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Six best practice tips |
The signs from overseas are clear. Advisers must have strong processes in their businesses if they want to avoid trouble with unhappy clients or their professional indemnity insurers.
Stories abound about cases overseas where insurers refuse to offer professional indemnity insurance to advisers, or if they do offer cover the premiums are extremely high.
One of the ways New Zealand advisers can avoid these types of situations is to implement quality systems and processes.
Tower recently brought two Melbourne-based commercial lawyers and compliance specialists to New Zealand to highlight some of the issues and suggest ways they can better run their businesses.
Tim Nethercote and Grant Holley say the two key reasons advisers should look at improving their processes are:
They say it doesn't matter whether an adviser sells investment or risk products - the need is the same.
Holley and Nethercote come from the angle that many advisers go about their business the wrong way.
They say advisers should see themselves as people giving advice and looking after the interests of their clients, rather than as sales people.
"Advice is not about pushing the end product, but the process followed in order to know your client and do best by them."
While this may seem obvious many advisers are focussed on the sale rather than the process.
Holley and Nethercote break the process of giving advice into six steps, namely:
1. Identify the task - ensure your are fully aware of you're being asked to do
2. Conduct a fact find
3. Analyse the client’s needs and objectives
4. Apply your specialist knowledge, (including information about the product, the economy, the fund manager or the life company and how well the suppliers operate
5. Make a recommendation
6. Document the process
Documentation counts
The first one of these points is often one where advisers get themselves into trouble, because they are not clear on what is being asked of them, therefore are unable to perform that function.
Holley and Nethercote say it's important to determine whether a client is simply after one product or wants a full financial plan.
If a person wants one particular product then that's what should be documented.
However, if a client comes into your office and says: "Look I just don't know where I am with my finances. I need help." The adviser has an obligation to consider all the client's needs and objectives.
That way they can collect a lot of information and provide a more comprehensive service. This will also result in the sale of more products.
One tip Holley and Nethercote suggest is that advisers should prepare an agreement at the start of the process outlining what service they are providing.
For instance if a client comes in just wanting income protection insurance they should have something saying that's all they want to avoid the client coming back later and alleging they weren't given proper financial advice.
They say that advisers are generally good at fact finding and making a recommendation, however identification of the task is critical.
Another of the key jobs is to fully document the process and be able to show what's happened if the matter ends up before the courts.
As Holley and Nethercote say in court: "It's not the truth of what happened it's what you can prove happened."
"The ability to show thorough and complete notes illustrating the steps taken to ensure you are fully aware of your client’s needs may act as proof you have acted reasonably in the event of litigation."
Stick to it
Another point they make is that sometimes advisers can get confused between the process and selling and end up making the decision for the client or prejudging what the client will do and only advising on that particular product.
The key point is that the adviser has to give his client enough information to make an informed choice and then let the client decide.
Holley and Nethercote say one of the things they have seen advisers do which potentially opens them up to litigation is amending advice to reflect what the client purchases.
"If (an adviser) amends their advice to mirror what the client purchased, then we think they are opening themselves up to some risk."
For instance if an adviser puts a client through the advice process and concludes that the person requires $1 million worth of term life insurance, but the actual sale is for only $650,000, then the recommendation should remain unchanged.
They say some advisers will change their recommendation to fit what the client buys.
Besides providing risk protection against litigation, good processes add value to an advisory business.
Holley and Nethercote says the other key reason for having good systems in an advisory business is that it makes the business more valuable to a future buyer.
They says a potential purchaser should be able to walk into an office pick up any file and easily tell, what has happened to date, where each matter is at and what needs to be done.
"That book (of business) is going to be worth a lot more to me than if I walk in and just see a couple of sheets of paper stuck in a file which really tell me nothing much about the client and their needs," Nethercote says.
He says the anecdotal evidence is that businesses with good systems are selling at higher multiples than poor businesses.
Holley and Nethercote say that processes have been forced on advisers in Australia. They reckon there's "a fair chance it will just happen (in New Zealand) because the industry thinks it's a good idea, and because the advisers can see it's in their own interests."
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