8 warning signs of a bad financial adviser

ASIC is the regulator of the financial services industry in Australia and maintains a register of advisers who are licensed to provide advice on investments, superannuation and life insurance. You should always check the ASIC register before hiring the services of a financial adviser to ensure they are licensed.

However, an ASIC licence is issued at a point in time and doesn’t guarantee the quality of an adviser’s services. Even if a financial adviser is licensed, it’s important to be aware of potential warning signs that their services may not be high quality or that they could even be unethical.

ASIC Banned and Disqualified Persons Register

ASIC has the power to ban or fine financial advisers based on their conduct. It also maintains a ‘Banned and Disqualified Persons’ register that provides information about people who have been disqualified from practising in the financial services industry. In the 2019/20 financial year alone it banned 22 advisers.

ASIC publishes a press release whenever they ban or disqualify an adviser. These press releases provide an insight into potential warning signs that you should be wary of when dealing with a financial adviser.

Here are some common warning signs and tips for how to avoid problems when choosing a financial adviser.

Warning sign 1: An adviser not having an AFSL

This is the most obvious warning sign and should have set off alarm bells in the case of Melissa Caddick, which is currently before the Federal Court.

Melissa Caddick fraudulently claimed to be a financial adviser, but it is alleged she misappropriated up to $25 million from clients between 2013 and 2020, many of them family and friends.

It is alleged that Ms Caddick and her company Maliver provided financial services without an Australian Financial Services Licence (AFSL) and that she used the licence of another company without authorisation.

Ms Caddick disappeared in November 2020 after Australian Federal Police raided her Sydney eastern suburbs home on behalf of ASIC, which had frozen her bank accounts and ordered her to hand over her passport. (She has since been declared dead after her remains were found in February 2021 on a NSW South Coast beach). The Court heard that from January 2018 to September 2020 a total of $20.3 million was deposited into her accounts and that she withdrew all but $700,000 of that.

A search of ASIC’s Financial Services register of advisers while she was active would have shown no results for Ms Caddick or her company, Maliver. A search of the AFSL she was using would have shown it was held by another company unrelated to Ms Caddick.

Warning sign 2: A financial adviser asking you to pay investment money directly into their account

A New South Wales’ financial adviser pleaded guilty to dishonestly obtaining approximately $208,000 from his clients. He advised them that he would invest money on their behalf if they deposited money into his business account. Instead, he used the funds for his own purposes.

ASIC permanently banned him from providing financial services and he was recently sentenced to three years’ imprisonment to be served by way of 750 hours of supervised community service.

Warning sign 3: An adviser operating under multiple company names

A former Sydney financial adviser was recently banned by ASIC after it was found that he had operated a financial services business under 14 separate companies. The adviser was a failed director of all the companies. They had all been placed into liquidation over a 13-month period. The combined debt owed to creditors was $9.8 million.

The adviser was subsequently banned by ASIC from holding a financial services licence for five years.

Warning sign 4: An adviser not taking the time to understand your needs and explain how their advice is in your best interests

Financial advisers are legally obliged to provide advice that is in the best interests of their clients, rather than in their own best interests. But some don’t. Just in the last 12 months:

• AMP was ordered to pay a $5.2 million penalty after the Federal Court found it failed to take reasonable steps to ensure its financial planners complied with their best interests duty. In this case, a number of planners provided advice that resulted in the cancellation of the client’s existing insurance policies and the taking out of similar replacement policies by way of a new application rather than a transfer. This exposed clients to significant risks and resulted in planners receiving higher commissions than they would by simply transferring the policies.
• ASIC is taking legal action against a financial advisory firm and one of their advisers for giving inappropriate ‘cookie cutter’ advice to retail clients to invest in complex structured financial products without taking into account their financial goals or risk tolerance. The impacted clients were, in some cases, preparing for retirement. ASIC alleges the adviser received upfront and ongoing commissions for each of his clients’ investments in the structured products. The maximum civil penalties for the advice firm and its adviser respectively are $1 million and $200,000 per contravention.
• A Perth SMSF adviser was banned for five years for failing to ascertain his clients’ personal circumstances before recommending they establish SMSFs through an administration service he owned. ASIC found that the ongoing SMSF costs were higher than the costs of his clients’ existing super funds. He also recommended clients invest in a managed fund for which he was the investment manager.
• An Adelaide financial adviser was banned for five years for failing to provide advice that was appropriate and in the best interests of his clients. This included recommending clients make no changes to their investments despite the investments being contrary to their risk profile and/or their SMSF investment strategy.

Warning sign 5: An adviser using your funds without your authorisation

Unfortunately, this does happen. Again, just in the last 12 months:

• A former Townsville financial adviser was sentenced to eight years’ imprisonment with a non-parole period of two years for misappropriating clients’ funds for his own use over more than ten years. It was found that he transferred around $1.1 million from his clients’ super, pension and personal savings accounts to fund his own lifestyle, including $72,000 to buy and maintain a boat.
• A former NSW financial adviser was sentenced to six years’ imprisonment with a non-parole period of four years for misappropriating $1.9 million of client funds. The adviser was found to be operating a type of Ponzi scheme, where clients were advised to invest in a company of which he was director, on the basis that it would invest the money. Some of the funds were used to pay dividends while the adviser used the rest for his own benefit.
• A Sydney financial adviser has pleaded guilty to misappropriating $2.9 million from 13 clients and transferring the funds into his personal accounts for his own benefit. He is awaiting sentencing.
• A former NSW financial adviser has pleaded guilty to dishonesty and theft offences after withdrawing $179,500 in seed capital provided by clients to invest in a proposed Initial Public Offering (IPO). He also pleaded guilty to larceny after withdrawing $30,000 raised for the failed IPO. ASIC permanently banned him from providing financial services. He is awaiting sentencing.
• A former Queensland financial adviser is awaiting trial on ten counts of fraud amounting to $975,600. It is alleged he withdrew funds from the accounts of SMSF clients to repay personal debts and expenses.

Warning sign 6: A financial adviser or advisory firm advertising investment returns well above market rates

Jade Capital, a Sydney-based investment firm, had its AFSL licence cancelled by ASIC for advertising misleading returns, fees and costs, performance history and results. Directors associated with the company were also banned.

Warning sign 7: An adviser recommending products without appropriate qualifications or registrations

• A Hobart financial adviser was banned for five years after providing advice that he was not trained to give and that was not in the best interests of his clients. It was found that he provided clients with inappropriate advice to double gear their investments, without regard to their personal circumstances, their cash flow position or their ability to cover margin calls.
• A Perth promoter of an unregistered managed investment scheme (MIS) has been permanently restrained from carrying on a financial services business without an AFSL or operating an unregistered MIS. The Federal Court has ordered that the MIS be wound up and ASIC’s investigation of the promoter and his company is ongoing.

Warning sign 8: An adviser trading in investments when unauthorised to do so

A Queensland financial adviser was banned by ASIC for six years after representing to clients that he was authorised to trade in shares when that wasn’t the case.

The bottom line

It’s crucial to check the ASIC Financial Adviser Register before you choose an investment adviser. It’s also important to look out for potential warning signs on an ongoing basis to ensure that your financial adviser is always acting in your best interests.