Financial planning is all about risk. Clients pay insurance premiums to protect against the risk of the insured event occurring; clients construct portfolios based on perceived risk tolerances; clients invest based on perceived up-side risk, ie the uncertain possibility of a gain.

Risk, and the management of risk, is part and parcel of financial planning. It’s what we do every day.

Risk is also part and parcel of running a successful business. In a free market there is a relationship between risk and return. The relationship is normally positive, but nowhere near as linear as some say. And there are exceptions everywhere: some activities have both a higher expected return and a lower expected risk than other activities.

It pays to spend time identifying these double pluses and then, when you do, allocate resources to them. It’s all to do with probabilities: in the long run you will win.

It surprises me that often people who should know better ignore this rule and instead allocate resources to activities that are high risk and low expected return. Once again, it’s all to do with probabilities: in the long run you will lose. Greed too often prevails and sensible management principles are ignored.

The risk management dice is loaded against the financial planner. Financial planners are required by contract, by a general law duty of care and by a statutory duty to act in their clients’ best interests, to provide appropriate advice and to prioritize their clients’ interests over their own interests. Our day to day environment features an aggressive regulator, predator law firms, an excitable and one-sided media and an external dispute resolution body that is a law unto itself, and accountable to no one.

Financial planning is a risk driven environment and a risk ridden environment.

Step 1 in long term survival as a financial planner is to eliminate all unnecessary risks.

Avoid high risk AFSLs

For a financial planner this means choosing a low risk AFSL. A low risk AFSL is one that is not going to go against your better judgment and require you, however gently, to do something you would rather not do. To not act in your clients’ best interests, to not provide appropriate advice and to not prioritize your clients’ interests over your interests.

High risk AFSLs consciously create conflicts of interest where their own commercial interests dominate the interests of the client. They know exactly what they are doing. They pay a superficial lip service to their client obligations but in reality it’s all about placing product with a “preferred provider” or, worse, themselves.

They dress it up as better client service, they even put out excited press releases, but it’s really about deliberately betraying your client and selling them a second best strategy.

There are thousands of potential managed funds on the market. Literally thousands. What is the mathematical probability the managed fund connected to your AFSL is the best managed fund for your client? Let me answer my own question: it’s less than one in a thousand. Less than 0.1%.

How are you going to explain your advice to FOS or a court ten years down the track?

The great class action of 2027

In 2017, faced with LIF induced falling revenues, an AFSL set up its own balanced investment fund.

Advisers were quietly encouraged to recommend this fund to their clients, both old and new.

Some advisers put more than 100 clients in, with average balances of about $300,000.

In the ten years to 2027 this fund underperformed the average balanced investment fund by 2% every year. The clients lost money compared to the funds they were originally in.

In 2022 the AFSL accepted an offer to sell its business and goodwill to an institution.  The investment fund management company was sold too. The directors made a killing, and then retired.

The transition was quick, and the AFSL eventually closed its doors in 2025 (once its grand-fathered commissions stopped).

In 2027 each adviser receives a court notice alleging negligence, and demanding damages for the loss of earnings, plus further earnings, plus costs, on behalf of each client who invested in the fund.

The average client damages are $80,000 plus costs, and the average adviser has 100 clients…

The average adviser is up for $8,000,000.

The AFSL has gone. The professional indemnity insurance has gone too. What do the advisers do now? How can they pay the damages bill?

I have no idea. But I wish them good luck.


The horizontal is the vertical viewed from a different angle.