Tuesday 26 June 2012

Consider the context!

by Tony Vidler.

Watching how the market regulator manages change in a principles-based regime is revealing, and highlights the difficulty in implementing the principles.  

That is; the very act of raising questions and seeking submissions from industry provides useful information about the most difficult and dangerous areas for advisers.

Yesterday the Financial Markets Authority (FMA) issued a guidance note to assist the market in putting forward submissions to the regulator on how to interpret a key part of the (relatively) new financial advisers legislation.  (The link to the full guidance note appears below).  The guidance note itself is very helpful in outlining the current thinking and expectations of the FMA, and is worth reading for that reason alone.

The critical question that is being addressed in this guidance and submissions request process is, what constitutes financial advice as far as the advice industry thinks?

The FMA put forth a view which basically suggests there might be broadly three forms of interaction between an adviser and a consumer.  They are:

1.  No Advice. Information only is provided - essentially just facts are given.

2.  Class Advice.  Information, opinion, guidance may be provided by an adviser to a group or collective (e.g. via seminar).  No personalized advice is provided however as the individual consumer's situation is not considered at all.

3.  Personalized Advice.  The clients situation is considered and advice is provided that addresses their needs or desires.

The Financial Advisers Act itself provides some clear definitions, though not drilling down to the detail that provides explicit guidance.  Personal financial advice is essentially a recommendation or an opinion (whether express or implied) to act, or not act, upon financial information and the clients circumstances (and which is also NOT specifically class advice).

Where this all gets tricky - and provides the entire reason for the FMA seeking input from the advisory sector - is that the national retirement savings scheme is a product that not all types of registered advisers are allowed to advise upon.  Only some are allowed to provide "personalized advice" on savings and investment products (of which KiwiSaver is an example).  Yet, with over a third of the country now enrolled in KiwiSaver and an express desire on the part of government to have ALL of New Zealand enrolled in it eventually, clearly it is set to become a significant factor in the financial planning of every citizen some time.

Add to this that a primary objective of the Financial Advisers Act was to promote greater confidence by the public in the use of financial advice and financial services.

So we have a situation where most of our population will one day be involved with the national retirement savings scheme, yet not all financial advisers can talk to them about it even though a prime policy objective is for consumers TO get good financial guidance and use such products.

It is an awkward situation for a market regulator to try and resolve without doubt.  Equally, it is undoubtedly an awkward situation for many financial advisers and institutions to try and work with. 

The extremely valid point raised in the guidance that lies at the heart of the need to consider how to implement the law, is that the "context shapes the customer's expectations" as to what is personalized advice.  Logically, you cannot disagree with this argument.

Look at the picture below for a graphic example of how context shapes precisely the same thing.
 





A financial advice example; if there are (say) 50 different KiwiSaver scheme providers that a consumer might choose from, and a financial adviser gives the consumer a single investment statement from a provider, is it reasonable to think that the consumer could consider that a personal recommendation?

The answer is "maybe". Which is not helpful at all is it?

Scenario 1:  Consumer says: "have you got anything you can give me on KiwiSaver?".  Registered (but not Authorised) Financial Adviser replies: "here's one provider's investment statement".   It is hard to imagine somebody perceiving that to be personalized advice.

Scenario 2:  Consumer says: "I think I should be in Kiwisaver and need to know which one to join".  Registered (but not Authorised) Financial Adviser replies: "here's one provider's investment statement".  It's hard to imagine that not being perceived as a type of advice.

Exactly the same response each time from the adviser - yet the context is substantially different.

Only 1 provider was offered to the consumer out of the full range of possible choices in this scenario.  The advisers genuine belief may be that by providing an investment statement they have merely provided factual information on a particular scheme.  This does not necessarily constitute a recommendation that the particular provider is better or worse than any other - it is just information on a KiwiSaver scheme.  "Frankly they are all much of a muchness and it doesn't matter who you pick" may well be what is going through the advisers mind.

To a consumer though the context is quite different.  Certainly in Scenario 2 there is a real risk that the Consumer's perception is "I told the adviser I wanted to join KiwiSaver and the adviser gave me this particular statement, therefore it is the one they recommended".

Regardless of the outcome of the submissions process just initiated by the FMA here, there is a long-term lesson for advisers that is immediately apparent:

Consider the context. It is the difference between whether you are well on the right side of the battle line, whether you just strayed into no man's land, or whether you have gone into territory that is not yours.


http://www.fma.govt.nz/media/887945/guidance_note_-_kiwisaver_sale_and_distribution_june_2012.pdf


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