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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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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Financial advice less beneficial than prostitution?

 by Tony Vidler.

The latest financial services regulation development in New Zealand has an interesting twist.

One has an immediate sense that somehow financial advisers have just swapped places with the prostitution business.

By that I do not suggest that now financial advisers are trading in sexual favours of course, or that sex-workers are offering financial advice. But which of them engages in acceptable business practices does appear to be shifting it seems.



You see, soliciting for sex on the street is a legal and regulated business activity in New Zealand. Clearly it is an acceptable business practice to regulatory decision makers, and no problems are caused to society at large from allowing those in the business to hawk their wares to unsuspecting passers-by. I am confident there will be rules prohibiting them from soliciting near schools or something (which would be quite ridiculous as I am confident their target market are not to be found in schools), but by and large they are allowed to ply their trade openly in the street. Fair enough I suppose, and good for them.

However, we have a new piece of proposed law (the Financial Markets Conduct Bill) which says soliciting for financial products is something which should be stopped.

It's an interesting contrast don't you think?

Without meaning to be disparaging in any way to sex-workers (who by all accounts are prospering in the regulated world), it would be fair to observe that their trade would set off alarm bells on more moral radar screens than, say, a chap wandering around offering life insurance. I have no doubt the wandering insurance sales person (if they still actually exist) will upset someone whilst going about their business. But then, there is a proportion of society who clearly subscribe to Big Brotherdom in most aspects and are able to move to immediate moral outrage and indignant huffing and puffing at the suggestion that some people don't care about carbon footprints either.

So we have a proposal which basically appears to want to banish "unsolicited offers" made by financial advisers.

But what is an unsolicited offer? Conceivably it is any offer to provide financial products or solutions which a consumer did not actively seek out.There's a problem in itself. In 22 years I could count on my hands the number of consumers who have apparently woken up one day and decided that was the ideal time to contact me and put in place a financial solution - unsolicited.

In financial services, where the benefits or the products are primarily intangible in the first instance, most consumers are not alert to the benefits of taking particular courses of action. To help consumers understand what their possible courses of action may be the financial services industry engages in a significant amount of advertising, marketing and - for lack of a better word - soliciting.

Advisers talk to people, and in a sense "hawk their wares". Just like most other businesses. Plumbers do it, and painters do it, and prostitutes too.

Why would it be that it is not acceptable for financial advisers to talk to people and offer their expertise, or products, or particular solutions?

In this country we have a recognised issue with low financial literacy across society; we have a recognised problem in under-insurance (and therefore over-reliance upon the state to put matters right); we have a looming issue with retirement funding for an aging demographic.

The proposed solution?

Don't let those who might be able to help address these issues actually go out proactively and talk to consumers.

It is, in a word, farcical.

Professional advisers are universally in favour of laws and regulation to protect consumers from the unscrupulous. We have those laws already in fact.

Suggesting that the country requires a further piece of law-mongering that will undermine the public participation in the use of financial services and financial products, and relegate an entire industry to a position where it has less ability to market itself than prostitutes have, is simply irresponsible.

Doing so suggests that financial advisers provide less benefit to society as a whole than the streetwalkers, which I am willing to contest.


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Good news: Regulators DO trust some advisers

by Tony Vidler.

Should Regulators trust some advisers to do the right thing? Or none of them?

This is the intriguing question which will be debated behind closed doors in NZ in the immediate future I am sure, following the latest round of financial services reform in Australia. The "Future of Financial Advice" (or FoFA as it has become known) has been a work in progress for three years, as Australian regulators do their latest bit to drive higher standards of client care and professional standards in their market.

Naturally there have been a number of contentious points there, and the usual mix of good intent mixed in with impractical rules, that have created debate and strong lobbying along the way.

One of the more contentious proposed rules from an advisory perspective has been the "opt-in" provisions. As is often the case, the rule-drafters have been driven to solve a genuine industry flaw (that of consumers paying ongoing costs for advice and/or service from within product fees or commissions, without necessarily being aware of it, or even receiving advice or service from those receiving the money). The method they chose to resolve the problem though was impractical, unfair and a logistical headache for adviser firms to implement - in the industry's view.

"Opt-in" requires the adviser to obtain periodic ongoing written consent from clients that they want the adviser to continue the relationship and receive agreed remuneration.

In principle that seems a fair thing. Though in practical terms everybody knows that consumers are just humans, subject to the same whims and emotions in general terms. The levels of client satisfaction and desire to stay the course with anything can be driven as much by the state of the economy or investment markets, whether we won the Rugby World Cup, or whether our boss is a complete twit, as much as whether the adviser is doing the job that they agreed to do in the way it was agreed to be done.

Logistically, the seemingly simple matter (in theory!) of getting the clients to confirm in writing once per year that they are happy to continue paying fees for ongoing advice, would be difficult. People are busy, and just forget to follow through on things. People go away, get sick, or just don't open their mail for weeks at a time. Clients - believe it or not - are often re-investing funds or sticking with the same product automatically year on year because they didn't bother to read a letter in time. And of course included within the "opt-in" provisions was a big stick for the adviser who did not obtain the written client consent within the required timeframe - meaning that it would become far too dangerous for an adviser to continue receiving fees or carrying on the relationship if that written consent was not obtained each year.

Logically one would have to expect that over time advisers would be having to disengage from otherwise happy professional relationships simply because they had not obtained the required consent at the right time in any given year. That cannot be a good outcome for consumers generally.

After much lobbying and debate, the opt-in provisions were amended to a 2 year period, instead of being an annual requirement. That change was an improvement to be sure, but all the flaws with this method of achieving client consent and aligning the professional obligations with consumer benefits remain.

In the last week though there has been an interesting twist. Interesting - and beneficial - for those advisers committed to working to the highest professional standards, and who are willing to pay the price to do so.

It should send a shiver down the spine of the many advisers who do not belong to a professional association, or who think they are fine just motoring along obeying the basic rules of the road that the FAA delivered.

Why? "Opt-in" passed, and has been included in the legislation in Australia. What happens there - particularly in terms of improving the immediate consumer experience in financial services - will influence regulators thinking here.

The really interesting point though: there is an exception to the opt-in provisions in Australia. The exception is that financial planners (in the widest sense) who are signed up to an approved professional code of conduct managed (with rigour) by a professional association are given a class exemption from obtaining the opt-in consents from individual clients.

In plain english: if you are an adviser who belongs to a genuine professional association, with high standards and the ability (and will) to enforce them, then you are trusted to do your job well and are relieved of some of the rules aimed at fixing the cowboy end of the market.

This is an excellent outcome for the many thousands of advisers who have invested in higher education, voluntarily operated at higher standards than the laws required for many years, have exposed themselves to the risks of getting it wrong in working to the highest standards - and who have demonstrated their commitment to doing their work as best they can.

This principle of applying tough rules across the market, yet providing class exemptions for segments of the market that have already demonstrated they have earned the right to self regulate to a degree, is sensible and practical. It is also the best possible method of ensuring that advisers who do operate on the fringes in terms of the business practices or standards become aware that there is actually real business benefit in voluntarily operating at higher standards than the minimums required by law.

We can only hope at this stage that this principle gets imported from Australia - that there are ways of raising standards generally, while recognising and trusting those who have already demonstrated their willingness to work at the highest standards. That would be good news for the local market.


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Why you shouldn't be a social media peeping tom

by Tony Vidler.

For quite a while I have been talking to financial advisers about how the marketing world has changed in recent years - and how their own marketing methods have not (generally speaking). 

In short, I have been beating the drum for the advisers to consider social media and digital marketing platforms as a core part of their communications with consumers and customers alike.

Driving this belief that advisers are missing the most fantastic and low-cost marketing strategy available today is the fundamental concept of "that is where the customers are". 

 Basically it makes good sense to use the platforms and methods of engagement that the consumers themselves use. It's not rocket science is it? Go where the customers are if you want to find more customers.

Recently I saw a wonderful article from Strategi - "Social Media - an advisers double-edged sword". It was fabulous, and just what the doctor ordered. You see, I have been "missing in action" for a few weeks, distracted by & dealing with some family illnesses and the like. Not a pleasant time for anyone concerned, and what I really needed was a jolly good laugh....and I got it courtesy of this excellently idiotic article.

The essence of the joke was the (I presume) serious suggestion that financial advisers can benefit most from using social media as a listening outpost only. They are urged not to comment or participate, but merely tag along as a listener to what everyone else is doing - particularly their competitors (other advisers). The advice therefore was listen, but don't talk. That is clearly advice from someone who doesn't understand a thing about social networking.

The 2 primary purposes of social networking are:
1. be social
2. network

Forgive me for stating the bleeding obvious, but it obviously wasn't bleeding obvious to everyone commenting on the subject.

How does one be social (in any sense) by not conversing or engaging with others? You'd be the total life and soul of the party and dozens of folk would want to invite you into their lives if you spent your entire time eavesdropping on conversations and not contributing anything. That's just the sort of person I'd like to do business with. Yeah, right.

How do you network, or engage with other people for mutual benefit, if you are intending that it be a one way street? That is someone to trust with your wallet isn't it?

It was the most ludicrous piece of marketing advice I have seen for some time - and there have been some seriously bad contenders. This was a doozy though.

The point has been fairly made for some time in a number of jurisdictions that there is risk for any business when using social media as part of their marketing - and perhaps moreso for financial advisers. Clearly there are compliance issues that every adviser must be mindful of - with ANY of their marketing. There are standards expected of an adviser to be truthful and honest in ANY of their advertising. Should an adviser provide personalised advice to any consumer with a megaphone in a public place, they are a goose (at the very least). Advisers are smart enough to know that by the way, and probably don't need to be told that any further.

The rules that apply to advisers in terms of their duty of care to clients, or restrictions upon providing personalised advice without engaging in the appropriate process, or respecting privacy issues apply to anything they do. Naturally that includes social media activity.

One of the (slightly) amusing things about this particular concern of the moment is that the doom & gloom brigade are suggesting there is an issue with advisers use of social media. It is "alarming" no less according to Strategi - who by the way are able to provide an audit and compliance sign-off for any alarmed advisers and then provide guidance on how to go about getting it right. (Free plug for Strategi there!).

I'm no expert on these things, but I am an active user of social media myself. Not necessarily a fantastic user, but with over 900 LinkedIn connections, 800 Twitter followers and about 1200 regular e-zine readers - pretty much all financial services (or associated) folk - I do tend to see enough of what people are using social media for to have an idea about whether there is an alarming problem or not in this industry.

There isn't. It's a load of cobblers (as far as NZ is concerned anyway).

I cannot recall a single example on LinkedIn, Twitter, Facebook or in email newsletters where advisers are being misleading, deceptive or providing personalised advice to consumers. I do not see too many blogs, so perhaps there IS an alarming problem there. However the few blogs I do read present no issues that I can see, so I am willing to wager that there is not a blogging problem of epic proportions either.

As far as I can tell, the few advisers who do use social media actively are quite mindful of their role and use the networks as a means of providing useful content and interesting information of a general nature. That is excellent content marketing, and they are to be congratulated.

One of the most critical things that advisers need to do is engage with consumers, and be a reliable source of excellent and useful content. 

 A relatively recent study revealed that only 19% of New Zealanders' cite the financial adviser as their primary source of financial information. We have a long way to go - and providing quality content is the key - before we are even close to being seen as a credible information source to the majority of the market. Content marketing via social media is in my view one of the areas where the financial advisory community can easily and affordably add to the financial literacy of the nation - which is an excellent outcome.

For any advisers considering using social media as part of their marketing strategy, here are simple rules (and they are provided free!):
1. Be honest - as you would be in any other marketing
2. Be mindful of privacy issues - as you would be in any other marketing
3. Personal advice should be given to people personally, not broadcast via satellite. But you knew that.
4. Engage with people. Social networking is about being social, and conversing - that's a two-way thing. But you knew that.
5. Don't be a social media peeping tom. It's despicable and nobody likes them. But you knew that too.

And one final rule for business in general:

Don't listen to self-interested and inane advice. Your clients won't, and nor should you.


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Financial Markets Authority get it right

 by Tony Vidler.

The Financial Markets Authority (FMA) just gave every NZ adviser a happier Christmas with an excellent piece of guidance to the entire financial services industry.  Give them a bow, and throw a bouquet - they just got a big deal very right.

The industry has been seeking guidance on a number of issues since the advent of new regulations, which came into effect July 2011.  The main piece of legislation governing advice is the Financial Advisers Act, supported by the Code of Professional Conduct ("The Code").  Both are largely "principles" based, as opposed to being overly prescriptive and full of "thou shalts" and "shalt nots".  A laudable and eminently pragmatic approach to creating lasting legislation generally - though it tends to get a bit awkward to apply in its early stages.  The key problem is the very people it applies to are initially left to try and interpret how a principle works and what the regulators or judiciary might think it means somewhere in the future.

In time, a principles based regime tends to be more robust and better able to cope with an evolving society.  On one of the more problematic areas for all market participants is understanding how a theoretical principle applies in the real world however.  Principles don't always translate easily into the day to day actions of human beings, continually changing their minds or wanting things done, like, yesterday.  But theory is grand.  In the theoretical world bumble bees cannot fly.  But they do.  So much for theory.

So today the FMA issued a Guidance Note on the difficult issue of "analysis before recommendation".  First big thumbs up is for issuing a well laid out and very clear guidance note.  The second - and way more important big thumbs up - is for the approach taken in interpreting the law and the Code.

It is practical.  It recognises how the industry actually works in interacting with clients.  It recognises that it is about agreeing to what the client wants.  It places responsibility fairly where it should be when external professionals take on part of the work in research. In fact on this point, it is more reasonable than anyone expected.

It is a great piece of work.  Incidentally, as an industry we have been quick to criticize the regulators.  As an industry we should be equally quick to congratulate them on a very useful and timely piece of work that indicates they have been paying attention and understand (at least some) of the issues advisers and industry are grappling with.

Let's cut to the chase on this particular piece though.  Code standard 6 says that the AFA must "make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation...."  Collectively we have tried to determine the extent of analysis expected, and what evidence would constitute a "reasonable basis".  We have been guided by rulings in foreign jurisdictions, and drawn conclusions from those.

A school of thought had evolved - and been blatantly promoted for commercial gain in some sections - that this meant the AFA must exhaustively analyse every possible product choice in the universe that might be a viable solution for clients.  A ridiculous interpretation - it was never going to be applied that way.  That would logically lead to paralysis through analysis.  Nobody would ever conclusively finish their research and clients would have died of impoverished old age waiting for the research and analysis to determine suitability.  As silly as this line of thought was, it was gathering momentum in the absence of better information.

The more rational industry commentators focused on elements such as a product needing to be "suitable" or "fit for purpose".  This is effectively precisely where the FMA have drawn the appropriate line.  

Better yet, they have recognised that what is suitable for one client is dependent upon the scope of service agreed to with the client, and the nature of the adviser-client relationship (para 17; Guidance Note).  This is a really significant point.  It provides context around what is considered to be reasonable work by the adviser, in each individual client situation.

They go on and provide some certainty regarding the positioning of independent research, or legal documents provided by issuers.  The responsibility for the veracity of the information provided by those documents sits firmly with the issuers, precisely as it should.  They have pragmatically considered the situation for dedicated adviser forces - those in dealer groups or aligned distribution channels - and determined that it is actually reasonable for the adviser to rely upon the technical assessment done by other and more suitably qualified professionals specialising in that work.  Hooray on that point.

FMA:  you have hit a home run here in my view.  Do more of it.  Provide more Guidance Notes on how you think the law should be interpreted and applied.  Especially do more if you maintain this pragmatic and thoughtful approach to making it work to promote and develope fair markets that engender confidence by all stakeholders.

Advisers:  Read this guidance, and digest it.  It is very helpful and should provide assurance that if you do diligently do research and know your products, and use them in a manner that is fit for purpose and suitable for your clients, then you have little to fear.  You can legitimately rely upon other professionals assessments of products, and you can trust that the information put into legal documents by issuers is accurate.  This frees the adviser up to actually focus on being excellent in their field of knowledge and focus upon the client.

That will do me for a positive message at the end of a challenging year, and hopefully set the tone for 2012 and beyond.

Merry Christmas one and all.

(The link to the full FMA Guidance Note is

http://www.fma.govt.nz/media/511496/seccomdocs-_191806-v2-fma_guidance_code_standard_6_d__2_.pdf


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Alphabet Soup is Unhealthy

 by Tony Vidler.

One of the intriguing little debates happening in NZ financial services in recent times has been the use of new (different) acronyms for different types of advisers. Observing the often heated debate got me thinking: who cares?

The answer actually surprised me:  I do.  I care.  

The incessant bickering, the unnecessary market noise it creates, the head-shaking that I am sure these types of arguments provoke in the non-adviser parts of the industry, the distraction and amount of wasted energy and resource that gets pushed into little guerrilla wars...I care because all of these things limit our chances of success, and are a barrier to creating a better piece of New Zealand.

We have plenty to use in the way of acronyms now.  AFA, FSP, RFA, CFP, CLU, IFA, PAA, LBA, NZMBA, NCFS, QFE, NZQA....the list could go on and on....and a vast combination of them can be thrown at the market by the financial services sector simultaneously.  It is an alphabet soup that is decidedly unhealthy. 

It is confusing consumers (well only those that are even interested enough to try and make any sense of it all), and it is clearly confusing advisers.  Like it or not, the more we confuse consumers then the less likely they are to trust and use us.  It creates an unnecessary barrier to achieving confidence.  There are a couple of things that we can do as an industry though to try and take down some of those barriers.

The first is the domain of the regulators mostly - but as advisers we have to take some responsibility too.  That is around the use of the licensing terms. As it stands under the newly regulated NZ environment we have broadly two types of advisers (in the most general terms), one being an Authorised Financial Adviser (referred to by all and sundry as an AFA), and the other is a registered, but not authorised, financial services provider.  That second main type of adviser is a bit of a mouthful to describe isn't it?


The authorities have decreed that anyone wishing to provide advice on complex and potentially dangerous financial products such as most investments, must be an AFA in order to do so. That person is individually authorised, and unable to hide behind the protection of a limited liability trading entity - so they carry full personal responsibility they cannot contract out of for any advice they give. There is a fairly basic education and fit & proper person assessment prior to being authorised, which is a decent starting point for an industry evolving and raising its standards. To keep it in perspective though the entrance education for this is about trade certificate level. Challenging perhaps, and definitely providing technical learning, which is good. The advisers going through that process are undoubtedly more competent for having done so. At the end of it they have a licence to operate in business as a financial adviser, dealing with securities and more complex products.

Where do the non-AFA advisers fit in? Heck, what do we even call them? The industry has settled on calling them "RFA's", which is logical I guess.  After all, they are registered and they are financial advisers.  Ergo:  Registered Financial Adviser!  To date nobody seems to have really cared about that label (including me), and there has certainly been no attempt I am aware of for any party to try and correct advisers to use something else that is legally correct, like Registered Financial Services Provider perhaps.


As an aside, and just so there is no concept that I have any issue with RFA's as opposed to AFA's (I most certainly don't), I observe that I have witnessed more confusion being created in AFA land - but of a different sort.  Disclosure statements and marketing material from newly minted AFA's referring to the authorisation as an educational qualification - which it isn't. To obtain it you have to do some education, but the licensing status is not an educational qualification in itself.  Some refer to it as an "award" - which it most definitely isn't. It is a legal consent to go about your business.  I have even see one adviser refer to their licensing status in their marketing material as one of their "Industry Honours".  THAT is mighty close to being misleading, and is heading for trouble with some authorities somewhere down the track. 

Undoubtedly there are AFA's seeking to use their authorisation in marketing their expertise and standing, and rightly so. They have engaged in additional education and taken higher standard of care obligations willingly, and are able to provide advice in a wider (and arguably more difficult) range of areas.  It is absolutely appropriate that they advertise this if they feel it will provide an edge to confused consumers, or accurately describe the areas of advice they are permitted to provide.

We need to get it clear though in the consumers mind, and be consistent in our own use of the terms.  The long anticipated consumer awareness campaign around the new regulations needs to be educational - and accurately describe both main types of adviser, not just focus on one particular sort. 

The other main area that is entirely within the hands of the advice side of the industry is the proliferation of industry associations and their accompanying acronyms.  I confess that I have a few letters myself - and have used them in a cavalier fashion (guilty!) - but I'll throw them all away and stop using them if we can get everybody else to throw away their letters too.  Beyond personal qualifications, designation and licensing terms there is further confusion over "professional bodies".  I have long contended that there is a place for all of the current industry organizations in the market - though not necessarily all aiming at, or dealing with, consumers.  For instance, there are some groups and organizations where the target market (their consumer) is clearly only the financial adviser and they exist to provide benefits to the adviser business.  An absolutely commendable objective, and one which has commercial benefit it would seem, so you'd conclude there is a legitimate reason for being and a bright future on that basis.

If there was a single area though where there is absolutely no room for competition or confusion it is in the area of "professional standards".  Standards are either professional or they are not.  They are not a competitive point of difference. That is not to say that standards are static and never evolve, as they most certainly do.  However what is a professional standard in the eyes of the end-users at any given moment in the evolution of a profession should be consistent throughout the entire sector.  In this respect the responsibility sits mainly with advisers.

There are some 2,500 advisers out there in NZ - RFA's & AFA's alike - who voluntarily committed to higher standards by joining some type of industry body.  There are perhaps another 5,000 though who belong to nothing and are not perhaps working to the same standards.  It is only "perhaps", as I am sure there will be a very healthy proportion of those 5,000 who actually do operate the same way as those in the industry organizations, and who do care about being seen as professionals, and do care about their reputations and standing.  The association proliferation is a barrier to those advisers belonging to anyone though.

My hope is that 2012 is the year where a single professional body can begin to evolve for the NZ financial advisers.  Whatever it is called, however it looks, whoever runs it are all fairly unimportant to begin with.  The past differences do not matter, and nor do individual ego's.  What does matter is that we begin to gain regulatory and consumer confidence by working cooperatively to reduce confusion, committing to common professional standards, and being seen to stand for something positive.  Let's do away with as much of the alphabet soup as we can.  It is unhealthy stuff.


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Regulators Report card: "Should do better"

 by Tony Vidler.

What should we expect a regulator to regulate? 

We (advisers and other industry stakeholders) presume that the regulators role logically is to administer the law (and regulations relating to the implementation of the law that the regulators themselves write) that they have been tasked to manage. 

It would seem to follow therefore that they must know that law and their regulations. 


You'd think they should have a clear idea as to how they intend to apply, or interpret, the rules and regulations on the sector they regulate.

So why isn't that quite happening?

At the outset and for the record, this is a not an anti-regulator rant.  In the main I have felt that the various departments and government bodies involved in implementing new regulation in the New Zealand financial services sector have done a difficult task pretty well thus far as I have dealt with them.  I don't have any particular issues with how the FMA, or the Companies Office, or Ministry of Consumer Affairs (etc, etc) have gone about their jobs.  Quite the opposite generally.  My involvement with each of these groups at different times have been polite, business-like, engaging and friendly.  They are generally staffed by very able people that take their roles seriously, and who are trying to do the best they can from what I have seen.  The report card (from my perspective) is generally positive.

Despite that, there is a really awkward and dissatisfying element to regulation work thus far causing disproportionate frustration.  The lack of "market guidance" is beginning to look like the most significant "cost of compliance" for industry, and is a source of teeth-gnashing that could so easily be avoided.

Most industry participants understand and accept that strict interpretation of new laws will largely come about as a result of future court actions providing case law.  That is not a regulators job to pre-empt, as it is the domain of the courts to strictly interpret the meaning of law when that meaning is contested.  Taking it a step further back from that, we generally accept also that a regulator may not wish to pre-empt the outcome of their own market complaints or disciplinary functions by advising the market of expected behaviors or business methodology.  Perhaps an arguable point there to many, but one I am personally willing to give regulators the benefit of the doubt upon, as their position makes sense from the perspective of maintaining judicial independence in the event of complaints that they must manage.

One area where most industry participants DO expect clear regulatory guidance though is on the basic "ticket to the game" elements of the industry structure that they govern.  The rules of entry and participation as financial services providers, and as RFA's or AFA's for example.

There should be no doubt at all for instance on the part of the FSP Registrar regarding what any business or individual must do to register as a Financial Services Provider legally.  It is ludicrous that the very people in charge of administering the process and accepting registration on the part of applicants cannot themselves tell applicants what needs to be done in order to satisfy the Registrars requirements.

It is decidedly unhelpful, and a direct cost imposition on business, to respond to such questions by suggesting that external legal advice should best be sought by the person being regulated.  Imagine if we actually replied to such suggestions as we truly felt:

"Pardon?  You want me to go and pay a lawyer to guess what your thinking might be in the future when you clearly cannot work out what your own thinking is at the moment?  And you are supposed to be in charge of understanding what the rules are?  Do you seriously want me to go and pay for an  opinion from someone who probably understands it all less than I do, and who is at best only going to be trying to guess what decision you'll come to?  Why can't YOU just tell me what your thinking is - you're supposed to be in charge anyway?"

I have had similar experiences with several departments now as we have tried to get to the bottom of how to successfully apply new rules, or understand what is expected of industry participants.  Suggestions that market participants head off and get opinions that provide no certainty whatsoever merely puts up a barrier and a cost to business, and achieves precisely zero.  It doesn't positively contribute to what could be a healthy partnership on the part of professional market participants and regulatory authorities.  I'm reminded of the old school reports that I seemed to continually receive for years, which could be summarised as "smart, and doing ok.  But really should do better".  That's about where the regulatory report card sits currently I suspect.

What the industry needs, and what the authorities must do if they wish to create an efficient and professional market place here is to make their own rules regarding participation in the industry clearly understood by everyone.  Greater clarity via market guidance will promote confidence in the authorities, it will promote confidence in advisers, and that will flow through to greater confidence in the industry by consumers.  That of course was supposed to be the objective of all the reform wasn't it?


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The price of professionalism

 by Tony Vidler.

It has been fascinating watching and following some industry debate recently regarding the outcome of a recent court case against a NZ adviser.  

By all accounts the adviser had largely done the job expected of him, though the office paperwork was a bit footloose some years ago.  Then upshot was that a client sued, the adviser was partially found against, in essence (it seems) because his documentation didn't substantiate his recollection of the client instructions.  Nothing terribly surprising in all of that, and most NZ advisers if they were honest about it would say "there but for the grace of god, go I" at some point in their own careers.

What has been remarkable to hear and occasionally see in print is the ill-informed commentary from some other industry participants, who clearly do not recognize what professionalism is, or at what price it comes.

The adviser in question had a complaint laid against him with his professional association by the same client, in addition to the civil proceedings.  The professional body upheld that complaint also, for essentially the same reasons it seems - he hadn't followed the expected process.

Now the idiots enter the fray....bashing the professional body for upholding its own standards.  I note that most of the bashers do not actually appear to be members of the professional association, nor have any clear understanding of what the professional body holds its members to account for.  I note also that the adviser on the receiving end of the verdict (and subsequent public dissemination of it) made a public statement endorsing the actions of his professional association.  He went further by also publicly stating that he would remain a member for the duration of his career as he believed that strongly in the goals and aspirations of professionalism.  So, a ringing endorsement for the professional association by the affected professional.

He is a man of principles, integrity and strength of character it seems.

He is also a man who understands the price of professionalism.

There are many elements that must combine to eventually form a profession, one of which is the ability to self-regulate to high standards.  Regulate beyond the minimum standards of behavior prescribed by law, and apply the higher duties of care and objective process that is expected of a professional.  It follows then that the professional, who voluntarily subscribes to higher ethical standards than the law demands, is a person willing to pay a price for the betterment of society.

The NZ financial advisory industry largely does not understand what a profession is.  Apparently, many of today's advisers simply don't care about it either.  Those people have no future in the long term as financial advisers.  They may well have a future as product salespeople - but may just as well be selling cleaning products as financial products.

I would suggest that for those who value their existing businesses, and either want a future working within them or to exit at a healthy price, then some thought needs to go into whether they are willing to pay the price of becoming professional financial advisers, rather than mere sales people.  There is already sufficient critical mass inside the industry for the profession to evolve.  Perhaps 20% of the financial advisers out there are willing to pay a price for the privilege of becoming respected professionals in their field.  Those who will enter the industry in coming years with an eye on carving out long careers are already people motivated by professional ideals.  Perhaps one of the barriers to recruiting business successors is the very lack of professional standards and reputation by some of those advisers looking to exit in the short to medium term?

There are laws governing what medical professionals can and cannot do.  For example, it is illegal for them to willingly assist intentional suicide.  Whether one believe that is something society should allow or not is a moot point here.  Of relevance is that those professionals impose standards of behavior upon themselves that are higher duties of care than prescribed by law, and then police and enforce those standards themselves.  And the laws of the land also apply.

If as a profession they have sufficient doubt as to the merit of those standards, or laws pertaining to them, they debate vigorously and rigorously within until they find the right balance of ethics & legal standards, and consumer (or market) demands.  Paramount though, is what is best for the profession and its consumers.  Then the process is that they seek to change the rules relating to their entire profession within the boundaries of, and working with, the laws of the land as required.  If society wants euthanasia, and the medical profession collectively believe it to be beneficial to society, then they work to change the law relating to it.  In the meantime, despite their own belief as to what is right, they maintain standards internally that reflect the minimum expectations of the law at the very least.

The provision of financial advice within New Zealand remains an "industry" today.  It is evolving and moving down the path of professionalism slowly.  You can sense the momentum will accelerate in the next few years though, as more incumbents and new entrants understand what the price of being a professional is, and are willing to pay it.



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The myth of the Independent Research defence

by Tony Vidler.

 Financial advisers safely relying upon third party (independent) research to defend product recommendations is a myth.  Many currently believe that through the simple act of out-sourcing product research, and then relying upon the research houses rating of a product, is in itself a recommendation of suitability for clients.

Product research houses themselves go to great pains to point out to advisers that suitability is not usually assessed.  Product structure and relative merits compared to its peers are assessed though. 

There is a side issue of course as to whether even that is credible research given the conflicted fee-charging methodology of many research houses.  However, let's put that aside for the moment and assume that all research conducted on financial products is unbiased, utterly independent, and thoroughly academic.  (yeah, right).

So the financial adviser pays his monthly subscription to the research house, checks the product rating/recommendation status, then proceeds to recommend it to clients. In the event of product non-performance, or claims of negligent advice in the future, the adviser points to the research claiming "but I got it checked out by experts, and they said...."

And there is the myth.

Total reliance on third party research to support product recommendations is dangerous ground.  Factoring in that research in product assessment is absolutely worthwhile, and adds to the defense of suitability.  So it is extremely useful as ONE aspect of product selection suitability, but you cannot fully "outsource" product recommendation responsibility safely. 

There have been a couple of cases in Australia that are very pertinent for NZ advisers.  Google and read up on them: "Delmenico v Brannelly & Anor" is one.  The Financial Ombudsman Service's Determination 18959 is another (with a link to the full finding below).   FOS 18959 is particularly revealing over a number of advice issues.  

The key paragraph (for this discussion) is para 148 on page 40 - "The adviser must go beyond this to demonstrate care and detailed understanding of the product before he can assume it suitable for a particular client".  The background in brief is the adviser defended the product selected on the basis that it was suitable as it was on his business' approved product list, and that products going on that list had been independently researched.

The conclusion that was reached by the Ombudsman was that this reasoning alone did not satisfy obligations to a particular client. The adviser had to go beyond this to demonstrate care and a detailed understanding of the product before he could assume it suitable.

Conclusion: a favourable rating on a product from a research house (while good) is not enough to rely on as an advisers defence  for client suitability.  Total reliance upon that rating or research is a myth.

To read the full FOS 18959 ruling click here

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