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Best interest 'unworkable'

A requirement to act in clients’ best interests is being described as “unworkable” in practice.

Friday, September 2nd 2016, 6:00AM 8 Comments

by Susan Edmunds

David Ireland

Advisers operating under the code of conduct in New Zealand are required to put their clients’ interests first – but are not subject to the broader standard, imposed in some other countries, of acting in the clients’ best interests.

The latest recommendations from the Ministry of Business, Innovation and Employment indicate that the “client first” standard is set to be applied across all financial advisers under the new Financial Advisers Act regime.

But it has been argued, including by John Berry here, that the industry should consider changing the standard to “best interest,” to hold advisers to the same level as lawyers, dentists, fund managers and real estate agents.

David Ireland, chairman of the Code Committee, said there had always been a “vocal minority” who thought advisers should have to operate under the best interest standard, or have a fiduciary duty to a client.

He said opting for “client first” in the code instead was not a “motherhood and apple pie” sentiment but instead a solution that could be applied to a wide range of advisers and advice processes.

“It’s a practical standard we thought advisers from every walk of life could relate to in any given advice scenario.”

That would mean considering what motivated them to give the advice they provided to a client – whether that was the interests of the client, themselves or a third party, he said. “We see it as a more pragmatic standard to apply in practice.”

He said it had worked well for AFAs for the past five or six years.  It could be a challenge sometimes to demonstrate what motivated a particular piece of advice but if advisers could say they placed the interests of the client above all else, that was easy to understand, he said.

“It’s far more challenging to think 'how can I demonstrate my advice as in the best interest of the client, in terms of an extreme, absolute standard',” Ireland said.

Financial law expert Sue Brown, who was part of the committee that developed the initial code of conduct, said there was a feeling that technical terms such as fiduciary duty were not helpful to advisers.

“In the early days some were still struggling to understand how they could say they were acting in the client’s best interests and still charge a fee.”

She said "client first" was seen as more accessible. “It boils down to the same thing, but it’s how you describe them. You need to ask what’s right for the client rather than what’s right for you. Sometimes you have to do something that’s not good for you but is good for your client.”

Murray Weatherston, of SiFA, said the client best interest standard would be unworkable in practice. “It’s a standard that’s impossible to meet. How would you enforce it?”

Ireland said those who wanted to offer a view on which standard was better would get a chance later this year as part of the FAA review process. “When the exposure draft comes out, that’s where that should be played out.”

Tags: client first

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Comments from our readers

On 2 September 2016 at 9:43 am Brent Sheather said:
It was inevitable that the apologists for the big end of town would get into the act here.

What on earth does Sue Brown mean when she says “sometimes you have to do something that is not good for you, but is good for your clients?” Surely the reality of financial advice more frequently is “often you do something that is good for the bank but is not good for your clients”.

However what a great quote from her which I am sure will get a lot more air time: “technical terms such as fiduciary duty were not helpful to advisors”. Typically when one talks about a fiduciary duty one has in mind the interests of the clients. Of course imposing a fiduciary duty on advisors will constrain their behaviour but that just might be helpful to the clients of financial advisors which of course, as a consultant to banks and the like, Ms Brown conveniently never has anything to do with.

Murray asks “how would you enforce it”? Very easily. Indeed the man in the street i.e. without the benefit of an unhelpful legal background would view it as common sense. We have used that model of behaviour for years and it has enabled us to avoid finance company debentures, Feltex etc etc etc. Every time you do something you ask yourself is this instrument, this asset allocation, this investment strategy consistent with what the average pension fund does? It is an easy thing to do, it’s not too prescriptive for the regulator but it is a huge line in the sand for the investment banking side of every vertically integrated organisation and that of course is why the government, the Ministry of Investment Banking, the Code Committee and many other people with vested interests will argue against it.

Really, legal manoeuvrings and associated silly talk from the big end of town and their puppets simply serves to bring our whole industry further into disrepute. The upside is, as non-aligned advisors, if we can get this story widely disseminated and in particular acknowledge the help of Ms Brown we can differentiate ourselves from vertically integrated providers, as fiduciaries.

On 2 September 2016 at 9:53 am Majella said:
There may well be times when the ‘client’s best interest’ is not the ‘client’s interest first’.

For example, a certain product or strategy is recommended which the adviser knows is in her ‘client’s best interest’.

However, the client sees it differently, and prefers another option - for example, a higher yield and higher risk product or strategy. This is the ‘client’s interest first’ is it not?

Should an adviser do as instructed or simply decline to implement?

You can't legislate for 'stupid'.
On 2 September 2016 at 1:07 pm w k said:
great point majella.

let me guess what may possibly happen:
1) if client took the option he wanted as oppose to, what in a professional opinion, is best for him - ie, client first. he lost money then sue for not given proper advice.

2) if client took the professional advice of what is best for him - ie., client's best interest. he did not the yield he wanted. he will then sue the adviser for selling him an inferior product.

what's the difference between the previous and the current regulators? aren't they trying to the same thing?

quote: insanity - doing the same thing over again and again. and each time hoping for a different result.
On 2 September 2016 at 1:29 pm blogger billy said:
There are two things that are seriously wrong here

1/ the whole revolving door situation where ex MP's and FMA staff can further their careers (without a 2 year stand down) at a bank is totally pernicious

As long as this is allowed to exist, the MPs and FMA staff will always favour the banks

which is why we get these ludicrous plays on words trying to convince us that a single product/seller desk can give advice

2/ There are no experienced advisers in the govt or FMA. Instead there are lots of lawyers and other civil servants applying theory but that cannot work

Would you want a Civil Aviation lawyer as captain of your flight to London ?

The FMA and its mates are only making the industry a laughing stock

As long as revolving doors and daft plays on words continue, the whole financial regulatory chain has no credibility whatsoever

Footnote - A federal judge in Texas has ordered hundreds of U.S. Department of Justice lawyers to undergo ethics training, accusing the agency of a “calculated plan of unethical conduct.”

The DOJ’s only explanation has been that its lawyers either “lost focus” or that the “fact[s] receded in memory or awareness.”
On 5 September 2016 at 11:05 am blogger billy said:
Its probably a good time to give Murray Weatherston and Robert Oddy some applause

They are both dedicated and fearless fellows who put in a lot of time gratis into our industry.

I would like to nominate them both for the FAFA award

Fierce Advocates for Financial Advisers

Murray should also get an LALB - Longer And Longer Blogs award

They are good boys and all credit to them, even if some may not agree with them at times
On 6 September 2016 at 10:51 am Graeme Tee said:
That’s right Billy. What’s the point in making a submission when you can just imagine what the previous Minister, in his capacity as a bank officer, will be saying to the new Minister. We mere mortals don’t get a look in, so how can we have confidence in a fair outcome for all. Anyone for a polo shirt?

I agree, too many lawyers creating complexity and whining about law being unworkable when they really mean it’s not good for their clients’ business models. John Kay, in his book “Other People’s Money”, suggested that regulation should be worded simply as a policy lever and then let the lawyers fight over the details. In NZ, we let these groups with vested interest influence the policy which usually ends up suiting their own business model.
On 6 September 2016 at 8:38 pm w k said:
@graeme t: a taxi driver will make more money by taking his passenger on merry-go-round. direct route means less income.

sometimes i wonder how come lawyers aren't paid only after they have written an act, agreement, etc to satisfaction and unambiguous.
On 7 September 2016 at 10:18 am dcwhyte said:
How a financial adviser gets paid is a red herring - it's how the adviser behaves that's critical. Any remuneration system can be gamed - fees, commissions - anything. The conduct and processes adopted are far more important in pursuing 'clients best interests' or 'putting the client first' - whatever. There is a cost to accessing and using the services of an adviser - how that is met can be fees, commissions, or a combination of both, negotiated between the adviser and the client. Delineating advisers by remuneration method is a nonsense.

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