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Thanks for visiting the Blog...BUT WE HAVE MOVED!

To give readers a better viewing experience and an easier platform to find stories of interest the blog has been moved to 

www.financialadvisercoach.com

All the existing posts have been transferred, and it is a lot easier to search for them than ever before.  It is also easier to share them with others, or to follow new blog posts as they are put up.

The blog has a new name, which is reflected in the domain name (as above)

www.financialadvisercoach.com

5 steps to playing it safe

By Tony Vidler

 

How does an adviser play it safe when it comes to proving that they have acted in the best interests of the client?

There are 5 key things that the adviser must do - and be able to evidence afterwards - to show that they have worked for the benefit of the client, and not acted out of self-interest.

It comes down to being able to show that you "know your client".

Knowing your client (as a principle of regulatory testing) is about understanding the clients situation and needs in order to provide suitable advice that is most likely to help them achieve their objectives.

The 5 things an adviser must do in order to play it safe, and be able to show they have been working in the clients interests, consist of 3 process steps and 2 ethical considerations.  They are:

1.  Identify the objectives and needs of the client, together with showing they know the clients financial situation

2.  There must be clear instructions regarding what advice is being sought, or offered.

3.  The relevant client circumstances need to be understood and documented.

Gathering the right information and having clear understanding with the client, as outlined in these three steps, will go a long way towards satisfying future critics.  However, to ensure that you are REALLY working in the client's best interest, two further tests can be applied.

4.  Did the adviser to attempt to find out more information regarding the client's circumstances if it could be considered "reasonably apparent" that the information provided by the client was inaccurate or incomplete?

5.  Does  the adviser have the competency and expertise to provide the advice required?  This is effectively a self-assessment on the advisers' part - but hey, we know whether we know enough to do the job properly really don't we?   

In reality, the ethical tests are never applied - unless the regulator comes knocking for an audit, or a customer expresses dissatisfaction.  Both of those circumstances can happen at any time, so you do have to apply these tests.  If you find yourself as an adviser thinking "I don't think I have the knowledge to do that really well"....then you really should decline to try and provide the advice.  Otherwise you are inviting future dissatisfaction and problems.

One of the key things that is often misunderstood by financial advisers is that you will rarely be playing in terribly unsafe territory because of product non-performance (e.g. problem insurance claims, investment market losses) - IF your process is sound.  The adviser will be judged primarily on the basis of the processes they can prove to have used, and the extent to which they have demonstrated the principle of "the clients interest first".

To play it safe as an adviser therefore there are 2 big things to do:

* have a process showing you understand your client, their circumstances, and objectives

* conduct yourself honestly - especially in assessing your own competency

further reading:

Best Practice: ASIC doesn't expect perfection

http://www.professionalplanner.com.au/regulators/best-practice-asic-doesn’t-expect-perfection/

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Should we care about the public interest?

by Tony Vidler

Should financial advisers care about the public at large?  The people who are NOT our clients?  Those who don't pay us anything?

Absolutely.

When one considers "professionalism", and the attributes that define a professional, you quickly come to the conclusion that a unique characteristic of the genuine professional is a commitment to the public interest.

If you are a financial adviser who is committed to being a professional, you have a social responsibility that extends beyond just those clients who can afford your services.  In plain terms, you have a responsibility to make available your professional expertise to members of the public who have genuine need of your knowledge, but who cannot necessarily afford to access it, in order to improve the standing of the profession itself whilst rendering service to society.

It is a principle of professionalism....one of the hallmarks that define a professional.  It is referred to as pro bono, or more correctly:

"Pro bono publico (English: for the public good; usually shortened to pro bono) is a Latin phrase generally used to describe professional work undertaken voluntarily and without payment or at a reduced fee as a public service. 

It is common in the legal profession and is increasingly seen in marketing, technology, and strategy consulting firms. Pro bono service, unlike traditional volunteerism, uses the specific skills of professionals to provide services to those who are unable to afford them."

(source:  http://en.wikipedia.org/wiki/Pro_bono )

One would like to think that all good citizens care about the public interest, and will do something to benefit wider society generally with the donation of their own time and expertise.  A huge part of our society does exactly that - contributing their time and effort to coach sports teams, raise funds for disadvantaged members of the community, work together to build facilities for the common good and so on. 

Undoubtedly our society would be a far more difficult environment, and less pleasant to live in, if it wasn't for the good citizens who donate their time and effort to making their part of society a better place by looking beyond their own immediate needs and pleasures.

Many financial advisers have contributed to their society in the same way over many years - they too coach the kids, fund raise, provide foster homes, mentor troubled youth and everything else that solid members of society do.

We have the ability to provide practical help however that not all other caring members of society can do however.  By sharing our knowledge and skills with those who might never be able to access good financial advice, we can create inter-generational change.

Helping a family with poor financial literacy to learn how to create assets and self-sufficiency, or escape crippling high cost debt, or understand how to create a dignified retirement for themselves....these are things which not only change the lives of those you help, but also the lives of those who they in turn influence and are responsible for.

Sharing our skill and knowledge in this manner is very rarely done by the financial advisory industry - and for many good reasons.  It does cost the adviser personally to provide such service - even if that is only in an "opportunity" cost.  There is the potential for public cynicism and cheap accusations of the adviser engaging in such programmes as a "marketing exercise".  The adviser potentially incurs the regulatory risk despite the absolute not-for-profit nature of the work being provided.

However, the potential benefits to financial advisers collectively of creating - or enhancing - public confidence through providing pro bono assistance to those in need are worth these risks. 

The elevation of the professional standing of those who commit to the public good over and above their own commercial objectives is satisfying and personally fulfilling at the very least.  The difference you can make in people's lives though - and ultimately in the lives of their dependents - is incalculable.

A word of caution though:  the same duty of care and professional diligence obligations must be taken when providing pro bono advice.

Apart from the very obvious need to minimize the business risk to the adviser, there is a higher level of public scrutiny placed upon the actions of the professional when engaged in providing such service.

Demonstrating your professional expertise and professional conduct while working in the public interest is what actually defines the Professional in the eyes of the public.

Financial advisers should grasp such opportunities to work together on pro-bono projects.  It's what separates the really good advisers from the rest.

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P.S.  Here is a blatant plug for a campaign being run by the Commissioner for Financial Literacy and Retirement Income here in New Zealand, that a number of professionals have agreed to assist with by providing pro-bono advice to members of the public during Money Week 2012.  

(Disclosure of interest: I have volunteered, and I would dearly love to see a thousand advisers participating!)

 

 http://moneyweek.org.nz/

For Consumers:  If you want to talk to a professional adviser for free during Money Week you can call the IFA on 0800 404 422 or go to 

 http://ifa.org.nz/professionals/events/eventdetail.php?eid=564

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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The good life or financial freedom?

 by Tony Vidler.

The Financial Services Council (FSC) has just issued issued a statement summarising some recommendations they were making regarding national retirement savings, following research it had conducted in New Zealand. The link to the full report is at the end of this article.

The report is extremely interesting, though missed the mark in a critical area. There is an inherent assumption that if the right product solution is created (as envisaged by the FSC), then that will address the issue. There is a lack of focus on the benefits of changing consumer behavior through good education and advice.

The focus of the report therefore is about a consumer attaining financial freedom in their golden years. What about the good life along the way?

The report makes a number of very interesting and useful observations, especially in the area of recognizing the extraordinary convergence of issues facing the under 40's. This included the some core retirement planning issues such as:

• They are likely to be living longer than previous generations;
• They are most likely to have less family financial support than prior generations; and;
• They face more uncertainty than prior generations when it comes to government support.

Some other very significant factors were not cited in the recommendations however. Without attempting to provide an exhaustive list, one should include other factors facing today's workforce when it comes to retirement planning.

• Less subsidization of health & education costs than previous generations; leading to greater strain on today's resources.
• Prior generations had access to "defined benefit" superannuation schemes which provided great certainty for retirees.
• Higher standard of living expectations from the children of today's under 40's - creating additional financial stress.

There is no doubt in my mind that this segment of society (the under 40's) is the "sandwich generation".

Firmly stuck in the middle of change - not deriving the full benefits that previous generations did of having guaranteed retirement, yet they are expected to fund it for those in retirement now. They are not deriving the full benefit of subsidized education and health, so are having to largely pay their own way - and also fully pay the way for their own children. One could go on, but I am sure you get the key point: they are funding the expected benefits for retiree's today, together with the wider benefits demanded by society today, together with their own needs today, and also having to make provision for the next generation on a user-pays basis.

The Sandwich Generation. They are the filling in the middle, that provides all the flavour and much of the nutrition in the meal.

Simply providing a retirement product solution to address the needs of these younger New Zealander's is not enough. Their needs are much more complex, and quite frankly they have half a century of working life to negotiate before they can realise the benefits of a well constructed retirement plan.

While it is important to make provision for the future, and ensure that the final 30 or so years of life are comfortable, dignified and independent (wherever possible), there is the remaining and somewhat important matter of trying to achieve exactly the same objectives in the first 60 years or so of life. Financial freedom (as an objective) has to be weighed up against having a good life along the way.

What will help these consumers do this better than anything else are getting 2 things:

1. Better financial education during their adult lives. They need the best possible information, tools, and understanding about how to manage their resources well, and to understand the impact of the choices they must make. It is an investment in efficiency after all - if they are assisted to make better choices, their resources will go further and it will be beneficial for society and themselves.

2. Professional and personalized advice. Their world IS complicated and they face many competing demands. Good advice will help navigate the competing demands, help them decide when and where (in their lives) products may or may not help, and help them get the best out of their resources along the way. During their working lives financial products are a relatively minor part of the overall financial picture. Advice addresses the bigger picture. Products do not.

Great products and great savings systems may well provide great retirement incomes.

Great advice can help them have a good life along the way as well though. And THAT is what most consumers actually want, and it is the item missing from an otherwise great piece of work by the FSC.

The full report from FSC can be found at:

Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders

http://fsc.org.nz/site/fsc/files/reports//FSC_Pensions%20report%20%20FINAL%20Publication%2017%20June%202012%20copy.pdf

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How going Low-Tech is best!

by Tony Vidler.

As advisers become more compliance-focused, and attain more technical expertise, there is a real risk of getting too clever - and clients not understanding what you are talking about.  It is helpful to have some simple techniques that cut through to the heart of the matter and show them precisely what you are suggesting, and how that benefits them.

Often the best way of explaining in simple terms what you are recommending is to go really really low-tech.  Use a blank piece of paper, divide it into 2 columns and put each "parties" part on either side of the page.

It captures precisely what you are suggesting; what the clients commitment is; and; what the other parties commitment back to them is.

People get it, and it is a lot more helpful than the 40 page detailed report with pie charts and graphs.

For Example:

I am not suggesting ignoring the technical information, or the necessary detail of your recommendation.  The detail is essential from many perspectives.  However, technical information should be supporting your recommendation - it should not BE the recommendation.   GREAT advisers are able to take complex technical information and deliver it in a way that clients can grasp quickly.

As Albert Einstein so famously put it:

"If you can't explain it simply, you don't understand it well enough"

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