Adviser receives FMA warning for "inappropriate" advice

by Ksenia Stepanova28 May 2020

The Financial Markets Authority (FMA) has issued a formal warning to a financial adviser for “inappropriate” advice which it says “had the potential for significant harm.”

The adviser recommended that clients move their investments to ‘low risk’ funds to lessen the financial blow following the market volatility in wake of COVID-19, but failed to specify that this advice may not be suitable for every client.

A bulk email was sent from the Authorised Financial Adviser (AFA)’s account in March 2020 to all clients recommending they move their KiwiSaver plans and other investments into ‘low-risk’ funds – a strategy which would lock in losses permanently, and generally isn’t suitable for long-term investors in higher-risk funds.

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The FMA was alerted after it received a complaint from one of the adviser’s clients. FMA head of supervision James Greig says the advice was inappropriate and could not be applied to every client without a personalised assessment.

“If the adviser’s clients acted on the advice, they would have locked in any losses caused by market volatility. This change may not have been appropriate for all clients, depending on their investment plans, risk tolerance and specific circumstances,” Greig said.

“The FMA has a low tolerance for poor conduct that poses risk to customers as a result of the COVID-19 crisis, especially because New Zealanders are looking for financial guidance at this time.”

Greig says that upon review of the adviser’s emails, a “reasonable adviser” would have clearly communicated that the advice may not be appropriate for everybody’s circumstances, and specified that the email provides “class” advice – that is, advice only suitable for people in a certain group or “class”.

Read more: Brokerage receives warning from the FMA

The adviser should also have urged clients to talk through their specific situation with an adviser instead of “asking them to urgently act on the advice.”

The FMA has concluded that this advice was in breach of section 33 of the Financial Advisers Act, as this was a failure to act with care, diligence and skill.

The adviser has cooperated with the FMA and is not being named at this time, and the FMA says it considers a warning to be an “appropriate and proportionate regulator response.”

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