Financial service providers can be “suckered” too
01 November 2012 | Magazine Archives FAnews & FAnuus | Features / Profiles | Wessel Oosthuizen, University of the Free State
Consumers are not the only stakeholders that are “suckered” by investment schemes. Financial advisors also fall prey to outfits that mask their true intentions behind plush offices, professional staff and flashy marketing brochures.
Unfortunately the promise of higher than average investment returns and generous remuneration structures is still enough to convince some advisors to advise their clients to invest in dodgy schemes.
The cost of lost credibility
Recent FAIS Ombud determinations confirm that advisors are still putting their reputations, careers and practices at great risk. Clients will do whatever it takes to recover their lost investment… And they will lodge a complaint regardless of whether an advisor might suffer financial and reputational damage.
How can you protect your practice from such complaints? Since prevention is better than cure you should consider the following points before adding a new investment product to your client product offering:
• Always conduct a due diligence on the product provider.
In Durr v ABSA the judge observed that: "The important issue is that even if the advisor himself does not have the personal competence to make the enquiries, it is incumbent upon him to harness whatever resources are available to him or if necessary to ask for professional, legal or accounting opinion before committing his client's funds to such an investment”.
• Make sure that you have the knowledge and the competence required to advise the client on the specific investment.
Quoting once again from the Durr v ABSA case, the judge noted: "One of the first requirements of a professional is to know when you may be getting out of your depth”. You must be honest about your knowledge of the product that you are "selling”. If you hold yourself out as having special skills and knowledge, you will be judged against that promise.
• Be wary of your external obligations or motivation for personal gain.
Either obligation or personal gain could result in an unsustainable conflict of interest and compromise the duty of care owed to the client.
A good test of a product or product provider is to ask yourself whether you would invest your money in the particular investment… A professional financial advisor is one who always puts the client first.
New product considerations
You responsibility does not end with the decision to introduce a particular investment product to the list of investments you offer to your clients. You must still make sure that:
• You, as representative, receive written authorisation and a mandate to sell the product to members of the public on behalf of the provider.
• You get training on the product (and are circumspect if the product provider does not offer any training). Section 13 of the FAIS Act requires the provider to ensure that the representative understands the product and is capable of advising members of the public. And in terms of Section 8 you must be competent to provide the advice.
• The provider certifies, accepts in writing, or provides a written undertaking that they will be responsible for "those activities of the representative performed within the scope of or in the course of implementing any such contract or mandate”.
• You establish the degree of vulnerability of your client due to their age, lack of language skills, investment knowledge, education or experience in the financial market. Do NOT invest your clients’ money into an investment they (or you for that matter) do not understand, or for which they do not have the necessary risk capacity
The above principles can save you a lot of money and protect your career as Financial Services Provider. Remember that financial advice on investments is like a coin with the client on one side and the advisor on the other.
An unconventional coin toss
If the coin earns a return both the client and the advisor will benefit… If the coin is lost or destroyed then the client loses his or her capital, while the advisor loses capital and so much more! It is for you to decide what you want to do with the "coin” and what your reputation is worth.
