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The problem with the ideal

The problem with the ideal is that it is so unrealistic.

Tuesday, May 31st 2016, 11:38AM 5 Comments

by Russell Hutchinson

I cannot really imagine that this is going to be the end-point for state of the art thinking on financial services. No, I’ll go further. In a few years’ time we shall look back on the academic and regulatory fixation with the ‘ideal’ as an amusing aberration.

To illustrate:
My doctor doesn’t start with the ideal. He doesn’t look at me and say, ‘You know, physically, your resting heart rate should be under 60, you should be able to run a marathon in about 3 hours, do 100 metres in about 10 seconds, have around 10% body fat, more hair on top, and…’ well, you get the idea.

They don’t do this for several simple reasons. It is unrealistic. It would scare you off in the direction of a more understanding practice. It would also be a poor use of time and resources. You might not want to be like that. Most health professionals like to ask client what problems they want to work on first and then set goals after that. They are allowed to make an assessment based on you and the symptoms you present.

Financial services thinkers the world over have some difficulty with this building-block approach. Instead they prefer to ask for an ‘ideal’ as the starting point. But what is ideal? There is no commonly agreed approach – at least for insurance there isn’t. We stray back in to the realms of a ‘reasonable ideal’ – surely a contradiction in terms itself, underlining that the ‘ideal’ has already been abandoned, only we aren’t supposed to admit that. The ideal may fuel underinsurance: faced with the impossibly complicated and expensive ideal some clients may simply be walking away. No one has the ideal – think about your friends, how many have the ‘ideal’ house?

If we genuinely put the client first then that is where we must start. The ‘ideal’ assumes that the spend on, say, insurance, matches a model of cover that is, in reality, the ideal sale. The ‘ideal’ assumes inconvenient truths like budget and client preference simply did not exist. In that way the ‘ideal’ runs counter to Code standard one. It also sets up the adviser as a kind of know-it-all in tension with the client, when instead they should be on the same side, helping the client select realistic financial goals and navigate their way towards them. The ‘ideal’ should be treated in the same way ‘idealistic’ is often meant as a criticism, not as a compliment, in conversation.
 

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Comments from our readers

On 2 June 2016 at 5:17 pm Tash said:
Hi Russell
Not sure I get your meaning here, what are you trying to say? I think our obligations as advisers are clear. We have to give advice about what type and how much insurance we think a client, taking their personal circumstances into account, should have (the ideal). While the recommendations (the ideal) can vary, there is a limit beyond which a recommendation will be legally deficient, it will not pass the legal test.

While most clients will not take the ideal, they must be made aware of it, they must be given sufficient information to make an informed decision. In my view, an adviser's obligation includes (once the ideal is recommended) working with the client to reduce the ideal down to something the client accepts with full knowledge of the risks and shortcomings.

I find that explaining this process at the start means the prospect is expecting an "idealistic" but possibly unrealistic proposal but they usually buy-into this and as a result also are more likely to take levels of cover closer to the ideal.

I see our job as educators too and we can't do that without showing them the ideal. Quite frankly (with the exception perhaps of living insurance)the ideal is usually very obvious to and easily quantified by, a compliant adviser exercising the necessary care, diligence and skill required.
On 3 June 2016 at 10:36 am Dirty Harry said:
Doesn't it all depend on how you define "ideal"?

The "ideal cover" is perhaps different to, say, the "ideal position". The difference being the ideal cover is a portfolio of insurance covers designed with consideration to the risks, risk tolerance, balance sheet, and age and stage of the client.

But that consideration is performed by the adviser, whose own thoughts and beliefs are inherently part of that.

The ideal position gives more weight to the client's thoughts and beliefs, which will inherently include the cost of buying the cover.

The key difference between the ideal cover and the ideal position is the cost.

The cost of the cover is a key consideration in the eyes of the client, and will vary wildly between clients. The ideal position is found when the client decides the right balance between ideal cover and cost has been found.

All this mumbo jumbo and postulation around "legally deficient advice" is usually derived from insurers CPD, designed for us to sell bigger. The outcome is irrelevant to the regulator. They are only interested in the process (and evidence).

Even if you're very caring, extremely diligent and highly skilled, the client still gets to decide what is ideal for them.
On 3 June 2016 at 1:38 pm Tash said:
Dirty Harry
I think we are saying the same thing. I'm not suggesting advisers should somehow be liable to ensure their clients take the ideal, but they do need to be made aware of it.

Clients want, no usually need, the adviser's thoughts and beliefs - these are what make up the advice.

These thoughts and beliefs passed on to the client as advice must be reasonable and given with care and consideration and due diligence, they cannot be fanciful and devoid of objectively acceptable proposition.

The law requires this, not "insurers CPD". Our advice cannot be legally deficient but this does not mean the client, with proper understanding of the downside, cannot accept something less, that is their prerogative.

Perhaps you should read the judgement in Carey Church's court case because the "mumbo jumbo" you speak of carries the weigh of the Courts.

I do not agree with you
On 7 June 2016 at 11:19 am Comprehensive Planner said:
Hi Tash and Dirty Harry, I agree that you are basically saying the same thing but it may be clearer to look at our titles, we are Advisers and clients should expect us to advise them.

Tash is correct in my view, in that we need to advise clients what we as professionals feel they should do or have as a risk portfolio in terms of breadth of covers as well as quantum, in consultation with the client this is then implemented in part or full according to client preferences and affordability, but the initial advice should not alter, just the implementation and acknowledgement of any shortcomings of one vs the other should simply be documented.

As long as we continue to follow this sort of rule we shouldn't fall foul of either the law or PD requirements.

Whether we use the term 'ideal', 'recommended' or 'most appropriate' simply becomes semantics, as Dirty Harry has suggested each is client specific.
On 8 June 2016 at 10:26 am Dirty Harry said:
The Church case is great, I'm glad you bought it up.

It proves my point.

The client's definition of his ideal position changed after he suffered a loss. In the subject to hand,an insured client could change their definition of their ideal insurance policy after suffering a loss that could have been covered.

In the Church case it all came down to process, and documentation. The Judge, quite unfairly IMO, basically agreed to a backward-looking re-write of the client's risk profile.

It seems a lack of supporting documentation recording the client's preferences and opinions at the time was what caught Carey, and made it an example to us all. It was her only defence - the outcome was not ruled on, only the process and documentation.

The point I make is I agree with Russell. I think it is healthy to reflect on, and acknowledge the tensions. Setting up Advisers as know-it-alls in tension with the client is not a workable situation.

What I do submit, is that the client has the final say, and if it is properly recorded it will hold in court, should that eventuate.

I submit that truly working as an adviser is working with the client. Alongside them. Teaching them how to come up with their own solutions. Showing them the different types of cover and explaining how they work, how it fits with their situation. They can then feel empowered and confident to form their own opinions. Tash and Comprehensive seem to propose that the adviser's opinion carries more weight than I do, and that clients expect that. On this, I disagree. This is the adviser/client tension Russell talks about.

This adviser self-importance might be part of why adviser market share keeps falling. It might be part of why some people do not turn to advisers, preferring to buy online, direct, or from a bank teller. Or worse, not at all.

Perhaps the better definition of adviser, is client advocate, educator, coach, facilitator.

If you go deeper with the client, and discuss the likely covers and costs at the fact find and scope of service stage, and work alongside the client throughout the process, - including the method, preferences, quantums and all the other client inputs along the way - the eventual SOA will more closely align with the client's expectations, and minimise the variations at the implementation stage, because it will reflect the discussions and inputs from the client.

We agree on most points, but have different points of view about certain aspects. In the end, perhaps we are all compliant, and maybe there is room in the market for all of us.

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