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Client interests: first, best or last?

Imagine you’re seeing your doctor or lawyer and they tell you “just so we are clear, my duty is to put your interests first… but I won’t necessarily be acting in your best interests.”  How would you feel? Comforted and relieved?  Or surprised and confused?  In this commentary John Berry looks at a financial adviser’s duty to place the interests of the client first (but not to act in the client’s best interests).  What does this mean?  Is it what clients expect?

Monday, August 22nd 2016, 6:10AM 39 Comments

by Pathfinder Asset Management

John Berry

Understanding professional duties

“Acting in the best interests of a client” seems self-explanatory but is also hard to define concisely.  It means something like evaluating and balancing all elements to promote the advantage of the client. This contrasts with the Code Standard obligation to “place interests of the client first” which appears to be much narrower.  “Client interests first” simply tells us that if the interests of the adviser and client conflict, then the client’s interests are to take priority. Exactly what does this mean in a professional context?   

Many, including the regulator, regard the “interests first” duty as satisfied if the products and advice are simply “fit for purpose”.  Whatever that means (apparently it means different things in different circumstances).  Shouldn’t advice be prepared with the client’s best interests in mind?  Why should an adviser settle for a solution they know to be the third best or even the worst?

Torturing the words “client interests first”

The Code of Conduct itself provides little guidance on what “interests first” means.  It simply suggests that “interests first” will be determined by "what is reasonable in the circumstances”.  This just parks the issue of interpretation for the future.  It has allowed everyone to interpret “interests first” to mean whatever they want.

What does “client interests first” mean for an adviser who only recommends managed funds produced by that adviser’s firm? What if they know one of their firm’s managed funds is the most poorly performing (after fees), least diversified and most volatile compared to competitor funds?  What if they know it to be bottom ranked in its category?  How can they possibly be putting client interests first if they only consider, offer and recommend a product produced in-house that they know to be inferior? 

This approach is widely regarded as acceptable, including by the regulator.  “Client interests first” has been interpreted to mean that “I will select the best option for my client from the small universe of funds I produce.  I choose not to consider funds or other products from third parties, even though many are clearly better than some in my narrow self-interested universe.  In the circumstances, I am putting my client’s interests first.”  This is how industry has tortured the meaning of “client interests first”.  The result is to put commercial interests (not client interest) first.

What is a fiduciary duty?

At the other extreme to New Zealand's interpretation of “client interests first” is a fiduciary duty.  This is what looking after a client’s best interests really means.

The common law concept of a “fiduciary” was developed over centuries to cover the special duty where one person acts for the benefit of another.  It recognises that when a special relationship exists the dominant party should act in the best interests of the other.  By extension the fiduciary cannot generate an advantage from the relationship. Examples of fiduciaries include trustees (having fiduciary duties to beneficiaries) and company directors (having fiduciary duties to the company). 

If advisers were required by law to act in the best interests of clients then they would have the equivalent of a fiduciary duty.  This is a high standard – but arguably one that clients already expect their adviser to meet.  If advisers were fiduciaries, adviser businesses that also manufacture fund product would not be able to put their own high fee, underperforming, more volatile and less diversified fund into a client portfolio.  They’d use a better product even if it was produced by a competitor.  That is what “client best interests” means (that is also what “client interests first” should be interpreted to mean). 

What's the standard for other professions?

While each profession has its own approach to ethical rules, “acting in the best interests of the client" is a common obligation.  For doctors the “well being of the patient is … [the doctor’s] first priority” 1 and they have a duty to “act in the patient’s best interest” 2.  Dentists “have a responsibility to put the interests of [the] patient first. The professional relationship … relies on trust and the assumption that [the dentist] will act in [the client’s] best interests” 3.  Real estate agents “…must act in the best interests of a client…” 4.  Elsewhere in the investment industry DIMs providers have a “duty to act … in best interests of clients” 5 while fund managers have a duty to “act in the best interests” of unitholders 6.   

How would we feel if these other professions didn’t have a “client best interests” approach? For example, if our lawyer advised us to set up a company structure because they had some already incorporated shelf companies they wanted to use – and didn’t recommend a partnership structure even though they knew the company would be more expensive to set up and less tax efficient?  The company structure is “fit for purpose”, but it’s not in the client’s best interests.  Or what if a doctor prescribes medication because by meeting quotas they get a bonus – even if they knew the medication was slightly more expensive and generally had worse side effects?  They could argue the product is “fit for purpose” even knowing it’s nowhere near “best of breed” and so is not in the best interests of the patient.

Why is the standard for AFAs (client interests first) different to DIMs providers, fund managers, medical professionals and real estate agents (client best interests)?  Is the different standard an accident, or rather is it to accommodate institutions exclusively selling “home brand” product?  

What’s happening offshore?

Australian financial advisers “must act in the best interests of the client in relation to the advice”7. Their law sets out a number of steps on how this can be satisfied - a very different approach to what has been adopted in NZ.  (Though making “best interests” prescriptive probably adds a different level of complexity). 

In the US advisers are currently required to suggest “suitable investments” to clients.  However, the Department of Labour is introducing rules this year requiring that advisers meet a “best interests” standard.  Britain made a similar change in 2013 8

In short – advisers in Australia, the US and UK have moved or are moving to a “best interests” standard. 

What standard should NZ advisers work to?

There are a huge number of AFAs the length of NZ who care deeply about their clients.  They set their own personal professional standard to act in their client’s best interests.  This is a higher standard than Code Standard 1 which requires an adviser to “place the interests of the client first” and yet allows the sale of inferior in-house product (just to be clear, we are not saying all in-house product is inferior, but some is).  Looking forward, the industry and the regulator could take one of four options:

  • Option 1 - Change the adviser standard from “client interests first” to “client best interests”.  This would give advisers the same professional standard as lawyers, dentists, DIMs providers, fund managers and real estate agents. It would also give the same professional standard that financial advisers in the UK, US and Australia are moving (or have moved) to. 
  • Option 2 – Interpret the “client interests first” standard fairly and bring it closer to a “client best interests” standard.  The meaning of “client interests first” has been tortured and is now anti-client.  It needs to be interpreted in a sensible way, putting client interests first (not self-interested commercial interests first).
  • Option 3 - change the Code to reflect the reality of client interests. Remove the “clients’ interests first” duty from the Code.  These have become meaningless words mumbled to make the industry feel better about itself. Replace them in the Code with an honest acknowledgement that, when convenient for the provider, commercial interests can override client interests.
  • Option 4 - Do nothing.  The current culture, where commercial interests can override client interests, could continue.  More lawyers could also be engaged to find imaginative new ways of torturing what little is left of the “client interests first” standard.

Let’s return to the initial thought in this commentary – how would we feel if our doctor or lawyer were to tell us “just so we are clear, my duty is to put your interests first… but I won’t necessarily be acting in your best interests.”  My guess is we’d feel gobsmacked – if they are not acting in our best interests then they aren’t providing the service we’ve signed up for.  It just wouldn’t be professional.

John Berry, Director
Pathfinder Asset Management Limited

Disclosure of interest:  John is a founder of Pathfinder and invests in all Pathfinder’s funds. 

1 NZ Medical Profession website
2 International Code of Medical Ethics
3 Dental Council, Handbook for the New Zealand Conditions of Practice
4 Real Estate Agents Authority website
5 FMA DIMS Guidance Note (also Financial Markets Conduct Act section 433(1)(b))
6 Financial Markets Conduct Act section 143(1)
7 Australian Corporations Act 2001 Section 961B
8 The Economist, 26 March 2016 page 63

Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors.

Tags: Pathfinder Asset Management

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Comments from our readers

On 22 August 2016 at 8:10 am Brent Sheather said:
Excellent article John but some readers won’t be happy so I have prepared a reply on their behalf. “You have done it again, putting words in my mouth, I didn’t say that at all, what I said was blah blah blah featuring extended legalistic posturing stressing semantics and understandable by no one. Furthermore I have had this view checked by my independent legal expert, Liam, who assures me we are on the right track and my colleagues at the Ministry of Investment Banking and indeed the Minister are right behind us on this matter. Coincidentally I spoke to our four major customers at a BBQ this weekend and they are “perfectly happy with the current law”.

John if you do this again I will speak to the Good Returns Editor and you will be back to writing a blog which only your immediate family will read.

PS : What you said I said I didn’t OK. FFS I’m not happy.”

On 22 August 2016 at 9:38 am Simon Hassan said:
Well explained, John. And gob-smacking.

The interpretation of 'client first' being promoted by FMA is clearly ridiculous (not to mention an abuse of the English language).

And it just doesn't relate to the rules about advice provided by employees of product providers. It also affects most of the ‘huge number of AFAs the length of NZ who care deeply about their clients.’ Most supposedly ‘independent’ and ‘non-aligned’ financial advisers operating in smaller and sole practitioner firm around NZ operate under company structures.

I am a director of one of these: our financial advice company. Under the interpretations set out in the article my duty to our company’s shareholders ranks above my duty to clients!

So unless my Board absolves me of this duty and expressly requires me to place clients first (is this allowed?), I may be obliged to put my employer before my client!

Memo to the directors: ....
On 22 August 2016 at 9:54 am Barry Read said:
Great Work John and thanks for taking the time to put this piece together.

Regards Barry

I vote Option 1 by the way.
On 22 August 2016 at 2:46 pm Another AFA said:
Excellent article, NZ certainly has room for improvement towards standards. I do want to raise the point over the comment in the article; "Why should an adviser settle for a solution they know to be the third best or even the worst?"

Who decides a solution to be the best? Or worst (or somewhere in-between)?

Who decides if an active managed fund at the top of the league table is better than an Exchange Traded Fund or vis-versa?

At present, Code Standard 1 provides a reasonable framework for all financial advisory businesses and AFAs to provide advice within a defined scope of service, act with integrity and place the clients interests first.
On 22 August 2016 at 3:37 pm mockingbird said:
John has written such a rational article. It clearly and simply articulates how convoluted Code Standard 1 is. I would sincerely welcome any comments countering his propositions from (aligned) advisers, FMA staff, Code Committee members or others who believe he’s off the mark (and why).

The reality is that the majority of registered AFAs are aligned to product providers or in some other way beholden to others besides their retail clients in the first instance. For this reason alone, Code Standard 1 is simply a “feel good” introduction to the Professional Code of Conduct, likely there to put an initial spin as to the “professionalism” desired under a new adviser regime. As John, Rob Everett and others agree (perhaps not intentionally), there is no generally accepted methodology to assess whether an adviser (aligned or otherwise) is acting in their client’s interest first when providing advice.

The inability for any of us to agree on how to apply and/or view Code Standard 1 in real terms is compounded by our sector’s pink elephant – the ongoing quest to squeeze the square peg of “sales” into a round hole of “financial advice.” Until there is a clear distinction in our sector between the provision of advice versus sales, we will continue to struggle to have any meaningful pre-eminent duty of care for clients.

John highlights the duty of client care from law, accountancy and medicine. Unfortunately, across our sector (as we are not yet a profession no matter what anyone asserts otherwise), there’s a fundamental difference between most of “us” and most of “them” – my lawyer, my accountant and my doctor base their service propositions on advice, not sales. As I seek to enter a business sale and purchase negotiation, comply with a complicated tax situation, or seek my best treatment options when I am unwell these professionals advise me first and foremost on process, then options and then help me make a rational decision. Sure, each of these professionals might have some marginal “value adds” but they are not their core proposition nor a barrier to entering into a business relationship (a professional trustee relationship for my family trust, a Xero subscription, or name brand versus generic drug prescription come to mind).

Until there is a clear distinction in our sector between the provision of advice and sales, we will continue to struggle to have any meaningful Code of Professional Conduct. Alas, everyone is too polite, embarrassed or self-interested in protecting their patch to call a spade a spade, and get on with it creating a proper profession that would mean an adviser is an adviser and a salesperson is a salesperson. And, by the way, I have no problem with salespeople who are good, and honourable and treat their clients well. I simply believe we are in different areas of the big ole world of financial services. They sell, I advise.

Not surprisingly, I am a diehard non-aligned and independent financial adviser. This is intentional on two fronts. One is that I like advising clients, I don’t like selling from a suite of product options and so I have built my career to provide independent advice. Secondly, the terms “client interests first” and “client’s best interests” are obviously synonymous in my mind. To think any other way is splitting hairs and leveraging semantics to justify a different career decision. If this is how I think, there can’t be any other way for me but to be a non-aligned adviser.

There’s a reason why the US, Australia and the UK are moving in this direction of client duty (holding advisers to a duty based on a client’s best interests) – it’s ethically right when providing advice.
On 22 August 2016 at 4:22 pm John Berry said:
Brent, thanks for your comment. You are right, I probably deserve to be grounded for this!

Simon, Barry, Mockingbird and Another AFA, thanks also for taking time to respond.

Another AFA - I think your average client would totally understand what you mean by "acting with integrity and placing the client's interests first" but they'd be scratching their heads when you say you provide "advice within a defined scope of service". What is that?! Why not just say you're selling not advising - at least then the client understands (Mockingbird is right - this discussion is fundamentally about sales vs advice).

On 22 August 2016 at 4:47 pm Brent Sheather said:
Hi another AFA

One way of answering the questions posed in your second and third paragraphs is to have regard to what best practice looks like as evidenced by the portfolios of professionally managed pension funds throughout the world. It is quite clear from their portfolios and comment from non-aligned academics that a focus on minimising fees should be first and foremost, maybe followed by performance, and in the equity space a split of 50/50 between active and passive is appropriate. So you don’t need to choose between the active managed fund and the passive fund. They both make sense provided the fees are fair. You can define fair by looking at the forward risk premium and academics reckon that this averages about 3% i.e. equities over long bonds. Through this lens a fund with a 3% MER, and yes there is at least one in NZ that I know of right now, looks unfair and unfit for purpose whereas an active fund with a .4% MER looks reasonable.

This sort of strategy, having regard to best practice, has all sorts of uses in answering day to day questions like :

• To what extent should I buy Feltex for clients – the answer was a weighting of virtually zero in NZ equity portfolios.
• To what extent should I buy finance company debentures for clients – the answer is pension funds have virtually no exposure to undiversified junk bonds i.e. they get their exposure through a portfolio of junk bonds and this is limited to about 5% of bond portfolios.
• To what extent should I diversify portfolios – answer lots, based on market cap i.e. virtually no exposure to that small cap Turkish bio tech fund that offered me free CPD last week.

The FMA talks about making sure fees are fair but either is too scared or doesn’t know how to define fair or has decided this isn’t its remit. In the absence of their intelligent input we as financial advisors need to step up. I personally think this is a far better value added proposition than knowing the names of the client’s grandchildren or pet ferret or offering to speak at their funeral.

Brent Sheather
On 22 August 2016 at 4:50 pm Dorothy said:
Excellent John Berry and the type of leadership that is needed to keep moving towards an, as yet, largely undefined objective of all the changes/bureaucracy.

I opt for option 1.
On 22 August 2016 at 5:23 pm gavin austin adviser business compliance said:
John - I always enjoy your contributions and this is possibly the best for some time, lets hope that those who will shape the way the industry is viewed, regulators, Professional Body representatives and other influential commentators, take notice of how you view this topic.

Also "mockingbird" you have added a valuable insight - the difference between selling and advising. In my HO those who are aligned in any way to the product producer or producers if more that one, are sales people and there's nothing wrong with that as long as the punter knows that's what you are.

You aren't however advisers. That designation should be exclusively belong only to those as described by Mockingbird as "non-aligned and independent financial adviser" - the code should stipulate this clearly and it should be enforced with strict penalties.
On 23 August 2016 at 4:44 pm Robert Oddy said:
It has been satisfying to read so many opinions on this thought-provoking issue and follows on from responses to the earlier article which quoted comments from FMA Chief Executive, Rob Everett. More opinions will be good to see.

However, we do need to be careful what we wish for when developing a definition to ensure the objective can be understood and met by all participants. That might be extremely difficult given Rob's quote: “It means different things for different people in different circumstances. What it means for an AFA holding themselves out as a non-aligned individual is different to someone with an ASB polo shirt on, offering ASB products."

SiFA's submissions and personal representations to MBIE argued strenuously the critical issue was for the separation of advice from sales. Adding a requirement that consumers be provided with clear documentation identifying the advantages and limitations of advice and of sales (including the risks the consumer would be accepting in purchasing a product or solution without advice) seemed sensible. The SiFA recommendation was to have only two categories - financial advisers and product information specialists with the latter regulated through the FMC Act and required to make it clear they were salespeople and not giving advice.

Unfortunately, MBIE, FMA and the Minister appear to have disagreed with that approach. Instead, consumers in the future will have as much difficulty as they do today in determining who they should approach for financial advice. And institutions will be free to sell their products through their agents while providing 'advice' but financial advisers will be held to a higher standard. That seems no different to the current situation.

Please add your thoughts here about the suggested different approach to be applied in determining what is required.
On 24 August 2016 at 7:28 am gaman AFA said:

You have a typo in your comment. Where you said

"Unfortunately, MBIE, FMA and the Minister appear to have disagreed with that approach."

I think you really meant:

"Unfortunately, the banks and the Minister appear to have disagreed with that approach."

There you go, all fixed.

In all seriusness though, given previous public comment by Rob Everett about where he sees the major risks lie for consumers (which for the avoidance of doubt was sales "advice": by the large banks), I am a little bit bewildered by this latest distinction where the quality and independence of advice is measured only in terms of "what is reasonable in the circumstances." If you are looking for evidence of the power of lobbying by big business at the expense of consumers, that is it.
On 24 August 2016 at 11:24 am Brent Sheather said:
Hi Robert, I must say if that is SIFA’s position I won’t be joining SIFA in a hurry. You wrote that SIFA argued that the critical issue was the separation of advice from sales. I disagree. There should be no sales – everybody should be held to the same standard as independent AFA’s. The “all clients’ interests will be put first but some will be put less first than others” regime brings the industry into disrepute. Put another way surely retail investors with modest sums are entitled to get access to the best products in the same way that high net wealth individuals are? In fact commonsense tells you that someone whose retirement savings are $50,000 needs good advice far more than someone with $5 million as their retirement will be proportionately more impacted by high fees.

On another issue perhaps my criticism of the FMA has been misdirected. Maybe the real culprits behind all this bad policy is the MBIE and their puppet masters the banksters / government. In this regard I seem to recall that the senior person in the MBIE, possibly responsible for the recent bungled legislation re financial advisors, has virtually no experience in the industry, indeed up until recently was involved in some totally non-related area of government ie the diplomatic service. Love to hear from anyone who can shed more light on this including the name of the perp.
On 24 August 2016 at 1:49 pm blogger billy said:
Or you could have said "unfortunately the banks have used all their power money influence and teams of lawyers to pressure the minister and the FMA to get what they want - unlimited profits.

And unfortunately the minister and FMA want to keep the banks sweet for their future career opportunities - revolving doors again."

Looks like they all want to protect their own interests first - not the consumer.

But to try and look good they hound hassle and persecute non aligned AFA.

They are not helping build public confidence in markets - that are destroying it.

On 24 August 2016 at 5:19 pm Sceptical said:
Brent - why exactly do you think that that financial sales should be banned, even when the person doing the selling doesn't attempt to represent themselves as adviser?

What is the market failure that government is trying to address? Yes, decisions about making financial products are among the most important that people make, but couldn't you say the same thing about property? Real estate agents are clearly working for the seller, no the purchaser of a property. That's not to say that there shouldn't be additional protections in place, but I have yet to see a case why financial products are so different that sales should be prohibited completely.

You mention the lack of industry experience of relevant people at MBIE (who I am sure you would be criticising as conflicted if they did have industry experience). I would argue that what is relevant for policy makers here is an understanding of regulatory policy - why governments should intervene in markets, what tools are available and what unintended consequences need to be avoided. Industry specific knowledge can be developed and supplemented through effective consultation.

In my view, MBIE went out of its way to try to listen to advisers in the review process. The adviser community does itself no favours by responding to any proposals with allegations of corruption and undue deference to the banks. Arguing the merits of the issues would be much more effective.
On 24 August 2016 at 10:46 pm w k said:
@sceptical: " Industry specific knowledge can be developed and supplemented through effective consultation." don't exist in reality. i've said it before and will say it again - the regulator's mind has already been made up even before the "consultation, workshops, seminars, feedback, etc". They are just going through the motion. we can say all we want and wait for the cow to come home. let's say i was wrong - when was the last time the regulators implemented a suggestion from advisers?

one suggestion from the session i attended conducted by mbie was to have advisers individually registered (and of course qualified too). they can then sell or advice on products in their area of expertise - this takes away the need to differentiate sales & advice. i knew it's not going to be look at - reason? cost will be far too high for the big boys.

i have the exactly the same thoughts as blogger billy.
On 25 August 2016 at 9:49 am Brent Sheather said:
Hi Sceptical

Thanks for that. I thought the reasons would have been pretty clear as to why “sales” needs to go. Let’s be honest – “sales” is just an excuse that vertically integrated organizations use to allow them to just sell their own high cost products, nothing more nothing less. Yes they do disclose – maybe - but we all know that you can disclose in such a way that no one knows with the net effect that “if you disclose anything goes”. So why specifically should we ban “sales”? Lots of good reasons:

• Obviously to get a better deal for investors with modest sums
• “Sales” brings the industry into disrepute because it is invariably associated with high cost, bad deals for clients. When people say that that sort of deal represents “putting client’s interests first” it makes the whole thing look like a sham.
• Send a message to the banks that the vertically integrated model is under threat
• Send a message to the banks that their good mates in government and the MBIE are losing influence

That’s just a few good reasons but don’t you think that it is a coincidence that most of the organisations that offer “sales” are vertically integrated organisations?

Let’s approach this from another way… you think that the members of the government super fund i.e. all the government employees would be happy if they got the same deal inflicted upon them as the recipients of “sales” advice get? Would they be happy with just one fund manager who extracted 2-3x the fees they are paying? If they wouldn’t view that as being satisfactory and they make the rules why should anybody else? And remember the GSF fee of 60 basis points is inflated by the fact that they have a big allocation to alternatives and their portfolios are effectively monitored by experts like Mercer etc with their associated overheads. The MER of the plain vanilla bond and equity funds in the GSF are probably around 25-30 basis points max.

Clearly “sales” has to go but how do we avoid the UK experience where the banks decided if the rules had changed they decided to take their toys away completely? That’s more difficult but given that disclosure doesn’t work, at least in the way that it is typically executed, probably the best answer is to compel the banks and other vertically integrated organisations to tell customers they can’t give them any advice but put in front of the customers low cost passive solutions ranging from higher risk to medium risk to low risk. Make it really simple and low cost and most importantly separate the part of the bank that is associating with retail from the institutional side of the bank i.e. bring on an NZ version of Glass Steagall.
On 25 August 2016 at 9:56 am John Berry said:
Thanks to those who have commented. I am disappointed, but perhaps not surprised, that no one has made a convincing attempt at explaining why the current defective duty to clients is in fact right. May be engaging on the issue is just to acknowledge that there is in fact a problem here....

Thank you "Another AFA" for at least trying to put a contrary case. But your argument (it's really hard to make a judgement call on whether a passive ETF exposure is better for a client than an active Australian Unit Trust or PIE fund from another manager, so advisers shouldn't have to make these decisions) doesn't make a compelling case. Those judgement calls are exactly what a qualified financial adviser should be deciding.

This article is about to disappear off the goodreturns homepage, but that won't make this issue go away....

On 25 August 2016 at 1:38 pm henry Filth said:
As an ordinary mug punter, I have had twenty to thirty years of dealings with the New Zealand financial services industry.

My experiences have not, overall, been heartening.

I have sought advice on how to structure my investments. Generally the advice model I have come across is to make me fill out a lowest-common-denominator "Risk Assesment" form, after which I am shoe-horned into a standardized category.

Once shoe-horned, I am then presented with an off-the-shelf "plan", comprising a collection of assets from a pre-selected range.

Usually, the adviser has provided little (if any) personalized input, and I am left with the impression that I have been dealing with a robot, but charged as if I was dealing with a person.

This article is very relevant to the industry but, really, it addresses concerns which should have been put to bed some time in the last century
On 25 August 2016 at 2:01 pm Murray Weatherston said:
Dear John

Nice try to try and close the debate with a claimed unanimous victory. But I can't leave that unchallenged - to reverse the old Roman saying, "tacet non consentit".

I am pushed for time this afternoon but I will try and do a full response tonight.

There are a lot of sub-themes through the responses to your piece, and the earlier blogs on Good Returns that are part of this discussion; inter alia, they include

1. what does putting the interests of the client first actually mean?
2. PTICF should be chucked out and replaced with "clients best interests"
3. What does "clients bests interests mean anyway"
4. Has FAAR advantaged the banks?
5. sales should be banned
6. sales should be separated from advice
7. what is the problem anyway -[Sceptical 24 August talks about "why governments should intervene in markets, what tools are available and what unintended consequences should be avoided"].

John, I had thought about making a response when the article first appeared. That comment would have simply been "be very careful about what you wish for".

PS I wonder how many of the contributors to this blog story actually made a submission to the FAA Review?
On 25 August 2016 at 2:41 pm w k said:
@mm - done it since simon power days. gave up months ago. it really took me a very long time to find out that at least talking to the wall there's an echo bouncing back.

On 25 August 2016 at 3:12 pm Brent Sheather said:
Hi Murray

I haven’t made a submission on this issue, indeed I haven’t made a submission on anything for years because my experience is that submissions, as WK said earlier, are a complete waste of time unless that is you are a bank and can get an audience and are able to offer the interested parties work when their current tenure finishes.

Yes I know heretical talk but it’s an obvious way of reconciling all the pro-bank legislative environment. The other alternative is that the law-makers are stupid or inexperienced which might be the case but I think that is less of an issue.

On 25 August 2016 at 5:59 pm said:
If a client currently uses an Adviser then the client must firstly trust the Adviser to act in their best interests, otherwise the client would find another Adviser who they can trust to act in their best interests.

Clients go to their banks for advice for the same reason they would go to an Adviser, because the client trusts the bank to act in their best interests.

However reading some of the comments, a client is misguided to trust their bank to act in their best interests as the bank doesn't separate the advice and sales side. Clients will always deal with Advisers who are worthy of their trust no matter what the advice/sales bundle looks like or lowest/high fee structure prevails.

Clients are all individuals with individual concepts of what trust means to them.

Based on my observations of the NZ industry over the last 37 years, I don’t think the majority of Advisers (including bank) should be trusted to act in their clients best interests.
On 26 August 2016 at 7:08 am Murray Weatherston said:
I think I bit off a bit more than I could chew in promising an overnight response. But here goes. I have dressed in my defensive body armour to try and deflect the inevitable slings and arrows that will be hurled my way.
I would like to try and explain this particular blog discussion in a wider and in an historical context.
Ever since the FAA came into effect in 2011, there have been rumblings that the rules for AFAs working outside of QFEs has been somehow more onerous than the rules for advisers working within QFEs. [ I have been known to compare the treatment of the big end of town with the area I practice in – the small non-aligned owner operated sector.]
AFAs have been subject to CS1, the overarcher that says AFAs have an obligation to put the interests of their clients first (PTICF). No-one has until now argued about that being the right standard. Why exactly that standard was adopted by the Code Committee is pretty much undocumented. In a recent blog, I opined that that was the standard for CFPs (monopoly licensed in NZ to IFA) and drew a link to the fact that the original Code Committee Chair Ross Butler (who still sits on the Code Committee I think) had been CEO or perhaps even Chair of IFA. I meant that in no sinister way. Often seemingly related things happen by coincidence.
A few years ago, FMA published a guidance note on using class advice for Kiwisaver advice – from memory 27 pages long and a tortuous read. To this day I do not really understand what they were saying – i.e. I don’t follow their logic. (incidentally this is not sour grapes from me as I am deliberately not involved in Kiwisaver advice, except as an incident of other advice I might be giving.}
That guidance seemed to coincide (or perhaps confirm what was already happening) with banks somehow taking control of some 70% of the Kiwisaver accounts, and there were plenty of murmurings in many quarters that bank tellers were somehow being incentivised to convert bank customers to the bank’s own Kiwisaver. (Was it McDonald’s meets banking – “do you want our Kiwisaver with your loan or TD?”)
But there was never any proof nor any apparent enquiry to see whether there was any smoke to any of this. The horse had already bolted anyway.
Fast forward to the FAAR. Lots of submitters said RFAs got it easy versus AFAs and a number said they should be subject to the same PTICF standard as AFAs. The MBIE review team listened to all that and recommended that to the Minister, who agreed.
I amongst others started raising the issue of what exactly did PTICF mean in practice. I called it an “apple pie and motherhood statement” – in my lexicon an APAMHS is a statement that everyone intuitively agrees with, but which no-one can actually explain; or if anyone thinks they can explain it, their explanation is different to the explanation someone else thinks is right.
Good Returns got into the fray and interviewed Rob Everitt CEO of FMA. In that article, he was reported to have said words to the effect that PTICF meant different things in different circumstances. And he contra-distincted an independent adviser working with a range of manufacturers, and an ASB employee in an ASB polo shirt advising on ASB products.
IMO that statement, which has not been denied, was the spark that set off the fire that led to John’s article a few days ago.
The flames attracted the attention of a number of people some of whom jumped to the conclusion that this was further “proof” that the banks were in a privileged position vs everyone else. Whether consciously or not, the client’s best interests (CBI) was a convenient big stick to bash the banks with, because if that became the standard (using deliberately perjorative words to emphasise the point) “how on earth would the banks be able to continue to ram their own high cost poorly constructed poorly performing products down the throats of their unsuspecting customers”.
To be crystal clear, I am not an advocate for CBI instead of PTICF.
I recently tried with spectacular unsuccess, to promote a debate on what did PTICF actually mean. My thinking was and still is that if CS1 has been PTICF, and FAA mark 2 was going to extend that CS to a lot more advisers, we ought to have some better idea of what it meant.
I was surprised CFPs didn’t rush to the defence of PTICF, as that is what their international body has as its standard.
But this attempt has been swamped by the outpouring to John’s article
There seems in this blog a jump to the notion of “PTICF is bad, CBI is good” without any real notion of what the differences between them were – yes I think they are completely different.
It is remarkable to me that the cornerstone standard of the existing AFA Code that has been in place for 5 years without a murmur of discontent, and that a large number of submitters to the Review said should be extended to more advisers than just AFAs, should suddenly in a matter of days become such a loathed concept that is should be dissed completely.
In my analysis, the spark was those two sentences by the FMA CEO in a Good Returns article.
Now I don’t know whether Rob Everitt wishes he had chosen his words more carefully in his Good returns article. Maybe he was deliberate to set the hounds running off over this new rabbit.
But I for one do not see the way this debate might be developing is at all helpful to advisers.

PS John you were right that this would disappear off the front page...
On 26 August 2016 at 11:31 am Brent Sheather said:
Hi Murray

Interesting view. Your last comment intrigues me and I think that whilst the debate might not be helpful to some advisors it is certainly helpful to those who embrace doing the best thing for clients where that means choosing from the entire universe of products i.e. what someone would reasonably expect a fiduciary to do. Anything else brings the industry into disrepute. I also think it is quite easy to define what a fiduciary relationship mans for an investment advisor - it means having regard to best practice as evidenced by the portfolios and strategies of the average pension fund.

I note you mentioned Ross Butler and my view is that the IFA has a long history of holding back progress in this industry besides bringing it into disrepute with its members recommendations of finance company debentures. This invited the inevitable response from the government and made everybody else suffer for their greed.

Brent Sheather
On 26 August 2016 at 2:05 pm John Berry said:
Murray, you’ve given plenty of food for thought, thanks. I do need to question one of your comments - “I for one do not see the way this debate might be developing is at all helpful to advisers.”

That may or may not be true. But shouldn’t everyone be more concerned with whether this debate is helpful to clients?

Client interests first ….. or are they?
On 26 August 2016 at 5:06 pm w k said:
"client interests first?" ... nah .... never have been from day one. it's crystal clear whose interests come first.

if client interests was to come first then why not a level playing field like in every other profession.
On 29 August 2016 at 8:08 am Brent Sheather said:
Well there have been 26 comments on this topic but not one from the IFA. Why would that be I wonder?

My guess is that there are two reasons the IFA want nothing to do with this topic...firstly because their members by and large don't embrace best practice and we got a good glimpse of that a few years back when all those eminently qualified CFPs put their clients into finance co debentures...we saw them at the time.

Second reason is that most of the marketing programmes that the IFA promotes as pseudo CPD would be exposed for what they really are...a waste of time, or worse….moving advice further away from best practice.
On 29 August 2016 at 1:18 pm Andrew Gunn said:
John, well done for generating interest in this ethical principle. To understand the Standard it is probably helpful to look at its origins. Code Standard One’s genesis is not with the IFA, but rather, is the first principle of the international ethical code adopted by the IFA from the Financial Planning Standards Board (FPSB). However the exact wording on the FPSB website is revealing – it requires that

“the financial planning professional to act honestly and not place personal gain or advantage before the client’s interests”

The key word to understanding the ‘client first’ principle is honesty (Code Standard 1 calls it ‘act with integrity’).

Maybe an analogy to another industry may be illustrative. The NZ car industry, like financial services sector, has many players that have ‘limited scope’ and displays a variable range of ethical behaviours. Toyota employees obviously only give advice on their product, BMW on theirs etc. However, as customers, we’d be very unhappy if these salespeople (let’s call them ‘agents’) were acting dishonestly. Practices like turning back the odometers, changes the car’s specs to cut themselves a fatter commission, or selling a car from the lot (at the same price) that was inferior to another without mentioning this. All these actions would clearly demonstrate they were not putting the ‘interests of the client first’.

To understand this principle we need to search for the evidence of the adviser’s honesty (or sadly dishonesty) – leading to their personal gain or advantage. This doesn’t preclude the adviser conducting their own self-search for 'the evidence'.

Regards, Andrew Gunn Manager, Member Learning & Development IFA
On 29 August 2016 at 2:59 pm John Berry said:
Andrew, thank you for commenting and for some helpful background to the code origins.

I have often heard the car industry analogy used by vertically integrated fund businesses to justify the model in financial services. I agree to the extent that I don’t go to a VW dealer expecting them to sell me a Ford. But that is where the analogy ends.

The car salesman doesn’t owe me any duty (other than I’d expect under the Fair Trading Act not to engage in misleading and deceptive conduct).

He/she does not advise me.

He/she has no statutory duty to put my interests first (and I don’t expect them to).

Most tellingly he happily calls himself a salesman. I would be laughed at if I went to my local Volvo dealership and asked to speak to one of their advisers.

By contrast if I go to a financial adviser I expect advice. Not sales.

Perhaps the crux of it (which the car analogy draws out) is this – do we want financial advice in NZ to be a profession (like lawyers, accountants etc – which brings clear client duties and responsibilities) or an industry like selling cars, mobile phones or shoes?

Nothing wrong at all with selling products – but we can’t pretend that people selling to us are our advisers with a duty to put our personal interests first.

It's called "selling" when the local car dealership tries to fit me with the right car from their aligned provider - yet a bank tries to fit me only with its in-house product and it's suddenly called "advice" (!!).

On 30 August 2016 at 1:54 pm Graeme Tee said:
The IFA are continually telling consumers and advisers alike that their members are true professionals and should be viewed as such. However, “official” comments such as this from Andrew Gunn making analogies with car dealers make it clear that they do not think like professionals.

Past actions speak louder than rhetoric as Brent points out. The IFA is happy to point out the difference between sales and advice, but supporting the notion of sales as advice and putting employers’ interests first is also not very professional.

In addition to the points noted by John, how may “real professional” associations spend their time defending dodgy sales practice as advice? How can an agent who puts their employers’ interest first be seen as putting clients’ interests first and acting professional all at the same time?
On 31 August 2016 at 7:43 am Pragmatic said:
Sadly I agree with Graeme Tee's sentiment.
The financial services industry must start working together to change the perceptions of the consumer. A starting point is to clearly differentiate between sales & advice.
Perhaps a better analogy is to look at the medical profession
On 31 August 2016 at 3:05 pm Murray Weatherston said:
If you want an exposition of how sales might have been differentiated from advice, look no further than the SIFA submission to MBIE's issues paper in 2015, Questions 35 and 37.

Disclosure - I had a hand in editing this. I didn't win the battle to rename "product information specialist" as a salesperson!

35. What changes should be considered to make the current regulatory regime simpler and easier for consumers to understand? For example, removing or clarifying the distinction between AFAs and RFAs.

• Amend legislation and regulation to become a fully principles-based regime (thus matching the Code of Professional Conduct) with a ‘consumer’ plus ‘advice’ focus - including the removal of current complexities. That will allow the consumer to determine what constraints should apply in terms of advice rather than being forced to submit to a regulatory model with unnecessary costs
• Simplify to two distinct terms:
(1) authorised financial adviser - with commonly recognised terms added that clearly identifies each adviser’s ‘streams’ of competence (e.g. financial planning advice, investment planning advice, DIMS, personal insurance advice, mortgage advice, financial product recommendations and implementation, specialist referrals, etc), and
(2) product information specialist (e.g. financial product information and sales only – no advice).
The former would remain regulated by the Code of Professional Conduct and the FA Act while the sales and information only people could be accountable through their employer or contracting distributor under the FMC Act
• Deleting RFA and QFE adviser acronyms
• Remove all other distinctions (e.g. class advice, personalised advice, category 1 products, category 2 products, wholesale client, retail client, comprehensive advice, limited personalised advice, information only)
• Require AFAs to provide both a written and verbal ‘financial health warning’ that clearly explains his or her advice limitations (e.g. the suitability of the advice and/or product recommendation does/does not take into account your personal situation and requirements)
• Require Product Information Specialists to provide both a written or verbal ‘financial health warning’ that clearly states “I cannot provide you with advice as to whether the product I am selling you is suitable for your personal needs. I am paid to sell the financial product by its issuer and/or distributor and can only provide you with factual information provided by them. You are solely responsible for making your own enquiries, including seeking advice from an Authorised Financial Adviser, to determine whether it is suitable for you.” – or similar
• Retain a disclosure statement in a single document that clearly identifies the AFA competencies and other matters necessary to inform the consumer of matters relevant in his/her adviser selection process

37. Should there be a clearer distinction between sales, information provision, and advice? How should such a distinction be drawn? What should or should not be included in the definition of financial advice?

Yes. We have suggested in previous questions a separation of sales/information provision functions from financial advice.

Financial advice:
• Provided only by AFAs
• Consumer is provided with a standardised written notice comparing the reasons for, potential benefits from, and disadvantages of (e.g. costs and time required to gather, analyse, and report on data) full financial advice
• Consumers should not be forced to receive advice they do not wish to pay for or receive - for any reason – and an AFA should not be required to provide more advice than is required by the client
• Consumer receives a financial health warning that details and confirms any consumer initiated limitations on advice required
• Consumer receives AFA disclosure that confirms competency to provide the advice required

Sales/information only:
• Provided by financial product information specialist
• Consumer is provided with a standardised written or verbal notice by each person providing sales & information only functions (e.g. including bank tellers and those operating under QFE structures) that clearly notifies;
: the ‘no advice’ rule
: identifies other limitations (e.g. a limited range of product), and
: gives a financial health warning along the lines of:
“no attempt has been made to compare the benefits of this product being sold to you against those provided by another product (including any benefits that you might lose if you are replacing a currently owned product with this one now being sold to you) and that you, the consumer, are solely responsible for ensuring this product is able to meet your personal requirements”
• Consumer is provided with a document that confirms that the current product information and features sheet has been delivered to FMA and that the product is fit for the purpose noted in the information data.
On 31 August 2016 at 7:20 pm traveller said:
Who was it who said" nothing happens until someone makes a sale"? Whether an adviser is receiving remuneration by a fee or a commission, it is still a sale and if you are in this business, part of your job is to make a sale and get paid, or you go broke or get fired.Selling is not a dirty word, although you would think it by this correspondence. I was once told by a lawyer that his job included selling his services, just as any adviser does.It's the ethics bit where the problem lies.
On 1 September 2016 at 1:15 pm R1 said:
In the context of giving financial advice there is a huge difference between selling your service and selling products. No conflict when selling yourself but not so when selling(others') products.
On 1 September 2016 at 3:31 pm Tash said:
Traveller is at least partly correct. Selling is not a dirty word, but selling is also not advice. While everyone is engaged in selling something, not everyone sells a product. The lawyer does have to sell his services but he cannot sell different types of law to his clients, his job is to advise them with due care diligence and skill.

While it is possible to 'buy' limited legal products, there are those who sell wills for example, they most certainly do not profess to offer advice on a broader range of legal matters. People go to them to 'buy wills' basically knowing what they need, unlike clients needing financial advice, in particular life, disability and health insurance, who, for the most part have no idea what they need, let alone which product or which provider's product is best for them. These people need advice, followed by an appropriate sale from a range of available options.

If the options are limited to one then a crucial part of the advice, 'which product/ provider's product is best for me?' simply does not exist. The choice of product provider can be the difference between no claim, a partial claim or a full claim in identical circumstances. Potentially akin to a client needing conveyancing services and being sold a will instead!
On 2 September 2016 at 10:08 am w k said:
allow me to add re selling. have you ever wondered how many people would buy a product without knowing how it will benefit them?

scenario a: patient has a lump on his body. he goes to a surgeon. surgeon tell him what he is capable of doing with a practising certificate - cutting up just about any part of a human body but i can't give you advice if i should cut the lump in your body. you will have to tell me if you want it cut. i believe that is selling because there is no advice from the surgeon.

scenario b: client with cash to invest. goes to an adviser. adviser tells him i've got a lot of investment products - from the low risk, medium risk to the high risk. i can't recommend which one you should buy. you will have to tell me which one you want. the adviser is selling, not giving any advice.

if you were the patient and the client, would you have ended up being the patient of the surgeon or the client of the adviser? what do you think? is it the same as selling vacuum cleaners and car tyres?
On 2 September 2016 at 11:59 am Graeme Tee said:
Hi wk

Scenario a)
Surgeon gets kicked out of Royal College of Surgeons for failing to give a patient proper care.

Scenario b)
Adviser gets sacked from bank for not selling their product.

No winners here.

On 2 September 2016 at 8:31 pm traveller said:
wk makes two points and I comment on the second one. I think that if the adviser gives the client a list of available "product" options, and asks the client to choose, then having done that the adviser places the business, then if things go wrong, is the adviser then not liable? I once heard that some advisers would not leave prospectuses with their stamp on them for a browser to casually pick up because they feared that if the investment failed, they would nevertheless be liable because they had supplied the means of investment, even if they had not made it on the clients' behalf
On 2 September 2016 at 11:22 pm w k said:
thanks guys for your response ..... and i wondered why there's no echo? (re my 25 aug thread)

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