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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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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