Can you fully adhere to standards that create more questions than answers?
The hallmark of a good orchestra is that every member has to play off the same song sheet. A similar principle can be applied to an industry government wants to align with best practice principles; all of the industry’s major bodies need to have the same objectives and have similar controls in place to achieve these objectives.
In line with the Financial Services Board’s (FSB) ambitions to reform the financial services industry, the Financial Planning Institute (FPI) recently released its Code of Ethics and Practice Standards Incorporating the FPI Rules of Professional Conduct. These standards apply to advisers who are members of the FPI (members).
It is a comprehensive document which should leave advisers in no doubt as to how they should conduct themselves when engaging with clients in the future. Because of the comprehensive nature of the document, we will only touch on selected topics.
Collecting client’s information
Collecting client information has been a matter of contention in the industry of late in that there is a belief that a number of determinations handed down by the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud) may be because of poor record keeping.
According to the new standard, the member needs to collect sufficient quantitative and qualitative information and documents about the client which is relevant to the scope of the engagement. The member needs to work with the client to resolve obvious omissions and inconsistencies in the information collected before making or implementing any recommendations.
It goes on to add that the member needs to gain sufficient understanding of the client’s needs, objectives, and priorities, and relevant personal circumstances to establish and confirm with the client the scope of the financial planning engagement. This will form the basis for the development of any relevant recommendations.
Changing needs
Members know that they need to reach a certain level of understanding with the client with regards to gaining information about their current financial situation and the purpose of gaining this information (providing them with an appropriate product). But in the current economic climate, the client’s economic situation can change very quickly.
According to the new standard, the client needs to ensure that information provided to the member is current, complete and accurate and that any changes to the information provided must be communicated to the member as soon as practically possible.
Should the client omit relevant information requested by the member, any recommendations made may be inaccurate or inappropriate.
This is where the contention comes in. In the past, determinations have been handed down because an adviser sells the client an inappropriate product. While many of these instances are blatantly cut and dry cases of negligence, what if a client does not communicate to the FPI member that their financial situation has changed and the product becomes inappropriate? Should the adviser be held accountable in this case if they appear before the FAIS Ombud?
It is vital to point out that there are no recommendations provided by the standard to circumvent this. Members should then be in constant contact with their client to ascertain if their financial situation has changed. Whether this would constitute as ongoing advice according to the Retail Distribution Review remains to be seen.
The role members play
Once you have gathered all of the information from your client, it is time for the recommendation of the product and its implementation.
This has also been a matter of contention in the industry as industry bodies are expecting a lot from members when it comes to their disclosure to clients. One of the major issues has been conflicts of interest.
According to the standard, members need to advise clients, in writing, of any actual, potential, or perceived conflict of interest including those that developed after the commencement of a financial planning engagement.
The standard goes on to add that members must not recommend a product or service in which they have a direct or indirect material personal interest without disclosing, in writing to the client at the time the recommendation is made, the FPI member’s direct or indirect material personal interest in the product or service.
Again, here is a matter of contention. High ranking people in the FSB have always said that advisers will inherently know whether there is a conflict of interest when it comes to the products they advise on.
However, let us paint a scenario and then ask a question. Suppose a member sits with his client and comes to the conclusion that products X, Y and Z are appropriate for them. If there are no major material differences between products X, Y and Z, should the adviser be punished for selling the product that earns him a better commission; or in the future, higher earning potential because of the level of advice needed? If this is a conflict of interest, according to authorities, then isn’t this trying to cap income? Is this fair?
Editor’s Thoughts:
As with any document that governs the actions of people, it leaves the affected parties with more questions rather than answers. Do you feel that this new standard will improve an industry that was not top badly run in the first place? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
