Australians continue to be at great risk of being misled by financial advisers, a senior academic has warned.

University of Sydney professor Susan Thorp issued a statement this week to remind Australians of her discovery in 2014: that we are “easily manipulated” by advisers.

Prof Thorp and her colleagues found that consumers struggle to judge the quality of advice they receive from advisers on common topics like superannuation and the stock market.

“What’s important here is that the skill gap between the client and the adviser can be large. The potential for misunderstanding or manipulation is quite high in this situation. In other words, clients are vulnerable so they need to be properly protected,” Prof Thorp said.

The study’s message is pertinent again because of the recent string of bank scandals, as an estimated 80 per cent of advisers are employed by the big banks. The vertical integration of advisers within the banks could well be examined if a bank royal commission is ever convened.

Watch Professor Thorp call for reform:

According to the 2014 study, Australian investors may be more likely to trust an adviser if they display professional-sounding certification, are young and female, have given them advice before, and can provide correct advice on simple topics – even if they then give bad advice on complex issues.

This was worrying, according to the authors, because it suggested the average Australian naively trusted their adviser based on irrelevant factors, and was thus open to being misled.

Ongoing reform

Bill Shorten, then minister for financial services, pushed through the FoFA reforms during the Gillard government. Photo: AAP

Labor implemented the Future of Financial Advice (FoFA) reforms from 2012. The regime was then amended by the Liberal-Nationals in 2014. The Turnbull government also enforced tougher education requirements in 2015, which will come into force from July 2017.

The success or otherwise of these reforms remains to be seen, and must be closely monitored, Prof Thorp said.

“With all of these types of changes, the proof is in the pudding. The regulators put these things in place. How they work is still an outstanding question.”

The reforms were triggered by public outcry at the collapses of Westpoint in 2006, Opes Prime in 2008, and Storm Financial and Trio in 2009.

Advisers fight back

The FPA’s Benjamin Marshan says the knowledge gap exists in every professional industry.

A spokesman for the Financial Planning Association, which oversees the ‘Certified Financial Planner’ certification, pointed out what he saw as several inconsistencies in the research.

First, he said the gap in skills between planner and client is no different to any other profession, including medicine and the law.

“While financial literacy is a particular issue in Australia, it could be argued consumers are actually more aware of their financial position than their health or legal positions,” FPA head of policy and government relations Benjamin Marshan said.

The spokesman noted that, under new reforms, planners must hold a degree, undertake a professional year of training, and pass an exam. He also said that of all the post-FoFA banning orders, only one has been due to an adviser not acting in the best interests of their client.

“The tests conducted also don’t test advice based on meeting the best interest duty, and in some of the scenarios tested, the good advice may have actually been inappropriate based on the clients goals and financial position.”

The New Daily also contacted the Association of Financial Advisers for comment.

How the study worked

A total of 1274 Australians participated in the study. They were shown a series of videos of actors pretending to be financial advisers. The actors gave good and bad advice on debt repayment, stock market diversification, investment fund fees, and super fund consolidation.

Worryingly, the participants gave good ratings to the actors who confirmed their preconceived ideas, even when that advice was wrong. And they gave the thumbs down to sound advice when it clashed with their incorrect assumptions.

If the words ‘Certified Financial Planner’ (the highest qualification in Australia) appeared on the screen, the adviser was rated higher. A disturbing number (18.5 per cent) also rated ‘Master Financial Planner’ as the “best” certification, despite this being fake. Also, the advice of the young, female actor was slightly more preferred than the advice of the older male actor.

Advice from ‘Claire Harris’, the younger female actor, was most preferred.

Perhaps most concerning of all, only 68 per cent of participants realised when the actors gave bad advice about the importance of choosing a low-fee investment fund. For example, the actors gave the following bad advice: “These various share index funds provide an almost identical product but some fund managers have better reputations than others and you get what you pay for. Therefore, I recommend that you avoid the share index funds with low management fees.”

As noted by the authors, it is an “enduring puzzle” why many consumers fail to account for fees when selecting investments.

The study also drew attention to previous research from across the globe, which, according to the authors, showed financial advisers “often give poor quality advice to clients that is not in a client’s best interests”.

The authors also warned that, based on previous findings in their field, individuals with low financial literacy may be more likely to be given poor recommendations by advisers, and more likely to follow that bad advice without question.

Watch an in-depth explanation of the study below:

https://vimeo.com/86743530