Although it is hard to understand how this view could have arisen, there was a view amongst some members of the financial planning industry that financial planners did not owe fiduciary duties to their clients. No doubt this is why statutory duties were imposed under the FOFA reforms in circumstances when personal advice is given to a retail client (see below).
However it is not the case that financial planners do not hold fiduciary duties to their clients. This has been recently confirmed in a decision of the Federal Court.
In a recent case the Federal Court held that a financial adviser owes fiduciary duties to his or her clients when giving financial advice. Those fiduciary duties are, unless the financial adviser has the informed consent of the client, firstly, not to obtain any unauthorised benefit from the relationship with the client and, secondly, not to be in a position where their interests or duties conflict, or where there is a real or substantial possibility they may conflict, with the interest of the client.
In this case, local councils had been sold complex financial products by a financial advisor. The Court found that the financial advisor owed these fiduciary duties and had breached those duties because the advisor had a conflict between, on the one hand, its duty to give sound financial advice to, or make investment decisions on behalf of, the Councils, and on the other hand, its own interest in earning very large, undisclosed fees or profits from its sales of these complex financial products to the Councils.
Even where financial planners were of the view that they owed fiduciary duties to clients, many believed that they could avoid these duties simply by disclosing the conflict to their clients. However it is “fully informed consent” that negates what would otherwise be a breach of a fiduciary duty. Therefore mere disclosure may not be, and probably normally is not, sufficient.
The case law on what constitutes a “fully informed consent” indicates that:
- it is a question of fact to be determined in all the circumstances of each case
- there is no precise formula which will determine in all cases whether fully informed consent has been given
- the circumstances of the case may include the importance of obtaining independent and skilled advice from a third party
- disclosure of a potential conflict of interest may not be sufficient
- disclosure must be full and frank and relate to all the material facts, and
- the sufficiency of disclosure can depend on the sophistication and intelligence of the person to whom the disclosure must be made.