8 warning signs of a bad financial adviser

As the regulator of the financial services industry in Australia, ASIC maintains a register of advisers 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 2022 alone, it banned 84 individuals from providing financial services or credit.

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 notorious case of Melissa Caddick.

Ms Caddick fraudulently claimed to be a financial adviser, but it is alleged she 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.

An ASIC investigation found her investors had lost between $20 million and $30 million between 2013 and 2020. Many of them were family and friends.

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. Three months later her foot washed up on a beach on the NSW South Coast. In May 2023, a coronial inquest found she was dead but the date and cause of her death remained uncertain.

A search of ASIC’s Financial Advisers Register 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 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 failing to act 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:

• Six of Australia’s largest financial institutions – AMP, ANZ, CBA, Macquarie, NAB and Westpac – had paid or offered a total $4.7 billion in compensation to customers who suffered loss or detriment because of fees for no service or non-compliant advice. This followed eight years of ASIC investigations into conduct that was not in the best interests of clients.
• The Federal Court ordered AMP to pay a $24 million penalty for charging life insurance premiums and advice fees from the super accounts of more than 2,000 deceased clients. This was despite being notified these customers had died.
• A Brisbane financial adviser was banned for five years for failing to act in the best interests of his clients when he recommended they roll over their existing super to a newly established self-managed super fund (SMSF) and borrow to invest in residential property. ASIC found his business structure – which included companies providing services in property sales, mortgage broking, accounting and financial advice – created conflicts of interest, conflicted remuneration and prioritised his interests over that of his clients. He also gave clients misleading statements of advice.

Previously:

• 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 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.

• A Perth financial adviser was permanently banned for making unauthorised transactions on the trading accounts of clients and forging their signatures on investment instruction documents with an online trading platform. The banning follows the adviser’s conviction for providing financial services without proper authorisation.
• 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.

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

ASIC permanently banned the sole director of a Melbourne financial services company for misleading his clients into believing they were investing in property developments across Melbourne that did not exist. He also falsely stated that investing in these developments would generate significant returns.

He obtained a total of $1.6 million from clients by advising them to withdraw money from their existing super funds and deposit it into SMSFs he set up. He then used these funds for his own purposes, including paying off personal debts.

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.
• In a sign of the times, the Federal Court prohibited a social media ‘finfluencer’ from carrying on a financial services business without an Australian Financial Services Licence. He is permanently prohibited from hosting online groups for which a membership fee is charged and where recommendations were made about share trades without an AFSL. ASIC commented that people who bought shares on his recommendation did not have the protection of financial services laws.

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

In a high-profile case, ASIC permanently banned former financial adviser Kristofer Ridgway due to concerns he was not a fit and property person to provide financial services.

While working for Shaw and Partners stockbrokers and without their knowledge, he promoted international unlisted shares to clients that were not on the firm’s authorised list. Among a host of misdeeds, ASIC found he made false statements to clients to encourage them to buy shares while failing to disclose trading profits and commission payments he received.

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.