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Is that really advice?

What ordinary people think is advice, what we think advice is, and what the law defines as financial advice vary a bit. So what is advice? Does it matter if your client knows?

Monday, February 13th 2017, 3:59PM 1 Comment

by Russell Hutchinson

The starting point when we meet with clients is often as simple as ‘they answered all my questions’. Which is great, functional and testable. When we look at the questions most people ask in the process of getting insurance advice, they can generally be answered by facts. If there is advice to be given, you will have to drive the advice process – pretty much explaining both the questions and answers.

Another consumer view of advice is that they are very grateful for your help to navigate complex processes: difficult forms, additional requirements, scheduling medical tests and so on. Most of this isn’t advice. Although, sometimes you need to give advice in special situations arising from the underwriting process – but most of this is, frankly, admin.

This is where we begin to step in the grey area between processes which are obviously not advice, to those which can be, or not, depending on how they are handled.

Helping the customer to choose ‘how much’ and ‘which options’ in the insurance package are both activities that are, more often than not, advice. Although some exceptions exist: some websites have calculators which are outside the advice process.

Another step often seen as the starting point for genuine advice is the presence of a choice of providers. Lots of people – think about the debates on banks selling KiwiSaver – feel that when there is only one provider advice cannot really be happening. Not everyone feels that way, however, think of those websites again, or regulators, as well as those rare financial advisers that provide advice with no implementation service sometimes like to remind us that probably no-one provides an unlimited universe of products.

But both of these steps are typically associated with advice and certainly they tend to trigger advice-seeking among customers, who often ask which one you recommend when a choice is offered.

Moving into advice as defined by the law we quickly encounter the building blocks of the six-step process. The collection of personal information, goals, and objectives for the advice. Explicit opinions and recommendations as to suitability, and sometimes that is placed within the context of a full financial plan.

Because customers do not, generally, know what is advice and what is not, you may have to educate them on that. If you do not, then your extensive and highly-regulated service may be unfairly compared to a service which is not advice.

Tags: financial advisers funds management investment KiwiSaver

« Setting trauma sums insuredThey don’t start out caring, making them care is our job »

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Comments from our readers

On 21 February 2017 at 10:56 am Dirty Harry said:
Well written Russell, as always.

I would submit that the calculators on life selling sites are created by people to generate certain outcomes. The people who make them decide what questions, formulas etc to put in the calculator so they should absolutely fit within any regulation as advice. Only independent site like 'sorted' should be exempt.

I also submit that the argument where a FAP employs a FAR to sell their own KS, and there is only 1 product being available, and therefore no advice being given, is false. Very few bank KS sales are to new members.
So there are 2 products that must be compared and contrasted and understood. The one the customer has, and the one they are being SOLD (which means they are advised to dump their old one).

One way to help with the grey area between obviously advice and obviously sales, is to look at how it began. If it was a customer walking and asking the man in the polo shirt for something specific, it may be more likely to be an execution only, no-advice deal. But if as often happens they are there to, say, sign a loan letter, or get a new eftpos card, and the bank teller/seller suggests the customer might like to see their KS balance on their phone.... just sign here....

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