There can be challenge for advisers in giving best-interest advice, writes Alan Hartstein.
Some financial advisers still struggle with ‘best interest duty’ as a concept and are unaware of what they need to do to meet requirements, though they have every desire to act in the client’s best interest and know it’s their statutory obligation.
It’s an ongoing issue for the financial-advice sector that becomes more pointed for an adviser in such situations as when a client’s household budget is stretched, possibly creating tension between what an adviser believes is in a client’s best interest and what the client is willing and able to pay for.
Best interest basics
Demonstrating best interest is far from a new obligation for financial planners. However, ‘best interest duty’ offers a more prescriptive approach to providing advice. The Australian Securities and Investments Commission offers these seven steps as a “safe harbor for complying with the best interests duty”:
1. identify the client’s financial objectives
2. identify the subject matter of the advice sought
3. understand the client’s financial circumstances
4. assess whether you have expertise to provide the advice sought – if not, decline to give advice
5. research products that might achieve the client’s objectives
6. base all judgments on the client’s relevant circumstances
7. take any other step in the client’s best interests.
ANZ Wealth advice coach Megan Rose believes the challenge for advisers is to demonstrate how their advice will put their clients in a better position, and this largely boils down to the documentation of their advice process.
“There needs to be a greater emphasis on gathering client information to develop the best financial strategies for their circumstances, particularly when they are considering alternatives that may be discounted compared with their current arrangements. Financial planners need to place all of their emphasis, not just part of it, on their clients’ best interests,” Rose says.
As a simple guide to achieve this, ANZ Wealth head of advice risk compliance Amanda Rockliff lists four questions every adviser should be able to answer:
1. Did you get to know your client?
2. Did you clearly define the task you were asked to do?
3. Did you follow a process?
4. Did your advice address the client’s goals and objectives?
Rockliff recommends advisers regularly review documentation in client files (or better yet, have a third party review it). That documentation should clearly demonstrate advisers have addressed the above questions, regardless of their clients’ financial circumstances.
“Finally, there is one last question that you should ask yourself to ensure that your advice meets the requirements of best interest duty: ‘Would a reasonable adviser believe the client is likely to be in a better position by following my advice?’,” she adds.
Fee structure v best-interest
While financial planners generally understand ‘best interest’ means ‘in the interest of the client’, Acumen Wealth Management senior adviser Peter Holland says there is sometimes less incentive for advisers to be as fastidious as they should be.
For example, in a funds-under-management model, where clients are charged a fee proportionate to the value of their investments, advisers have little motivation to take on smaller clients, given that larger clients will be paying much larger fees.
Holland believes charging fees on a time-worked or flat-dollar basis would enable advisers to still work for these smaller clients profitably and allow them to prioritise their best interests along with other clients.
“If advisers spend a little time constructing a service model that addresses key concerns of less affluent clients, they can potentially open up a much wider market apart from the typical high-net-worth individual and still adhere to any issues arising from the client’s best interests,” he says.
A similar conflict for advisers could arise over insurance for smaller budget-challenged clients, says ANZ Financial Planning associate Peter Hodgson.
“If a client needs to restructure their insurance because of budget constraints, for example, we still have an obligation to provide the best possible advice,” he says.
“But recommending that a client stays with their existing provider and restructures their policy accordingly is going to pay much less in commissions, usually about 10 per cent of what a planner could expect from moving the client to a different provider and banking the up-front payment.”
Echoing Holland’s comments, Hodgson refers to a new service model emerging in the sector for higher ongoing policy commissions and less up-front fees, with less emphasis placed on the sign-up payment and more on long-term client engagement.
“A best-interest issue is less likely to occur over strategic advice as product commissions have been removed from superannuation and investment platforms,” he explains.