Business and Management INK

What Can Go Wrong When People Get Financial Advice?

July 5, 2021 2185

Today we look at professionalism in the financial planning industry as explored in the paper “Ethics in financial planning: Analysis of ombudsman decisions using codes of ethics and fiduciary duty standards” in the Australian Journal of Management. Lead author Daniel W. Richards, assistant professor in the School of administrative Studies at York University, describes the research that he and coauthors Abdullahi Dahir Ahmed, an associate professor in the College of Business and Law at RMIT University, and Kenneth Bruce of the School of Accounting, Information Systems and Supply Chain at RMIT, undertook in examining wrongdoing and mitigation in workaday misconduct in the industry.

Bernie-Madoff-led-off-in-handcuffs
Most misconduct in the finance sector doesn’t end up in an executive being led off in handcuffs, as Bernie Madoff is in the Elizabeth Williams drawing above. So what happens when less dramatic and more commonplace misconduct has allegedly taken place? (Image: Elizabeth Williams/Library of Congress)

Misconduct occurs in professional financial advice and leaves the unaware investors in dire situations. Common perceptions of misconduct for unwitting investors are Ponzi-schemes, embezzlement, or funding a financial adviser’s holiday to a tropical paradise. Despite such occurrences grabbing newspaper headlines, they do not reflect what is involved with the bulk of financial misconduct.

Our research investigated financial ombudsman cases where customers of financial advisers have their complaints about misconduct adjudicated by an independent body. By analysing 212 decisions, we can ascertain what occurs when those getting financial advice feel they have been wronged by the financial adviser providing it.

We find that multiple factors occurred in each instance of wrongdoing, with over half of the misconduct involving:

  • a lack of diligence
  • a failure to act in the client’s best interest, and/or
  • having no reasonable basis for the advice given. 

A lack of diligence, or not taking due care, resulted in financial advisers not doing what was required to provide correct advice. This impedes an adviser’s knowledge of their client and inhibits an ability to act in their best interest. However, sound financial advice should always be based on the client’s goals and personal financial circumstances.

Interestingly, some clients may perceive that financial advisers have conflicts of interest and are not being fair. However, when fairness and conflicts of interest are raised by the client as a complaint, financial advisers are more likely to win the outcome of the financial ombudsman decisions than the clients. This may occur as conflicts of interest are hard to prove or that clients perceive conflicts which are not there.

How do you know if an adviser is acting in a client’s best interest?
There are certain steps that a financial adviser should be undertaking to ensure they are working in the best interests of their client. Of these steps, two are most pertinent. A financial adviser needs to identify a client’s objectives, situation or needs and they need to base all judgements on client information. When getting financial advice, a client should expect to share and communicate a lot of their personal situation, both financial and actual, with their financial adviser. If this has not occurred, clients should be cautious about the financial advice they receive.

What should be done to improve ethics in financial advice?
Improving ethics in financial advice is a difficult topic. Our research finds that diligence and communication are two facets that need to improve. Giving financial advisers both the environment and time to competently undertake financial advice and the expertise to communicate with clients, are areas of importance for policy to address.

Daniel Richards is an assistant professor in the School of Administrative Studies at York University. He teaches personal financial planning. His research interests are behavioral finance, financial planning and investment decision making.

View all posts by Daniel W. Richards

Related Articles

Opportunity to Participate in RFI on Proposed National Secure Data Service
Announcements
May 28, 2024

Opportunity to Participate in RFI on Proposed National Secure Data Service

Read Now
How AI-Integration is Changing the Workplace
Business and Management INK
May 28, 2024

How AI-Integration is Changing the Workplace

Read Now
Why Social Science? Because It Can Help Contribute to AI That Benefits Society
Industry
May 28, 2024

Why Social Science? Because It Can Help Contribute to AI That Benefits Society

Read Now
Keeping Qualitative Research Weird!
Business and Management INK
May 23, 2024

Keeping Qualitative Research Weird!

Read Now
Sometimes, We Do Need a Narcissist

Sometimes, We Do Need a Narcissist

Karynne Turner, Feray Adigüzel, and Jatinder S Sidhu reflect on their research article, “Chief executive officer narcissism, corporate inertia, and securities analysts’ stock […]

Read Now
From Collision to Collaboration: Bridging University and Industry Relationships

From Collision to Collaboration: Bridging University and Industry Relationships

In this article, Will Harvey and Paul Spee reflect on the importance of collaboration between industry and universities. This topic was the catalyst for their research article, “Walking the tightrope of academic and practitioner expectations in field research,” found in Management Learning.

Read Now
Biden Administration Releases ‘Blueprint’ For Using Social and Behavioral Science in Policy

Biden Administration Releases ‘Blueprint’ For Using Social and Behavioral Science in Policy

U.S. President Joseph Biden’s administration has laid down a marker buttressing the use of social and behavioral science in crafting policies for the federal government by releasing a 102-page Blueprint for the Use of Social and Behavioral Science to Advance Evidence-Based Policymaking.

Read Now
5 3 votes
Article Rating
Subscribe
Notify of
guest

This site uses Akismet to reduce spam. Learn how your comment data is processed.

0 Comments
Inline Feedbacks
View all comments