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Client-first may be too big an ask for biggest players

Is "client first" too much of a challenge for vertically-integrated organisations, such as banks? David Whyte ponders whether it's time to provide a carve-out for sales, as opposed to advice.

Thursday, January 26th 2017, 6:00AM 23 Comments

It would appear that the regulators in Australia and New Zealand are failing to provide the consumer with much needed clarity on the activities, functions, and rationale for providing guidance on financial matters.

The reluctance to delineate clearly between a sales process and an advice process causes difficulties for a number of stakeholders.

In the context of the financial services industry, selling a product is a totally different function from providing advice.

In the consultation process of the FAA review in New Zealand, a number of submissions called for a demarcation line to be clearly drawn between the two processes.

The same issue has surfaced in Australia and, contrary to orthodox opinion, the attempt to blur the lines has not, and will not, work to the advantage of vertically integrated companies.

The NZ regulator chose to discard any suggestion that differences between selling and advising be enshrined in the review, in the mistaken belief that drawing such a distinction would favour one distribution model over another.

This is a fundamental error that has slipped almost unnoticed through the review process, but which remains as the single most potentially damaging issue for all stakeholders, if not addressed properly.

Let's get this straight, there's nothing inherently wrong, sinful, or negative about the concept of selling. Robert Louis Stevenson rightly stated - "Everyone is selling something". This is true for the neurosurgeon who sells his expertise and experience, to the sportsperson selling their prowess and athleticism, and to the politician who sells his/her future view of an improved world for voters.

In the same vein, the product sale witnesses a transaction taking place, and the financial adviser sells advice - which may or may not include a product solution.

But the procedures are quite different, and they diverge early in the process of providing a solution to the client.

Once a client and the product salesperson agree on a course of action, all that remains is to confirm quantum and to go through the process of implementation.

In the case of the financial adviser, the process goes in a diametrically opposite direction. Instead of reaching for the documents to commence the application process, the financial adviser embarks on investigation, research, and analysis. The adviser and the client are faced with the one clear distinguishing feature that does not form part of the process for the vertically integrated organisation’s process - choice.

This is a huge clue for the consumer that a sale proposition is being presented and that advice is not integral to the process. With an Approved Product List of one product, choice is absent. The only measure of success in sales context is the sale of as many of the organisations own products as possible.

But this is neither negative nor critical - providing the consumer is made aware of the process and can clearly identify that no choice of solution is being offered, that the range of solutions available has not been compared and evaluated, and that there is no capacity to do so, the function of the sale is legitimate, appropriate, and commercially valid.

But to seek to call this process ‘advice’, is a misnomer and the regulators on both sides of the Tasman are doing the industry, the participants, and the consumers they purport to serve no favours whatsoever.

The industry's reputation falls into disrepute when consumers discover that a sale was disguised as 'advice'; the position of vertically integrated organisations is compromised when disputes over client misunderstandings occur; and the consumer is left wondering who to trust.

Advice requires the adviser to exercise judgment, discretion, and ultimately, based on experience and qualifications, to make a recommendation to the client. Financial advisers, by their nature have more than one product in any category on their APL, and offer a variety of choices of solutions.

In the NZ context, the Code of Conduct - which is proposed to apply to all "advisers" will surely catch the employee of the vertically integrated organisation. This will inevitably lead to significant expense, and I have no doubt that these organisations are resistant to funding the expense of meeting Code standards for what is not an advice process.

But regulators need to recognise and acknowledge the facts and provide the proper regulatory framework within which vertically integrated organisations can operate. Forcing them into a 'best interests', 'client interests first', or whatever is your preferred terminology, distorts the picture for those consumers the regulator is trying to protect. It also causes confusion among the management of these organisations that appear to be faced with meeting a duality of standards.

So rather than leaving the consumer guessing, it would surely be advisable to refer to the product salesperson in more accurate terms, e.g. Westpac Product Specialist, which describes the function perfectly, no confusion, no obfuscation, no ambiguity.

Add the required disclosures as outlined above, then the function and position of the Product Specialist is clear and unequivocal.

This also leaves the consumer in no doubt when dealing with a Financial Adviser, that there is an obligatory process to be followed by the adviser, as per the Code of Conduct, that relates to securing the most appropriate solution available in the market.

Making clear the functions, the purpose, and the processes of the various providers of financial guidance in the market is, or should be, a prime objective for regulators.

For far too long now, these issues have been neglected and been a source of confusion and uncertainty, and it’s time these should be addressed. In this instance, regulators on both sides of the Tasman appear to have dropped the ball.

Tags: banks client first

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Comments from our readers

On 26 January 2017 at 10:32 am Brent Sheather said:
There are a whole lot of problems with this story. My view is that “sales” of investment products should have to pass the same test as “advice”. This would mean no “sales” and a better deal for retail investors. No advice is frequently better than bad advice and “sales” is just another name for flogging high cost products to naive clients. In brief here are the issues with this story.

• Selling a product is not “a totally different function from providing advice”. If Mum and Dad buy a KiwiSaver fund with high fees that doesn’t do the job from somebody who can only sell “high cost, bad for everyone products” that transaction has just the same importance to them than if they got advice.
• Let’s be honest…..there is indeed “something inherently wrong, sinful, or negative” about selling high cost products that won’t perform to clients who don’t realise that fact. It’s called exploitation.
• I don’t at all buy the idea that “choice is a huge clue for the consumer and that advice is not integral to the process”. The client assumes and is no doubt told by the sales person that the only reason they just sell that product is because it is the best. This is standard stuff and anyone who has been in the industry for more than five minutes knows that this is the process, this is how it is done and that’s how people get ripped off.
• How can Mr Whyte say that a product with high annual fees – and we all know that most of the time products provided without advice by people who have chosen to just sell the products of one provider have much higher annual fees – that “this is neither negative or critical”. Ridiculous. The fact that “the range of solutions available have not been compared and evaluated and that there is no capacity to do so” might be “commercial and valid” but it isn’t ethical, it isn’t legitimate and no way is it appropriate. It sure isn’t putting clients’ interest first. Mr Whyte might also note that the FCA in December started requiring sales people, selling only their own high cost annuities, to put in front of their clients information on low cost annuities that they don’t sell. Why would they feel compelled to do this if there were nothing inherently wrong, sinful, or negative about “sales”?
• Just for the record we don’t have an “approved product list” where the providers have furnished our firm with soft commissions, trips, free anti-CPD etc etc. We have products that, in our view, best meet the requirements of our customers (low costs are a critical variable) and we don’t own any product providers.

Mr Whyte talks about the industries reputation falling into disrepute. My view is that trying, and failing, to validate bad practice does exactly that.
On 26 January 2017 at 4:45 pm gavin austin adviser business compliance said:
A very insightful read (including Brent comments some of which I feel may have some merit). David your views are spot on as there is a need for clear, accurate and understandable ways of communicating what the public is being exposed to ie an advice process or a sales process. Let's hope the regulators and their advisers get it right this time. The first attempt didn't rally work ie Disclosure, but it was a step in the right direction. The next stages of the FAA will be critical for ALL participants. The fear is that the BIG end of town will have a greater impact via lobbying (just like last time). We can only hope that when the next dissertation from MBIE is released that they have "listened" as they said they would.
On 27 January 2017 at 9:21 am BGW said:
Well said David. One of the main issues is that the legislators drafted the application of the act too widely, which meant trying to impose fiduciary obligations on non-fiduciary positions (like sales), which creates a host of fundamental issues (square pegs - round holes etc). Instead of raising the bar for sales, they went about lowering the bar for fiduciaries (advisors), due no doubt to bank lobbying (banks not being terribly conversant with fiduciary obligations). End result is a mess, and a general lowering of advisor obligations. Real solution is to remove sales from the FAA, but that's unlikely.
On 27 January 2017 at 10:16 am dcwhyte said:
The issue in the piece is around HOW products are distributed, not WHAT those products portend to be or how they are structured.

That is a different subject deserving of far more expertise than mine, so in the context of the current regulatory review, and in light of developments in Australia and the US, consumer clarity on roles, functions, and responsibilities is vital.

The article makes no comment on fees or any other product feature, just as I didn't mention high executive salaries, or poor administration practices - does that mean I condone those also? Of course not, but neither the product charging structure nor executive salaries are relevant to the issue.

So getting back on topic, as long as we do not live in a controlled economy product manufacturers will seek to distribute their products. The manner in which these are presented, as Gavin rightly points out, was only marginally improved by disclosure.

But making such organisations comply with a standard that is impossible to meet - as some Australian banks have discovered - is costly and damaging. Hopefully, the Ministry take some heed of experience elsewhere.

And Brent, if I may, your ad hominem remarks do you no service at all. Turning a piece on regulatory review into self-promotion advert for your practice looks like your trying to sell your services - careful.

For the record, I've been operating with some success in the UK, Australian, and NZ financial services industry for over four decades - still learning.
On 27 January 2017 at 1:12 pm Brent Sheather said:
Hi David

I am sincerely sorry that my piece looked like a self-promotion advert. For the record with $820 million under management I am not taking new clients unless I absolutely have to – just turned away someone with $1m this week. My interest in this topic is not self-interest.

Also given that you are “still learning” any logical approach to HOW products are distributed should mention the attractions of Glass-Steagall although that might upset one’s client base. It is clearly difficult if not impossible for an intermediary to give good advice to a client when they work for a distributor of a product.
On 27 January 2017 at 3:06 pm R1 said:
Given that most financial products are about investing peope's life savings with a view to maximising total return consistent with the risk profile of the client and fees are the major determinant of returns (I subscribe to unconflicted research as opposed to fund managers and their consultants), Brent Sheather’s comments are highly relevant. The idea of selling such products without a duty of care re the client's best interests and needs is abhorrent. If the vertically integrated firms can't provide products to investor clients within that standard then they should not be so vertically integrated and not selling high fee or any products for that matter to retail investors. Logically they should be wholesaling to AFAs only and stay out of the retail space.

Mr Whyte’s comments re Brent Sheather's contribution are hypocritical at best given his conflict of interest (as a consultant to the industry, etc.) and his own self-promoting comments. I fail to see how Brent Sheather is promoting his practice with these comments on what is essentially an industry blog but the same cannot be said of Mr Whyte whose clients are the industry.
On 27 January 2017 at 5:37 pm dcwhyte said:
Hi Brent -

The topic I'm seeking to focus on is sales v advice in the context of the FAA review, not the quality of products available.

The concept of 'client first', client's best interest, or whatever words you prefer, has been promulgated by the regulator as being an essential ingredient of the review. Like you, I question whether this is achievable for those employed by vertically integrated organisations - open to suggestions, of course.

I fully accept your integrity in commenting on product charges etc., and there is a strong case for promoting focus on this subject which you very ably succeed in doing on many occasions and on many forums.

But I'm looking to progress the discussion on sales v advice in the context of the current review.

But to R1's point, I just can't see this, or any NZ/Australian, Government legislating to prevent product manufacturers also distributing/retailing their products.

Glass-Steagall might well be attractive, but a) it's long since been repealed and b) it never existed in NZ.

I agree that someone employed by a vertically integrated organisation is selling product, and I maintain that's not the same as you giving independent, research-based advice - that's kinda the thrust of the article, based on similar concerns raised elsewhere.

I'm not sure who R1 means when he says that my clients are the "industry" and that I'm a self-promoting hypocrite.

It seems that personal insults are the order of the day - probably the Trump effect.

I've never done anything else but sell my services to those who find a use for them. Isn't that what you do - oh (anonymous) R1?

And, for the record, most financial products are not about investing people's life savings. There are a fair number of risk protection products out there which are also classified as financial products - not 820m of them (now where did that number come from I wonder?), but with around 100 insurance companies registered with the Reserve Bank, your opening statement is as inaccurate as your closing statement.
On 31 January 2017 at 8:35 am Brent Sheather said:
Hi David

I appreciate that you are “seeking to focus on sales versus advice in the context of the FAA review”. My point was that that focus is a bit like rearranging the deck chairs on the Titanic. The fact is wherever you sit you are still going to hit the iceberg and similarly finessing a bad deal for retail investors who are unfortunate enough to present themselves to a salesman still end up with a bad deal. It is too easy for commentators and regulators to spend their day thinking about where the deck chairs might get the best view and ignore that big white frozen thing.
You write “in the context of the financial services industry selling a product is a totally different function from providing advice”. That is wrong and in any case the context should be client outcomes. The critical difference between “selling” and “advice” and the one that commentators like yourself and regulators should be focussing on is that “selling” is just an excuse for “bad advice”.

Brent Sheather
On 1 February 2017 at 10:46 am dcwhyte said:
Hi Brent,

Fair points - to an extent.

The scope of the review and the Act goes beyond the world of the investment sector and includes life insurance and F&G advisers. In this context, risk products issued by vertically integrated organisations are perfectly capable of achieving client outcomes. In the risk space, the proposed process for a product sale and advice provision are separate and distinct. Making them subject to the same standard is inappropriate as has been discovered in Australia.

It's unrealistic to expect Government to legislate against these organisations selling their own products, and it's highly unlikely to happen. But on the risk side at least, it would be a step in the right direction to have the consumer made aware of the difference.

Purely tongue-in-cheek - I wonder if you're condemnation of 'principled persuasion' would have been so vociferous in the days when you $820 under management!

Thanks - appreciate the input.


On 1 February 2017 at 12:27 pm Ron Flood said:
David. I have to totally disagree with your comment that "risk products issued by vertically intergrated organisations are perfectly capable of acheiving client's outcomes."

Several submissions ago I included several examples of some Bank's offering policy wordings that I consider would make the cover unfit for purpose. MBIE decided to redact these references as I don't think they wanted to upset the big end of town.

The examples are as follows:
Bank 1. Mortgage Protection cover only valid if the mortgage is held with their
bank. This could result in an uninsurable client being left high and dry if they changed banks.
Bank2.Only providing mortgage cover with a 2 year benefit period and selling a lump sum TPD cover (Any Occupation) on the basis that if they were of work for 2 years they would most likely be Totally Disabled!
Bank 3. Suicide Clause of 36 months instead of the industry norm of 13.
Bank 4. No life cover if the insured dies as a direct or indirect result of an illegal or unlawful act whether or not they are charged with an offence..

All of these banks systematically replace existing cover that does not include such restrictions and have done so in the past without any sanctions.

I don't believe that these banks client's do achieve acceptible outcomes.
On 2 February 2017 at 7:02 am Pragmatic said:
It is interesting that the industry debate continues about ‘sales’ versus ‘advice’.

Over the years I have repeatedly encouraged the industry to look back on itself through the eyes of the consumer, as the entire industry will suffer from poor consumer experiences.

Rather than attempting to distinguish between sales or advice, the ONLY starting point is to provide what is best for the individual consumer (ie: fiduciary duty). If this concept (which sadly needs to be defined through regulations) becomes non-commercial for some, then they will need to make decisions around whether their vertically integrated models can make a buck. Interestingly, some of the larger financial institutions appear to be considering that question right now – with institutions owning each component of the value chain being a concept that is relatively unique to this part of the world.

It may be useful to view this concept through the lens of the medical industry to give it perspective: how would you feel if your unique medical concerns were addressed at a product level as opposed to providing the most appropriate solution?
On 2 February 2017 at 9:55 am dcwhyte said:
Hi Ron,

I didn't claim that they were ALL perfectly capable, only that there are such products that can achieve client outcomes.
But can we please focus on HOW contractors/staff/employees of vertically integrated organisations interact with consumers and clients?

By applying a best interest/client first standard, such individuals are faced with an impossible dilemma. By recommending their employer's product, they have no idea whether this is the best solution available, or if they are putting client interest first, or whatever phrase you prefer.

And I refute Brett's statement that 'selling' is just another excuse for 'bad advice'. Brett, like most of us, sell the attraction of our services, our integrity, and our ability - otherwise why bother having a website?

But getting past the semantics and considering the issue of having consumers able to distinguish between when a sale is being made and when advice is being provided, how can we achieve this objective?

At present, as has been discovered in Australia, the consumer is unable to make the distinction due to a lack of clarity.

So how can we address this?
On 2 February 2017 at 12:27 pm Brent Sheather said:
These comments are highlighting some important issues. Congratulations Pragmatic for that analogy. Imagine if when you went to the doctor he or she said I only work for Glaxo and he or she knew that their product wasn’t as good as the products of some other drug companies.

As for David’s comment, “integrity and ability” are redundant and illusory if you are unable to do the best for your clients and you don’t do for your clients what you would be happy to do for yourself. By the way in the past I have had a number of new clients who worked for vertically integrated organisations who invested their own money in low cost funds through our firm including the families of senior executives of local banks.

David the issue is not a lack of clarity it’s the fact that many retail investors cannot discern between good and bad advice. Lots of research showing that disclosure doesn’t work.

The best way to address this problem is Glass-Seagall and make advisors absolutely responsible for doing the right thing. My guess is that a lot of local institutions would go the way of that PYE factory in Waihi.

Having said that we all know that’s not going to happen because the politicians and the regulators are often ex-banks and looking to return to the industry before too long. Regulation is often effectively a subsidy for vertically integrated institutions and a cost to consumers… and very annoying to independent advisors wanting to do the right thing.

What we should do is compel regulators and politicians to invest through the highest cost products available locally. That might get their attention and shouldn’t be a problem on the basis that if they are good enough for Mum and Dad they are good enough for them.

On 2 February 2017 at 1:19 pm Murray Weatherston said:
After 6-7 weeks blissfully away from all this stuff, I can't help myself wading in now I'm back. It seems to me there are several different issues mixed up in this thread. So here goes my Gospel - with signposts to see whose view I side with and whose I don't, and in David's case which of his views i agree with and which of them i don't agree.

@David, if you continue to be mixed up about the difference between "putting the interests of the client first" and "acting in the best interests of the client" you will continue to chase shadows. It is only in Humpty Dumpty's world (Alice in Wonderland and his comments about the meanings of words) that they can be the same. I feel sorry for the next poor beggar to come before FADC if the first thing that needs to be sorted out is what does the core standard mean!

@others, please tell me why a bank adviser who tells his customer
(1) I can only tell you about my banks own products
(2) I will keep my job and my get some supra-salary payments from the bank if I sell enough of our stuff; and
(3) the Bank will make fees and profits as the manufacturer of this stuff
is not putting the interests of his customer first.

If you disagree, please enlighten me exactly why he isn't.

If the customer so informed is prepared to buy the bank's product putting her faith in the Brand and if all goes pear shaped hopefully in the deep pockets of the Bank, why should she be stopped. Her choice - caveat emptor.

@all There is a completely different issue as to whether the bank person has or has not provided 'advice". It seems to me that often the bank doesn't want to provide advice (see the kerfuffle about Kiwisaver sales/class advice guidance) but they still want the customer somehow to think that the bank person is providing advice when the bank is asserting he isn't.

This is where David's advice/sales distinction is apposite. I agree with him 100% on this. I reiterate my support for this advice/sales distinction being made. But I am forced to recognise MBIE and the big end of town have not agreed, and have got the government to side with them.

@Brent I think you go further than all this if I understand your comments correctly in that you think a bank should not be able to sell its financial markets products at all. The corollary of that at least to me is that you would allow only 2 cases - full (and independent?) advice or DIY (assisted by a sibling, cousin, neighbour, golf buddy or religious adviser).

That position (following on from your ban on sales) would be to me nonsensical.

If I go into the Toyota new car sales department, how mad would I have to be to think that the lady behind the desk would try and sell me anything other than a Toyota?

What pray tell is different between financial products and cars (or any other thing that I might want to buy).

@Ron The difference between you and David is that you want to generalise from a few particular events and say (in a non seqitur fashion) that no bank product is good, when David is generalising that there is no fundamental reason why a bank couldn't manufacture a decent product.

@all HNY. And go Trump!
On 2 February 2017 at 4:29 pm Brent Sheather said:
Hi Murray

Welcome back. Answers to your questions are as follows:

A bank advisor who discloses to his customer that he is about to rip them off is, funnily enough, still ripping them off. What is more one can disclose in such a way that the customer doesn’t appreciate the significance of the disclosure and that is assuming that the customer has the ability to process the information. You will no doubt be aware that thanks to our education system about half the population can’t understand what a percentage is. By not getting a client the best deal they can get, by not embracing best practice as evidenced by the typical portfolio and product choices of the average pension fund who have the benefit of expert and independent trustees, any advisor is not putting his client interests first. The fact that he or she is constrained by only being able to sell bad products is no excuse. The worst thing about this sort of bad advice is that it brings our whole industry into disrepute and that’s made worse by individuals who should know better saying things like “putting clients interest first means different things to different people”.
With due respect I think that the comparison between buying a car and financial services is not valid. Rightly or wrongly the general public know a lot more about cars, put a lot more effort into buying a car, and buying a car most often isn’t as important a purchase as saving for ones retirement or investing ones retirement savings.

Lastly its unrealistic to think that banks should not be able to sell their own products but their advisors should be required to put their clients interests first irrespective of whether they are wearing an ASB polo shirt or not. Obviously this is a problem and would be open to abuse so that’s where Glass-Steagal comes in.

One can argue about what putting clients interests first means but to a reasonable person without the benefit of a law degree it means embracing best practice, it means doing the right thing, it means investing for your client as if it were your own money. If you want to call it acting in the best interests of the client that’s fine but I’m sure you know what I’m getting at. What it does not mean is selling high cost products just because that’s all you’ve got to sell.

On 2 February 2017 at 8:10 pm dcwhyte said:
Hi Murray,
HNY also. Not confused about the meanings of the different phrases - the regulator tells us we should know what is meant without further explanation, no? Definitely trying to avoid getting side-lined by a debate over which terminology is good/better/best and what they all mean.

To Pragmatic and Brett - I cannot envisage this, or any other government, banning product manufacturers from distribution. The introduction of a Glass Steagal Act in NZ is highly unlikely, as is the possibility of compelling regulators and politicians to invest as per Brett's suggestion.

So what is practicable? How can we provide for the consumer to be sufficiently informed to make an informed judgement on such matters? At least articulating the difference between sales and advice would be a start.

Murray - your analogy re Toyota is good. But what if I asked the AA if they could point me in the direction of a low-cost, economic, 4WD? And then asked them which was the lowest cost, most economic model?
On 3 February 2017 at 10:33 am BGW said:
Murray (or someone else) - could you (just briefly) explain the difference between "acting in the client's best interest" and "putting the clients' interest first"?

I know they're different because the Code Committee said so - and as an equity lawyer I also know what is meant by acting in the client's best interest.

However, I genuinely have no idea of what is meant by putting the client's interest first, - other perhaps than restricting an advisor to only having one client at a time (it doesn't say "putting the client's interest first-equal" in other words).

Beyond that I'm just confused. Any explanation would be welcome. However, if like others of us, you're not sure, then understand that too. Really just seeking clarification on some of the comments above that suggest people do know the difference.
On 3 February 2017 at 10:33 am Murray Weatherston said:
@Pragmatic - in your assertion that the ONLY starting point is fiduciary duty goes was beyond what I believe the existing law is and anything that has been proposed in FAAR.

Does your view put you squarely in Brent's camp?

As far as I am aware NZ financial advisers have no general fiduciary duty (as that term is used elsewhere in the law) to their clients either by legislation (Acts and Regulations) or by case law.

Note that I am not saying that in some particular cases, an individual AFA might not be deemed to be a fiduciary at law on the facts of their case, but I assert that there is no general fiduciary duty that applies to all AFAs in all circumstances.

I think the same situation applies in Australia and in UK.

The situation in the USA is different. In ruling in the early 60's on a case under the 1940 Act, SCOTUS ruled that investment advisers (as defined in their legislation) had a general fiduciary duty. The DOL Ruling shortly to apply extends a fiduciary duty to brokers advising on retirement accounts only. That Ruling faces challenges in the Courts.

The assertion by some AFAs that they are fiduciaries does not make a general proposition that all AFAs are fiduciaries. BTW I hope that those who claim to be fiduciaries have advised their PI insurer specifically that they do make those claims.
On 3 February 2017 at 11:00 am Murray Weatherston said:

I think there is a simple answer to your AA enquiry. In that case, you have asked them for advice and a particular recommendation under certain parameters.

Shifting that to the bank, if you went into your bank and asked them what is the lowest cost fund that invests in international equities, I suspect that the bankperson's "trained-to-the- minute" or scripted answer would be "Laird, I am not allowed to discuss products that are outside our banks product range. If you had more money I could refer you to our private banking consultants, but unfortunately you don't. So unless I can interest you in our international equities fund, which may not be the lowest cost fund, I must show you the door. Good bye."

Second I do not share your view that what good/better/best means is irrelevant (i.e. an issue that is a sidetrack. The "putting the interests of the client first" is not merely a footnote - it is the paramount standard in the Code from which everything else flows, and it seems the same will be enshrined in the FAAAB.

I do not think the answer "we don't need to spend any time on that definitional matter because everyone knows what it means" cuts the mustard.

I think every adviser should put themselves in the shoes of the next adviser who finds him or herself in front of the FADC on a charge of "failing to put the interests of your client first". What will be your defence if there is no agreement as to what the duty means. How will you feel if your view of what it means is not the same as the Prosecutor's nor ultimately the FADC's?

I think general consensus on what the duty means is a critical issue in the regulation of financial advisers. Humpty Dumpty will no do.
On 3 February 2017 at 12:07 pm Graeme Tee said:
Buying a car and financial products is not a good analogy – one difference being knowledge of the product as Brent points out. Two other points being, buying a Toyota with an in-built fault would be recalled and the fault fixed at the manufacturer’s cost, not so with a financial product. A high fee product that can’t possibly produce a real, after cost return is a faulty product. Secondly, of course a Toyota salesman will extol its virtues and a prospective buyer knows that, but who asks for advice from a car salesman selling you a car?

Murray, am I right that you think anyone should be able to buy a dodgy financial product if they choose? Of course that is fine and there are plenty of dodgy products to choose from but the point here is whether advice is sought and given. Too little attention is paid by the regulator to what happens, what is said or implied at the interface between client and bank adviser. Where are the mystery shoppers when you need them? Oh that’s right, they all want to work for a bank sometime!
On 10 February 2017 at 10:38 am Murray Weatherston said:
@Graeme Tee

I still don't see why buying financial products is different from buying a lot of other stuff.

In answer to your second paragraph, yes I do believe that a non-advised investor should be free to choose to buy any legal product. The alternative is complete "nanny state".

I would like to see your evidence that ex ante, a "high fee product ..can't possibly produce a real after cost return." The way you make the statement, it sounds to me you think this applies to all high cost products.

I don't disagree that a high cost product might ex post produce a negative real after fees return, but I don't think I would have to look too hard to find a low cost product that has produced ex post a negative real after fees return either.

There is no argument from me that if two funds had the same return pre-fees, the one with the lower fees would yield a higher return to the investor.

But the world is full of examples of different consumers being prepared to pay a higher price for the same goods - a particular vintage of a particular winemaker's wine at a discounter vs retail store vs suburban restaurant vs Michelin starred restaurant; rental car at marquee on-airport store vs off airport cheapies. Some investors might just be prepared to pay a higher fee at a big brand, vs a lower fee at a boutique- that's surely their choice.

If the real problem is financial literacy, or the absence thereof, the answer surely isn't to beat up the institutions (everyone should know that I am not normally a defender of the institutions,but fair's fair.)

Finally, Who do you propose should be the "faulty product" arbiter, ex ante?
On 10 February 2017 at 1:18 pm Pragmatic said:
I'm not sure whether I should be heartened or disturbed by the levels of banter that the topic of "putting clients interests first" (aka fiduciary duty) attracts. Probably more the latter, as contributors attempt to defend flogging product

To suggest that some industry participants (e.g.: larger financial institutions, or product manufacturers) should some how be allowed to function under a different set of rules is missing the point.

If a consumer chooses to purchase a financial product without advice, then good luck with what you're sold. If the consumer approaches an intermediary (irrespective of who employs the intermediary) for advice, then that consumer should rightly expect to receive solutions that are appropriate for their circumstances.

Any deficiencies or departures from fiduciary duties will only damage consumer confidence in an already fragile industry

... and don't be distracted by the "low price" debate that continues to be commented on, as price does not necessarily define whether a solution is good/bad/or otherwise
On 11 February 2017 at 4:40 pm dcwhyte said:
For the record, I concur with Murray's remarks on products - succinctly expressed, thanks.

To Pragmatic's input - suggesting that an employee selling a financial product on behalf of his/her employer is the same function as a research-based analysis and advice process provided by a non-aligned financial adviser on behalf of his/her client is entirely missing the point.

The processes are different, the principal//agents relationship is different, and the scope of service offered is different. Stating that they are the same does a disservice to non-aligned financial advisers.

The issue in Australia is not that consumers sought to buy/invest without advice, they were provided with what they perceived to be advice, when, in fact, they were being sold bank products exclusively.

Buying directly without advice is the prerogative of every consumer in our market - caveat emptor applies.

But this is a conscious decision on the part of the consumer not to seek advice or guidance. Tthe clients are upset in Australia because they believed - or were allegedly led to believe - that they were receiving advice most appropriate to their circumstances, and that the solutions offered were the best available. And here's where the words are important - the solutions offered were the best available to the institution - not the best available from the wider market.

And non-aligned advisers would naturally be critical of what they perceive as 'product-floggers', but if you believe that the Government will remove the ability of vertically integrated organisations to sell their own products, thereby handing the distribution space to non-aligned advisers, you're dreaming. It's not going to happen. But by requiring non-aligned advisers to adhere to a higher standard, these advisers will be distinguied from provider-retained sales personnel.

You may hold subjective views on the relative merits of either channel, but rather than demand the impossible, I suggest a practical solution to reality.

Provide the consumer with a clear explanatiion of the different functions, drivers, and processes involved in providing advice versus selling a product.

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