AFRM Referral Partner Newsletter - 2 September 2019
A recent report in Professional Planner, covering presentations made at the Best Practice Forum 2019 in Melbourne on 1 August 2019, noted that renowned ethicist Professor Peter Singer had highlighted a “grey area” created by Financial Adviser Standards and Ethics Authority’s (FASEA) treatment of vertical integration in its Code of Ethics and Explanatory Statement. I have strong views about how advisers can simply address this supposed dilemma but first, for those who are not familiar with Professor Singer’s argument, it runs like this…
Singer compared FASEA’s third ethics standard – which says advisers cannot “advise, refer or act” if a conflict exists – to the standards’ explanatory note, which says that while you won’t breach the standard for merely recommending products your employer offers, you will breach it if a variable part of your remuneration depends on it. Singer reportedly said:
“So, no volume bonus and no commission for putting products in – that’s pretty clear.” “But what if recommending those products puts you in the good books with your employer? Isn’t that relevant to your future success in the company, and possibly to your pay rises in future years which are not volume bonuses?”
Singer warned FASEA was trying to draw “a pretty fine line” between the code and the explanatory statement. Singer said FASEA could have been a lot clearer in how it worded its code and standards.
“Perhaps this was an area they didn’t get right, or perhaps they didn’t dare to push hard enough to get it right, because there seems to be a bit of a clash with what they’re saying about conflicts of interest, [and] this line between volume bonuses and remuneration,” he explained.
Singer said FASEA should have either banned financial advisers from working for institutions that offered products or, if that wasn’t feasible, put up barriers that stopped advisers from advising people to invest in those products.
“One of those two things would have been more consistent with what they’re saying about avoiding conflicts of interest,” he said.
Further, Singer claimed most advisers don’t understand that, under the wording of the Code, disclosure is NOT a cure-all for conflicted advice provision. He said, the explanatory statement clearly states that explaining a conflict does not absolve advisers of the duty to abide by standard three.
Singer said: “I find the juxtaposition interesting because the explanatory statement explicitly says that [disclosure is] not enough. If you have a conflict of interest, you must not act; exposing it to the client and getting their consent is not sufficient.”
This argument was raised with me by a colleague who suggested that if we are to accept Singer’s interpretation of the Code and the Explanatory Statement, advisers would be hard pressed to find a working practice model that is indeed not conflicted.
This includes the Risk Advice model. Despite the “carving out” of commissions on Life Insurance products from the conflicted and banned remuneration regulations, Singer’s interpretation may well still apply.
I disagree. In my view, it is not hard to meet the Code requirements although across the industry we are seeing manufacturers of product unloading their dealer groups; thereby separating advice and product, as a means of removing conflict.
In AFRM’s case, product selection is based on merit to the client, regardless of provider. For practices like AFRM, the onus is simply to demonstrate you are acting in the best interests of your client and the product selection you have recommended is relevant to the client’s needs, circumstances and/or objectives.
That’s why our Statements of Advice detail how we have worked out our client’s level of the risk and also work through our justification for the product/s recommended.
In my mind, addressing the ethical considerations is as simple as avoiding conflicts of interest by protecting your clients’ best interests – regardless of Professor Singer’s interpretation of the Code and Explanatory Statement.
Singer’s argument does not address the fact that Pt 7.7 and Div. 2 of Pt 7.7A of the Corporations Act 2001 and the related REGULATORY GUIDE 175 - Licensing: Financial product advisers—Conduct and disclosure, stipulate that priority must always be given to the client’s best interests, which in effect recognises that conflicts WILL occur during the course of providing advice to clients.
Specifically, Paragraph 20 point (d) of the Regulatory Guide states that advice providers providing personal advice must: “where there is a conflict with their own interests, or those of one of their related parties, prioritise the interests of the client.”
However, at the end of the day, all such discussion is merely academic perhaps and in these changing times we should not only be guided by our own best instincts but also by how ASIC itself is interpreting and policing the regulations.
Recent evidence of this can be seen in ASIC’s 15 August 2019 media release announcing a three-year ban of a Victoria-based adviser for failing to act in his clients’ best interests.
ASIC found the adviser did not obtain adequate information from clients about their personal circumstances including financial details, needs and objectives. He also recommended new insurance products to his clients without identifying or considering their existing products.
Further, ASIC found the adviser made recommendations about the level of insurance cover based solely on client direction instead of undertaking a thorough analysis of their needs or determining the impact of the insurance premiums on their superannuation balance.
ASIC said the ban is part of its “ongoing efforts to improve standards across the financial services industry.”
The media release also provides a summary of ASIC’s expectations of advisers regarding protecting a client’s best interests:
“When providing personal financial advice, financial advisers have a legal obligation to act in the best interests of their clients. Advisers must take reasonable steps to understand and take into consideration the clients’ personal circumstances when providing personal advice, and not rely solely on client direction.”
“ASIC expects advisers to adequately demonstrate why the advice is appropriate and why it is in their clients’ best interests.”
Please take a few moments to read the brief Case Study below which underscores the importance of not simply following client directions but rather undertaking a thorough analysis of their needs to ensure any actions implemented are indeed in the client’s best long-term interests.
Until next time, live your life well!
Managing Director AFRM
All too often when clients experience a reduction in income and/or cash flow, insurance cover is seen as the first “luxury” item to be sacrificed.
That was certainly the initial view of Sarah, client of AFRM adviser Dan Musumeci, when she called him in November last year.
Nearing 50 years of age, Sarah, had held a Trauma policy for close to a decade and had never had any reason to call upon it.
On a limited income, single and working to pay off a property in Sydney, she was not at all sure if she could continue to afford to pay her Trauma cover premiums.
After a long conversation in which Dan encouraged Sarah to take a long-term view of her circumstances and to consider every possible set of circumstances that may befall her in the coming years, Sarah ultimately chose to retain her cover.
Fast forward to April 2019 and Sarah called Dan to advise him that she had been diagnosed with breast cancer. Sarah was in a state of shock and was concerned about her continued ability to pay her mortgage if she was going to be forced to take time off work.
Dan assisted Sarah file a claim under her Trauma policy. At the time she had only missed several weeks of work.
Her claim was successful and she was subsequently paid in excess of $230,000 in benefits.
“The money has made a massive difference in Sarah’s life and has allowed her to give herself some breathing space to focus on what is important in life,” Dan said.
When asked what he believed the key learnings to be from this case study, Dan said:
“These events can strike at any time, without warning. Having that financial security of the right insurance cover in place gives people options."
"It allows them to get the treatment they need and adjust their lifestyle according to what they want to do ‒ not what they have to do.”
“It’s about the client understanding the total risk and giving full consideration to what they are prepared to trade off."
"Insurance can often be seen as the first thing to be cut when cash flow gets tight, but people should understand that their financial situation [without insurance] would only get worse if a serious and significant claimable event were to occur.”