18/10/2016, 10:51:AM
18/10/2016, 10:51:AM
Can a disclaimer protect a financial advisor from giving negligent advice?
As the dynamics in the economy change, the risk level of potential losses from negligent financial advice increases. Even though the risk is prevalent, who can be held accountable, if the advice relied upon caused the client to suffer losses!
Generally, most investors use the services of a professional financial adviser.
The financial adviser has a duty of care which is owed to their client, that the advice proffered is correct. The advisor also has a duty to ensure there is no conflict of interest. A conflict of interest could occur were the adviser is directing the client in a certain direction to invest due to commissions that would be payable to the adviser. However, this issue of commission is normally resolved through the engagement contract signed by the client, which acknowledges that the advisor will receive commissions.
Providing financial advice is subject to the scope of the advice required and the implied contractual term to exercise reasonable care and skill, especially when the adviser may assume that the client will rely on the information that has been provided for investment purposes. This duty of care by the advisor will also apply for the sophisticated investor client.
Usually, when financial advisors provide advice, part of their contract terms will include exclusion clauses and disclaimers on duty of care. This should raise a red flag to the client as it is a form of indication that the adviser is trying to limit their liability, or duty of care with the advice provided to the client.
When it is a positive market and there are profitable gains, clients usually do not make a claim against their advisor. However, when the market is negative, and losses start to add up, accountability for the advice needs to be considered.
If there is a disclaimer in the service agreement provided by the financial adviser, careful consideration should be given to the scope of the retainer, wording, and the circumstance in which the disclaimer applies.
As example in Wingecarribee Shire Council v Lehman Brothers Australia Ltd [2012] an adviser attempted to rely on a disclaimer to avoid liability for providing negligent advice, and the court held the disclaimer in the agreement would not protect the advisor because it did not apply to the relationship between the financial adviser and the client, and the advice given to the client.
Then ABN Amro Bank NV v Bathurst Regional Council (2014) the financial advisor tried to rely on disclaimers to avoid liability for erroneous statements made for financial products. The defence put forward by the advisors failed because the wording of the disclaimers did not apply to the circumstance in question and the advisers were liable.
For a disclaimer to be effective to negate liability, the disclaimer in the financial services contract needs to be prominent and brought to the attention of the client, and there needs to be unambiguous language used. This means, plain English. Therefore, if plain English is used, and in the absence of misleading and deceptive conduct, duress or unconscionable conduct by the adviser, the disclaimer in the contract may be argued as valid.
There are laws to regulate financial advisers and how advice is to be tendered to the client. Then if the adviser has complied with the law, the client has little recourse but to accept investment outcomes, whether positive or negative, based on their own choice and decision.
As most financial advisers get to know the intimate financial details of the client, the unscrupulous adviser, may use that information to their advantage, indirectly or directly, to mislead, deceive, apply duress or even act with unconscionable conduct towards the client in respect to selling financial products. However, in this type of circumstance if the client did enter into a financial services contract that had a disclaimer, the disclaimer will not protect the adviser.
Investing comes with risks, and the key aspect is to minimize the risk from the outset. So when you are presented with a financial services agreement and if you are not sure how your rights will change, or whether liability can be placed back on to your financial advisor, call me, and get that legal advice to protect your legal rights and interests.
The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799
Legal AU Pty Ltd Lawyers are “Liability limited by a Scheme approved under Professional Standards Legislation.”
