Standard five of the 2019 FASEA Code of Ethics states: “All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances.
“You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied.”
Likewise, section 961B of the Corporations Act also states that advisers “must act in the best interests of the client in relation to the advice”, while section 961G requires advisers to only provide advice that could reasonably be considered appropriate for the client.
Speaking with ifa, partner education manager for MLC Life Insurance, Marshall Ross, explained that, while the requirement to act in the best interest of the client is included in both the Corporations Act and the Code of Ethics, what is actually necessary to meet this requirement has been greatly exaggerated over recent years.
“The intention was never that the word ‘best’ was to be conflated with the recommendation itself. That was basically born out of this requirement that the government at the time and the industry at the time sought the need to show that the advice was putting the interests of the client ahead of the interests of the advice provider,” Ross said.
“Therefore, it was the client’s interest that was being prioritised. And I think gradually over time, that use of the word ‘best’ became conflated with the actual recommendation itself, which was more the recommendation needs to be the best.
“It needs to be the best product, needs to be the best price, the best rating, all of these kind of objective measures that we might want to lean on, when the Corps Act has only ever asked us to give recommendations that are appropriate.”
Michelle Levy’s fourth recommendation in the Quality of Advice Review final report suggested the introduction of a good advice duty requiring a financial adviser to provide advice that is fit for purpose and reasonably likely to benefit the client, among other things.
To this point, Ross explained that exchanging best advice for good advice would remove some of the confusion that results from using such an ambiguous word as “best”, as it is simpler to showcase how advice was good for the client.
Where are we and what can we do now?
As the situation currently stands, he said, advisers are left relying heavily on the monetary factors of their advice to provide tangible proof of the validity of the advice given.
“It leaves me falling back on external pieces of data to validate my decision,” Ross said.
“Things like price become a lot more important, because I need to show some kind of objective measure that this dollar figure shows that it’s the cheapest, the most cost-effective recommendation, or that I’ve used some kind of research or ratings and that kind of thing to show that it’s the best possible product that’s available when, again, it’s not necessarily what the law actually requires us to do.
“The law requires the recommendation to be appropriate, which simply means it aligns to the circumstances of the client.”
As such, he argued that the word “appropriate” has been somewhat lost in recent years, making it harder for advisers to meet the compliance standards.
“A lot of focus, when it comes to regulation and compliance, has got onto the word ‘best’, which has made it quite challenging for advisers to meet that duty. It’s quite a high and difficult threshold to meet,” he said.
Discussing the merits of cricket players, as an example, Ross explained the challenges that come with using the word “best” in the context of financial advice.
“If I was to come out and say that Steve Smith is the best bat we’ve ever had, I’ll probably get a fair bit of debate and people with different opinions, but if I say Steve Smith’s a good batsman, I’d probably get 99 per cent of people to agree with me,” he said.
“So, you can see that it becomes a lot easier to form consensus based on the language that we use.”
While the government has said that the second tranche of the Delivering Better Financial Outcomes (DBFO) reforms will modernise the best interests duty, there are currently minimal details available and no timeline for delivery of said reforms.
As such, Ross said that Australian Financial Services (AFS) licensees may be in a position to address this issue, at least in part.
“It does require the way we view the compliance process to change a little bit. So it is up to, I suppose, the AFSL, to a degree, to really look at how we view this and look at it through that lens of appropriateness, not necessarily best. And it’s a big shift,” he said.
“We’ve spent a number of years, I think, in an environment where we’ve become quite cautious, and that has led to this kind of gravitation towards best and needing to recommend the best and things like that. But I think changing the way we actually approach it is the most important thing we can do today.
“So, what we require in terms of justification of advice, what we expect when it comes to recommendations, looking at what the law actually says, looking at what our recommendations actually need to be – appropriate, not best – and thinking of best interest instead as this overarching requirement.”
If Steve Smith was a financial planner and he hit a boundary the fielding team would appeal to AFCA and he would be fined on the basis that he had the audacity to look at the ball when it was bowled.
He is correct that “best” was never intended in the way it is treated when first proposed by ASIC but the way it is assessed at the moment is driven by ASIC / AFCA and whatever other regulatory bodies that now exist.
“Things like price become a lot more important, because I need to show some kind of objective measure that this dollar figure shows that it’s the cheapest, the most cost-effective recommendation, or that I’ve used some kind of research or ratings and that kind of thing to show that it’s the best possible product that’s available when, again, it’s not necessarily what the law actually requires us to do.”
Okay so the law doesn’t actually require us to find the cheapest product according to Mr Ross. Then please explain to me why ASIC has imposed upon our licensees a requirement that when I, as Professionaln Risk advisor, recommend a particular life risk policy, somewhere in that SOA there has to be a table comparing the premium of my recommended product with the premiums (only) of two other “similar” products.
And then if the product I recommend, on the basis of greater contractual right to claim,happens to be the most expensive option, then I have to insert additional paragraphs explaining why my recommendation is more appropriate.
There is a pretty simple explanation. ASIC have a proven record that they do not like commissions and if they had their druthers advisers would not be paid commissions based on a percentage of premium for life risk products.Anyone who doubts that Statement better have a good look at ASICs record. (Report 413)
So it follows, at least in ASICs thinking, that if a recommended product has a higher premium than to other “similar products, then the adviser MUST be “gouging” because of increased commission available in dollar terms on the recommended product
All of this continues while ASIC fails to investigate the impacted of DURATION BASED PRICING on the premiums our clients are paying on any business over a long-term
And having ran a risk only AFSL for five years I concur with the comments by others that the solution is to run your own AFSL, preferably as a single adviser.
How exactly has ASIC imposed a requirement on licensees for a table comparing the premium of a recommended product with two other similar products? Can you provide a reference to the relevant section of Corps Act or an ASIC Regulatory Guide or an ASIC Instrument that requires this? Are you absolutely sure this is factual, or is it something a compliance bureaucrat has told you?
Remember, 80% of the time a compliance bureaucrat says “ASIC requires this to comply with the law” they actually mean “I require this to cover my ar$e”.
Let’s see Mr Ross argue his position in court.
That all sounds well and good ah appropriate ah better than the alternative ah almost as good as ah ok best it is then…
You can’t make this stuff up and retirement is looking like the BEST option rather than continuing to put up with this crap but isn’t that what the agenda was always about?
Sadly yes! Financial planners have been played like musical instruments.
First time I have ever heard someone talk about Best Interests this way. Completely at odds with (i) legislation, (ii) ASIC guidance and (iii) AFCA findings. Maybe a Bex and a lie down in order.
Agreed
excellent observation – we definitely waste a lot of time finding ways to prove this best outcome issue on every file when more often than not we know sometimes the intangible or other benefits may be far more important
This message needs to get to the licensees. I know the one I deal with has a compliance level much greater than the legislation. Until the Licensee are satisfied that they are comfortable, protected and relax their policies nothing will change despite the industry’s best intentions.
Rid yourself of the dealer group leeches. Set up your own AFSL. There are some upfront costs and time/disruption involved. But in the long run, the costs and time savings in other areas more than make up for it. Just get a good compliance consultant, plan ahead and the process is simple. I’m a solo adviser, who did it a few years ago. It was a life changing decision. No regrets whatsoever.
Totally agree. Part of the reason dealer group compliance is so excessive is because dealer groups exist to sell inhouse products. Dealer group compliance has to go over the top to “prove” the inhouse product recommendation was in the client’s best interest. If you aren’t recommending inhouse products, you don’t need the same level of compliance bloat.