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'Client's best interests' doesn't have to mean cheapest

Having only a limited product set to offer clients should not stop advisers putting their clients first, the Financial Markets Authority says.

Wednesday, August 17th 2016, 6:00AM 18 Comments

by Susan Edmunds

There has been debate over recent weeks about how advisers who are aligned to a provider can meet the requirements outlined in the Ministry of Business, Innovation and Employment’s recommendations for a review of the Financial Advisers Act.

It wants a conduct obligation to place the consumer’s interests first applied to all participants, consistent with the obligation currently placed on AFAs by their code of conduct.

“What would be required to place the interests of the consumer first would be determined by what is reasonable in the circumstances, but should be founded on what is suitable for the customer regardless of the differing incentives for the adviser or agent. This recognises that all advisers and agents have limitations on the services they can provide,” MBIE said.

“They would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite. If no product that they can recommend is genuinely suitable, they would then be expected to advise the consumer on that basis.”

Adviser Brent Sheather has argued that advisers who work for an institution could find that more difficult.

“Most academics reckon that a key element to the success or otherwise of an investment plan is fees.  Therefore a key part of an adviser’s job is to ensure that the products that they put their clients into are fair,” he said.

“Given this scenario do you think that one can put client’s interests first if one works for a vertically-integrated organisation that only sells its own high-cost products?

“The standard wealth management solution provided by a typical private bank has an overall total fee structure of 2%  to 3% per annum, the forward-looking risk premium of equities over long bonds is 3% per annum and the average yield  on a high-quality bond portfolio locally is 3%.  So a 2% or 3% per annum fee structure appropriates most of the risk premium and delivers retail customers the return of bonds with the risk of equities."

But Liam Mason, director of regulation at the FMA, said putting clients first was a principle-based obligation that would mean different things in different circumstances.

“The AFA Code expressly states that …it does not require an AFA to provide services in relation to products that are outside that adviser’s scope of services.  Our data in the replacement business report and the recent AFA returns show that many AFAs, whether at a QFE or non-aligned, do not currently offer or advise on multiple products and in fact only offer from one provider they know well or a small selection. The law recognises that advisers may not offer from a wide range of products and that within those limitations you must still put your customer’s interest before your own,” he said.

Mason said the key factor would be whether the advice or product met the client’s needs, whether all fair and reasonable disclosures were made and whether the product was fit for purpose.

“A good conversation will include factors of risks, returns, costs, benefits and fees and remuneration, and we expect all types of advisers to help customers understand the impact of fees on total returns. If the product you are recommending is not appropriate or fit for purpose, even if it is the cheapest in the market, then you will not be complying with your obligations.”

Tags: Financial Advisers Act FMA

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Comments from our readers

On 17 August 2016 at 8:51 am Brent Sheather said:
Let’s put some more context around what Mr Mason is saying. The government super fund, which is the pension vehicle for government employees including presumably Mr Mason, paid an average of 0.6% pa in fees to fund managers in 2015 and in the annual report it says a focus of the funds trustees is on minimising cost of investments. I wonder if Mr Mason and indeed all the other government employees would be happy if they got the standard wealth management solution fee structure of 2% - 3% pa i.e. up to 5x what they are currently paying.

Let’s consider the implications of that move in the wrong direction ….. the SEC website says that each 1% in fees reduces the terminal sum over a 20 year period by about 18% so a 3% pa fee structure is going to reduce Mr Mason’s pension outcome by maybe 50% as opposed to a 0.6% fee. I wonder if he would be happy with that? I wonder if he would consider a product that reduces his pension outcome by 50% as being a product that puts his interests first? My guess is that the answer to both those questions would be no. So how can a product/service which is demonstrably not delivering good outcomes, that is demonstrably not fair, and which some people by virtue of the organisations they work for are constrained to just offering, be described by the regulator as “putting client’s interests first”?

By the way no one said that just buying the cheapest products would be complying with their obligations so that is another example of the FMA trying to dodge this issue. The question I put to the Minister was - “Is an advisor who sells only high cost products putting clients’ interests first if, apart from the high fees, those products are appropriate for the client?”

The Financial Times wrote an article the other day about the implications of a lack of trust in institutions. He said that scepticism was maybe lapsing into solipsism and that was potentially the reason we got Brexit and Mr Trump. It is a slippery slope and trust is easily lost.

Coincidentally Anatole Kaletsky of Project Syndicate writes today about King Canute. He says politicians need to acknowledge reality – before it’s too late.
On 17 August 2016 at 9:52 am Tash said:
Clients best interests most certainly does not mean cheapest, especially if we are talking about life, disability, trauma and medical insurance. Whether anything and how much is paid claim time is what matters.

It would be useful when discussing these 'principle based' obligations, to distinguish between investments, managed funds, life insurance, F&G insurance, mortgages etc

Putting your client first most definitely means you must know the whole market if we are advising on life/disability insurance, after all there are probably no more than than 15 providers to consider at most (and usually much fewer depending on product type) and the difference between the same product offered by different providers can be very significant - claim versus no claim! One just has to consider what a provider's trauma cover will pay on carcinoma in situ (which makes up a very large portion of trauma cover claims) to see there are large differences in how much, if anything will be paid.

"sellers" - those who can only sell one providers' products (and who cannot advise on the most generous/appropriate provider) cannot put their clients interests first without a very clear disclosure that other products in the market may pay a claim when theirs will not and a recommendation made to take proper advice. If the client is prepared to forgo that advice and accept the risks concerned and buy from the seller, that is their choice but there should be no misunderstanding about the risks and dangers. The loss involved in getting it wrong is not a wasted premium, it is a potentially a large amount of money (and all that this brings in terms of choices, treatments, financial security)when a family needs it most desperately.
On 17 August 2016 at 10:21 am Charity said:
Let's put this in perspective. It's not that the banks and large institutions can't offer other products. They just choose not to because otherwise they wouldn't get paid twice--once through the product and once through the adviser. So how is that putting the client first. I listened to Rob Everett's recent radio interview on this subject. I have to say I was disgusted. So was the interviewer. What a tap dance! He sounded like he was representing the banks! Maybe he's angling for one of those ASB Polo Jerseys.
On 17 August 2016 at 10:23 am AFA Muggins said:
"“They would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite"


Best interests of client is wider than a product selection. Particularly a product selection limited to commission based remuneration. Stunning stuff from a regulator.
On 17 August 2016 at 1:57 pm henry Filth said:
Out of idle curiosity, would your average mug punter trundle along to their bank expecting free, frank, unbiased advice covering the full spectrum of available vehicles?


I rather doubt it.

The banks sell a standard range of products, to a pre-arranged process. Effectively, they're offering robo-advice but charging as if they offered a real human being.

Not nice
On 18 August 2016 at 8:56 am Barry Read said:
Banks and other product providers don't state that they offer independent advice. They offer advice on their product range. Currently when giving that advice they dont have to put the clients interests first, so they can sell any product. Under the proposed changes they will have to ensure that the advice they give about the product and service options are in the clients best interests. This is a step forward. If consumers are making a choice to go to a product provider for advice then they are accepting the limitations of that advice, buyer beware anyone? As far as I know we operate a free market and it is not the job of the government to regulate out all risks in the market for consumers. If that was the case then everyone might as well pack up and go home and the Government should have one state run investment scheme managed by Brent Sheather and Murray Weatherston.
On 18 August 2016 at 9:59 am Tash said:
People tell me all the time that those who go to the bank expect bank products not the market so it is acceptable to give them one product only.

This may be applicable with banking products, where, lets face it, the differences are small and of minor financial consequence but this is not the case with life/disability/trauma insurance, where offerings other than the banks may be significantly more generous, more efficient and more appropriate. Most people don't know and understand the potentially dramatic differences in claims outcome that can eventuate as a result and so don't see the danger.
On 18 August 2016 at 1:41 pm Murray Weatherston said:
Your headline (clients best interests) does not match the content of the article (putting the clients interest first).
When will journalists, commentators and regulators stop using the terms as they are fungible - the two principles are quite different.
On 18 August 2016 at 4:53 pm Graeme Tee said:
The FMA has really put its foot where its mouth should be with this issue. Liam Mason’s legalistic and semantic explanation of what they really meant to say is a Liam (sic) attempt to cover up what, we in the business all know, is common behaviour by the banks. Incidentally, the review on replacement insurance excluded banks, I wonder why?

Yes you can try to differentiate between advisers and sales people, insurance and investment but in the end if you go to a bank you get bank products, whether you are talking to an AFA, or Agent or RFA or sales person.

The high annual costs of the investment products are virtually guaranteed to not produce the outcome expected by virtue of the high fee structure. This is now known as “putting client’s interests first” and before the interests of your employer if you are a QFE or soon to be known as a “financial advice firm”.

This behaviour is now being legislated as in certain circumstances “putting client’s interests first”.

This outcome is a “clayton’s client first principle” i.e. a ‘client first principle” in name only. In my opinion this is a huge step backwards for the investment industry.

Who is going to be around to advise or tell the investing public this when the banks have the whole industry to themselves.
Disclosure : I work with Brent Sheather.
On 18 August 2016 at 4:59 pm Brent Sheather said:
Hi Barry Read
I’m not so sure you are correct about banks not stating they offer independent advice. Certainly the AFA advice at private banks for higher net worth individuals give that impression but that wasn’t my point. My point was that you can’t realistically label second rate advice as “putting client’s interest first” unless you are a complete idiot or the Chief Executive of a bank. I’m not so sure we have a free market in financial advice either. There is an increasing body of thought amongst lawyers and academics, in the US in particular, that there is an information advantage accruing to the sell side which the regulators need to address. The current regime of “anything goes if you disclose” might suit some but it certainly is not a good deal for retail investors. Speaking of disclosure I don’t currently work for a bank, haven’t worked for a bank, don’t intend to work for a bank and don’t consult to any banks. Would you mind providing full disclosure in respect of yourself.
Brent Sheather
On 19 August 2016 at 11:36 am Barry Read said:
Happy to provide full disclosure.

I don't currently work for a Bank, I did work for an insurer that was owned by an Australian Bank for two years, I don't intend working for a bank and don't provide consulting services to any banks. IDS exists to support independent financial advice businesses with compliance and development support. Quality financial advice is about more than just product (Though I agree not all products are equal, but also think that people should shop around). New Zealanders have choice about the advice they access. The proposed changes are an improvement and can apply to bank advice or advice where product choice is limited.
On 19 August 2016 at 12:06 pm John Makowem said:
Hi Barry
Just a question as I really do not know the answer. So if Bank's currently do not have to put the client's interests first, in what way do you think that their current practices will change to ensure that the product and service options are in the client's best interests? Really interested in your view.
On 19 August 2016 at 1:02 pm Barry Read said:
Client First in a limited product solution environment such as a QFE could do the following.

Advice on product should be the most suitable available from the selection rather than the best for the individuals KPI or the most profitable for the provider.

Replacing existing product could only be done if the client is better off. (That is going to be a headache for most).

Stopping a product sale or replacement to say 'Hey you should get some advice' would be great to see as part of a Client First environment. Rather than just saying the scope is limited and proceeding with the sale anyway.

On 19 August 2016 at 1:14 pm Ron Flood said:
John, irrespective of what Barry thinks on the matter, my hope is that the Banks will now put processes in place whereby any insurance policy being replaced by one of their 'agents' is analyzed by a senior staff member whose KPI's do not include 'flogging' as many insurance policies as they can. W

That will be definite improvement over the current situation.
On 19 August 2016 at 1:15 pm Graeme Tee said:
Liam Mason is arguing semantics in his defence of the FMA’s “client’s interest first” principle. As I understand the FMA is saying there are two types of CIF, one for independent AFA’s and another for banks, that includes AFA’s working for a bank.

From a client’s perspective, an AFA is someone you go to for advice, the FMA perspective is if you disclose that you will charge high fees for no extra service or performance then that’s fine. But Mr Mason goes on to say, in the second to last paragraph “whether the product meets the client’s needs” and “all fair and reasonable disclosures made”.

The problem with this is that fee structures that remove any potential for longer term risk adjusted returns cannot possibly meet client “needs”. It will meet the AFA’s and their employers needs before the client. Disclosure of a high fee structure does not make it “fair”, legal definition or not. Mr Mason is defending the indefensible and by pursuing the idea that this is a “client first principle” is simply beyond common sense. It reminds me of that old TV advert – a “Claytons” client first principle is one in name only.
Graeme Tee
On 19 August 2016 at 2:42 pm Murray Weatherston said:
@John Makowen

I don't want to pick on you but do you not see that you are also mixing up "client interests first" (line 3) with "client's best interests" (line 4).
I keep beating the drum that they are not the same principle, but no-one appears to listen.
Under the FAAReview proposals, a bank employee (whether agent or financial adviser) will not breach "client interests first" if she discloses she can only recommend the bank's own products provided she gives the required remuneration disclosures. This will apply even if the bank's product is 10 times the cost of the rest of the market.
But please don't fall into the trap of suggesting the standard for all should be changed to "client's best interests" as probably no-one will be able to meet that standard if applied literally.
The Aussies have a "best interests" standard. But they don't define what "best interests" means. Rather they provide a safe harbour procedure - but IMO their safe harbour provisions do not provide for what other jurisdictions would describe as "best interests"
Frankly internationally the whole issue is a dog's breakfast. No-one has solved it. The Brits made be onto Mark 10, the Aussies Mark 8.
Would drive a man to drink...where is the Laird when you need him.
On 19 August 2016 at 3:51 pm Murray Weatherston said:
@Barry Read

I missed your earlier comment but what I have said to John Makowen applies equally to you.
I do not think at all that the banks under the FAAreview proposal have to ensure that the advice they give is "in the client's best interests".
If you really think they do, can you please point me to the places in the document that lead you to that conclusion.

PS I have absolutely no interest in running an investment scheme, let alone a monopolostic one. My aim is to get everyone to understand that the institutions are being given carte blanche to SELL their financial products to the consumer under the guise of ADVICE. The sales vs advice issue was a key issue in the options paper, but the instos have successfully kept it out of the final report. Well done them. But it doesn't make it right!
PPS I'm not trying to sell the instos anything so I feel I can comment without fear or favour.
On 19 August 2016 at 6:04 pm Mrs AFA said:
Hey Murray, you’re absolutely right. There appears to be confusion about the terms ‘client’s best interests’, versus ‘client’s interests first’ as the terms are being used interchangeably. These two concepts are radically different. Using them interchangeably is muddying the water unnecessarily. I believe working in a client’s best interests is much wider in scope than the narrower client’s interests first, which seems to refer more to how the adviser gets paid.

In MBIE’s final report on the review of the FA and FSPR acts, they are consistent when talking about the desirability of having all advisers put client’s interests first. At least until the section on churn on page 15, when magically, the phrase “consumer’s best interest” creeps in. They state: “this suggests that some advisers are not acting in the consumer’s best interest”. I didn’t think the goal was about working in the consumer’s best interest, but rather to put the client’s interests first. We have to be very careful that we don’t end up with more regulation by guidance note when this sort of creep starts happening.

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