Tuesday, 7 February 2012

The Adviser as an Artist.

by Tony Vidler.

There is an area of financial advice which is subject to perpetual testing - suitability of the advice given.

WHY was a particular piece of advice appropriate? What factors were considered, or even discarded, that led to a particular recommendation as being the right advice?

It is an area that holds the attention of litigators, regulators, the judiciary and disputes resolution case managers, and of course advisers themselves. This is largely because it is a subjective matter, in a field where you will often receive half a dozen opinions from half a dozen well qualified people - all using the same underlying facts.

Of course one of the major difficulties for advisers is that when the advice is provided they can only take into account known circumstances and factors - and there are always more new dangerous unknowns lurking about that nobody thought of, or which were not recognised as dangerous things at that moment in time. No advice is ever really totally circumstance-proof. Nor is advice in itself something which removes risk for clients.

Market risks & contractual interpretations play very significant parts in product performance. The performance of a financial product is generally the trigger event that raises the issue of whether the advice itself was suitable. That is, when a financial product does not perform as the consumer expected, the bulk of the suitability testing falls on the advice component, rather than the product. Not terribly fair, but that is our lot in life it seems.

As an adviser how can one go about determining "why this advice is appropriate"?

Especially knowing full well that the adviser cannot control actual product performance - and that is equally true of investment, mortgage or insurance products. Nor can the adviser remove market risks, or even necessarily begin to cover all risks for a client by transferring every conceivable negative outcome to another party.

Providing suitable advice for a particular client situation is an art form, make no mistake about that. The beauty is going to be in the eye of the client beholder, and that critical inspection may take place a very long time after the advice was given.

The real art of providing suitable advice is to form a professional recommendation as to what is "most likely" to be the optimal solution. Then very carefully conveying precisely to the client that this is "most likely" - not foolproof, not guaranteed, and not a certain outcome. It is "most likely" to work, and that message carries the weight of any future suitability testing.

In forming the recommendation it is vital that the clients needs are identified. There has to be substance to the recommendation, and that is founded upon knowing the key facts of the client situation and therefore what needs are to be addressed.

The next part is the area that many advisers do not think through, or do particularly well - prioritization.

This is THE essential step in providing advice that is most likely to be most suitable for the client's situation. The client will often have multiple (and sometimes competing) needs, and it is critical to establish a priority list - something has to be more important to get right than another thing. The something else is second in importance, and so on.
Identifying the needs, and then prioritizing them, are the canvas and the oils. The artist then goes to work with these ingredients to create something unique for the client. The artwork is not the underlying ingredients, it is the image and end result created from them.

Provided these two critical steps are undertaken AND the client understands that the recommended advice is suitable as it is most likely to produce the desired result, then it should result in advice suitability rarely being seriously challenged.

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Barry Read said...

Great post Tony! Though doing the job properly will not reduce the risk of the advice being seriously challenged, as hindsight is usually involved, but it will provide an excellent platform for which to defend the challenge and reduce the risk of it being found unsuitable. We see the recording of prioritisation and/or the reasoning behind why a particular strategy was selected, lacking in 70% of advice documents we see.

Tony Vidler said...

Thanks Barry. You are quite right - hindsight always consists of 20/20 vision, which we don't always have in advance. I am not hugely surprised by the number you quote, but appreciate the validation of what I believe to be the missing link for many advisers..