss with the firm paying the complainants’ SMSF $17,158.59 plus interest at the rate of 1.5 per cent per annum compounding annually from 24 July 2017 to the date of payment.
Mr Singh said it’s important that advisers ensure that MDAs are suitable overall and remember that recommendations are considered personal advice.
