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RFA requirements 'inadequate'

There are calls for scrutiny to be given to the differences between the requirements placed on authorised financial advisers and the obligations of registered financial advisers.

Tuesday, September 23rd 2014, 6:00AM 11 Comments

by Susan Edmunds

Legal expert David Ireland said he thought the extent of disclosure regulations for RFAs was inadequate, compared to the obligations of AFAs.

“They need to say ‘this is my name and this is how you can complain about me’, the present form of disclosure requires them to say the sort of advice they’re able to give but there’s no prescribed obligation regarding the disclosure of fees.”

While all financial service providers must act with care, diligence and skill, there was a question over whether RFAs even had to disclose any conflicts of interest, he said. AFAs, by contrast, are required to transparently manage conflicts of interest and, if they cannot, should decline to act.

Ireland said many advisers would obtain informed consent from their clients in that situation and explain their conflict before getting their agreement to proceed.

David Greenslade, of Strategi, said advisers should record every incentive and conflict they encountered and ask themselves whether it altered their advice.

“Conflicts of interest are not wrong in themselves, but they should be properly identified and effectively and transparently managed. When a conflict of interest has been ignored, improperly acted on or influenced actions or decision-making (that may not be in the best interests of the client), then the conduct (not the conflict itself), can be seen as misconduct or an abuse of trust.”

Ireland said the gap between RFA and AFA requirements was something that should be a key component of the upcoming Financial Advisers Act review. “A number of RFAs operate to the full professional level anyway and are adopting a similar standard to the code. But in reality there’s not the same prescribed obligations of them. It’s a can of worms.”

But adviser Brent Sheather said even AFAs’ requirements were inadequate. He said even transparently managing a conflict  was insufficient. “Lots of studies on disclosure say it’s not a good deal at all for consumers. Consumers perceive that people are honest if they disclose but all disclosure says is I’m going to rip you off.”

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Comments from our readers

On 23 September 2014 at 8:28 am Carey Church said:
I agree with David and David that this is an issue that needs a lot more discussion. A recent experience has highlighted the difference between disclosure obligations.

I am working with two senior executives of a large corporate who are leaving and have continuation options that they can choose to exercise. We are not the adviser on the group scheme.

These people are my personal clients. As an AFA I duly did a complete needs analysis and disclosed the remuneration I would receive on an insurance proposal, in dollar and percentage terms. I also disclosed any risks and benefits and any relevant conflicts of interest.

The adviser for the group scheme is part of a large 'professional' multi national insurance broking group and not an AFA. One client received a limited advice form to print out and sign and a form to fill in. No illustration, just one number in the proposal - the monthly cost.

The other client received brochures, and an illustration and no limited advice form or other information.

I suggested to both clients that they ask the adviser for information on how much they would earn if the clients went ahead with the insurance through them (which I was happy for them to do if the terms were appropriate). I also suggested that they ask for a discounted commission, given that there was no needs analysis provided, and there was no underwriting involved.

The response from the professional adviser was that 'the adviser couldn't provide information on the commission they earned, as they wouldn't know until the business was written' and 'it was x's policy not to discount commissions.'

My clients then went back and asked again for % commission that would be received. Eventually one received a vague answer.

Fortunately, I have a strong relationship with both of these clients and they understand the environment and I have explained the difference in disclosure standards. The response from the clients was 'ridiculous'.

I have had no problems disclosing the actual dollar amount that I earn from working with my clients. In fact, it makes me sit back and think of whether it is appropriate remuneration.

I believe it is time for all people in the industry (including QFE and bank representatives) to be transparent on exactly what they are earning, what their incentives are and any conflicts of interest.

It would be interesting to know if the Secret Commissions Act requires commissions to be fully disclosed or not.
On 23 September 2014 at 10:13 am Pragmatic said:
Well said Carey. I'd be interested in David's response
On 23 September 2014 at 11:51 am btw said:
It would help if more people had a better understanding of applicable fiduciary obligations. Blah, blah, blah, ...record turning...but until that happens we're going to continue to have ongoing and wide spread confusion and misinformation on these matters.

Carey, there are a number of valid points you raise, and it’s impossible to address them properly in this forum. However, for what it’s worth IMHO a couple of brief comments in response;

One, don’t get too distracted by the amount of remuneration when assessing conflicts of interest. Generally it’s not relevant how much you’re actually getting, or whether it’s an appropriate or fair amount. Disclosure and avoiding conflict is mainly about whether the source or basis for the remuneration creates a conflict with your advice. That could happen whether you’re being paid $10 or $10K. For the same reason, the professional advisor shouldn’t have to disclose how much he’s getting if it’s not relevant to the advice he’s giving. If he’s on a salary for example, does he have to disclose how much he’s paid? We might all want to know what everyone’s earning of course – but the actual salary level isn’t relevant to the advice or the service (the fact that its salary based and not commission based is of course hugely relevant).

Two, I don’t think you would equate the advice you gave them as an AFA (personalised etc) with the “sales” advice the professional RFA advisor gave. Accordingly, you can’t equate the obligations of AFAs and RFAs. Those obligations derive from the trust and reliance a client places on an advisor. As an AFA your clients rely on you (full stop). They don’t rely on the professional RFA salesperson to the same extent, so therefore that salesperson doesn’t have the same obligations. If you claim to be my advisor, then I expect you to look after my interests above all others, and you have an obligation to do so. However, if you present as a salesperson for an insurance company, and not as my advisor, then I don’t expect you to look after my interests in the same way, and you’re not obliged to do so.

Of course, my comments assume a perfect environment in an ideal world, which is not the one we currently live in…..

On 23 September 2014 at 2:53 pm Jenny Campbell said:
I strongly disagree with the David's on this one. I suspect that this is the first step towards pushing everyone up to AFA status, when the lack of consumer complaints to the various Disputes Resolution Services would indicate that the general public are completely happy with the current Disclosure arrangements. There are problems with advice from QFE advisers (see recent FMA comment about poor KiwiSaver advice from bank staff in particular). This area should be addressed before any changes to the current RFA/AFA regime.
On 23 September 2014 at 8:01 pm Ron Flood said:
You state that one client received a limited advice form to print out and sign and a form to fill in. No illustration, just one number in the proposal - the monthly cost.

Surely, as the client was simply wishing to exercise the continuation option, nothing else is required.

There only needs to be a more comprehensive statement of advice if the client indicates that they wish to evaluate their needs before exercising the option.
On 23 September 2014 at 8:35 pm w k said:
D.I. is a legal expert, but does he has experience practicing as a financial adviser?

the dispute resolution services is a waste of money. the key is client selection - reject those who are potential 'risks'. advisers should share information about these 'high risks' clients (btw, i do). maybe refer them to QFEs.
On 24 September 2014 at 10:16 am Broker said:
So the first thing we should is disclose our commission? Ridiculous and unnecessary at every level. Go ask the banks or trademe if they intend to start every conversation with 'now before we start you need to know how much we are going to make off you' selling you this insurance policy... Do you think the average person wants or cares about how much we earn? As long as they get good cover and good advice and the adviser is working in the best interests of the client...Maybe there other agendas at play here ah?
On 24 September 2014 at 6:57 pm Carey Church said:
I agree with many of these clients, including the ones questioning my comments. My real issue is, why are there so two disparate standards.

Broker - I agree, people don't want to know. But why does an AFA have to declare their insurance commission and no-one else have to?

Ron - again, that is great for non AFA's, but is an AFA allowed to do that? I'm not sure. The point is that the clients were assumed to want limited advice and were not asked if they wanted advice prior to being instructed to print out the limited advice form.

BTW - I agree that it isn't the amount of dollars - it is more that I was required to disclose how much I earn, but non -AFA's aren't.

Great discussion, thanks everyone.

On 25 September 2014 at 8:40 am Lovelace said:
As an AFA at a bank I never disclosed the amount of commission the bank was going to earn, only the fact that a fee was going to be paid.
Strikes me that Carey's motive was not out of concern for his clients, more concern that someone else would earn what he perceived to be "easy money"
On 25 September 2014 at 8:12 pm gavin austin adviser business compliance said:
Hi Lovelace - if you what you say is true then you are in breach of the Financial Advisers Disclosure regulations 2010 which require you to disclose what fees you and your employer charge.

You also seem to be quite a novice in our industry as you refer to Carey as "his" when in fact it is widely known that Carey is a lovely lady.

So a bit of advice - check your facts and only make comment if you know what you're talking about.
On 25 September 2014 at 8:42 pm Carey Church said:
Lovelace, thanks for your comments. You couldn't be more wrong.

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