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Advisers told: Avoid conflicts with any other person

A new explanation of how advisers could be expected to legally put clients’ interests first is causing more confusion that it solves.

Monday, February 27th 2017, 6:00AM 7 Comments

by Susan Edmunds

How advisers should show they are putting clients’ interests first, or acting in a client’s best interest, has been a contentious issue in the industry. Some have called for clearer guidelines.

But while the new Financial Services Legislation Amendment Bill provides clarity, it has left many unimpressed.

The bill says advisers have a duty to put a client’s interests first.

If they know, or ought reasonably to know, there there is a conflict between the interests of the person to whom advice is being given, and their own interests, or the interests of any other person, “[the adviser] must give priority to [the client’s] interests, including by taking all reasonable steps to ensure that the [adviser’s] own interests or the interests of any other person do not materially influence the advice.”

Adviser Murray Weatherston said it was too broad.

“Any could mean anyone – what happens with a sharebroker who is allocating a float?  There’s conflict between what they would give me or you.

"It’s fine to put meat on the bones and I’m personally pleased that my articulation of what I thought it meant is pretty right but with this ‘any other person’ I don’t think the people who wrote the legislation understood what they were writing."

David Ireland, of Kensington Swan and chair of the current code committee, said the committee would make a submission on the point.

He said, as it was written, it was not workable.

“Any means any, with no wriggle room other than it only extends to where the financial adviser ‘ought reasonably to know’ that there is a conflict.”

He said the way the bill had been framed was unfortunate in that regard.

“Irrespective of your views on whether the standard should be client first or best interests of the client or some alternative formulation of that sort of concept, code standard one [placing clients' interests first] has been fundamentally altered and its application narrowed by the way it has been reflected in the draft legislation.

“The explanation we have received as to the rationale behind that draft wording convinces me that the substance of the obligation should revert back to the code, where it does not require the tightness of a legislative straight jacket and can remain a principles-based requirement.

“To give effect to Parliament’s policy decisions, the Act could simply note the obligation to place the client first must be discharged in accordance with the code – or something similar. That way the financial advice sector and consumer interest groups get a decent opportunity to help the code working group properly couch this core obligation of the new regime.”

Tags: client first Financial Advisers Act Financial Markets Conduct Act

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Comments from our readers

On 27 February 2017 at 7:36 am Murray Weatherston said:
Thanks for giving this very critical issue oxygen GR.
I am perplexed though that while I think the duty is expressed too broadly, David thinks it has been narrowed. How can that be?
I intend to have a discussion with David Ireland off-line, and promise to report back through another comment here when I understand whether we are talking about the same or different things
On 27 February 2017 at 11:39 am Brent Sheather said:
What is David Ireland saying when he says “the substance of the obligation should revert back to the Code”? Is he saying that as the Code is regularly ignored and/or has no substance the industry is much happier with the status quo? Certainly one can understand that the bad end of town would be happier with a Code of Conduct that permits bad conduct. Lots of current examples of bad conduct masquerading as good conduct such as advisors who wear polo shirts and can only recommend high-cost products from their provider are able to satisfy their obligation to “put their clients’ interests first”. Another good one is that independent advisors who only recommend high cost Kiwisaver funds because they are paid commission are able to satisfy their obligation to “put their clients’ interests first”.

When you have members of the Code Committee covertly lobbying the FMA in favour of unfair performance fees one has to wonder whose side the Code Committee is on. It is pretty clear from an observation of the unsatisfactory reality that is NZ retail financial advice which the Code describes as good conduct that Committee members are not putting retail investors’ interests first.

Just from my preliminary reading of the law on Good Returns I like the look of the legislation as, if it were interpreted properly, goodness me, advisers might have to put clients’ interests first. That would mean, for example in Murray’s scenario, that I might be offered as many shares in Genesis, Meridian or Mighty River as some big spending US hedge fund. I think the SEC has or is investigating just this sort of favourable IPO allocation behaviour in the US although with Donald Trump on board don’t hold your breath.

All participants in the industry need to remember that we will all make more money in the long term treating investors fairly rather than exploiting them.
On 27 February 2017 at 1:01 pm John Milner said:
Brent you always manage to make my day with your comments. Whether it be your summing up of Milford's success, which I thought was right on the nose, to IPO sales by those who you would think would know better. So funny, yet sadly so true.
On 27 February 2017 at 6:28 pm Murray Weatherston said:
Update
I have had a short email exchange with David Ireland and a much longer phone discussion. Both exchanges were very cordial, in case you were wondering.

So to the nub of the answer.

There is a simple explanation - while I thought we were talking about the same thing, it turns out we were looking at the issue from two different and separate perspectives.

Starting with my issue - the crazy broadening of the duty by the inclusion of the words "or any other person"- we are actually agreed. So if MBIE would just do something to fix it, we can move on.

On David's point of "narrowing" I now understand what he was thinking. He thinks the "client first principle has been neutered" because in the ED definition it only applies "where there is a conflict at play".

Regular readers of GR will know that I have only ever been able to make sense of PTICF in the context of conflicts of interest. So when I read the words in the ED except for the broadening) I mentally said "tick."

But I now discover that David doesn't agree with that because he thinks that client first applies also in circumstances where there is no conflict.

So in his view, restricting the situations where the standard applies only to places where a conflict is in play is actually narrowing its import.

I should be clear that at this time, I do not agree with his view.

So I have challenged him to articulate the circumstances where he thinks that, although there is no conflict, the client first principle still applies.

He may be able to convince me his view is right, or he may ultimately recognise the error of his thinking (maybe this latter outcome is just wishful thinking on my part.)

It's my intention to conduct such debates in full public glare - "sunlight is the best disinfectant" and I encourage all 25000 advisers who will be affected by this legislation to pay attention and contribute their own dollar's-worth - we may ultimately crowd source a better outcome for us all.

I also wish that officials might be more forthcoming and be prepared to enter into the debate (even if it's only to explain their thinking) - after all it's supposed to be consultation. As I am sure Mr Slater would concur, it takes two sides to consult.
On 2 March 2017 at 2:04 pm Murray Weatherston said:
Just to keep this pot boiling.

Someone might come up with the idea that a good place to look for what Code Standard 1 actually means is to look in the decisions of the FADC. I can save that person the trouble by saying I have looked at the five cases and they are no help at all. Viz
1. Musaphia - while a charge was laid under CS1, FMA presented no evidence and the charge was dismissed
2. Beecroft No evidence was called on any of the charges.
3. Bourke-Shaw FMA did not offer any evidence on the CS1 charge and it was dismissed.
4.Ross ...sent to jail; case never heard
5 [Mr/Mrs/M]s X - no charge laid under CS1.
On 3 March 2017 at 10:15 am Brent Sheather said:
The investment world has always been full of ironies but just of late NZ has been making an even more important than usual contribution to the field. A good irony in the regulatory space was provided, courtesy of the FMA, to the effect that financial advisors are still able to put their clients’ interests first even if all they have to offer is high cost products which are good for nobody.

Another excellent example of things ironic is that many of the active managers who deride index funds actually use index funds to gain equity exposure in their actively managed funds. Even more ironic is that due to their totally unfair performance fee structures they manage to extract performance fees from investing in index funds. If this isn’t closet indexing what is? More engaged regulators overseas are taking fund managers to task on this issue.

To these outstanding local investment ironies we can add the Code Committee members who pontificate about conflicts of interest and how they should be avoided when some of them seem to be totally conflicted themselves by virtue of the fact that, as Code Committee members, they are ostensibly batting for retail investors but at the same they work for the big end of town, ie institutions on the other side of the trade. How does one manage this conflict? Hint: you don’t.

It’s a great pity the “ironists” won’t engage on this forum to answer their critics, but one can see the sense in that. A Judge once told me, after quite a few drinks, that the best strategy when you are caught doing something dodgy is to say nothing.
On 3 March 2017 at 4:05 pm Pragmatic said:
As I think that the Regulatory theme has been thrashed ad-nuaseam lately, I’ll pick on Brent Sheather’s second comment that relates to Active managers delivering beta, and charging high fees.

It may interest followers of my rambles to know that I agree whole heartedly with Brent Sheather’s comments, albeit with a continued strong preference for active managers. Where I have difficulty, is when those managers who claim to be active (or – to put it another way – claim to have skills that justify their fees) simply deliver a beta outcome – less their fees of course. In that instance (or the scenario where the manager is simply at the right-place-at-the-right-time, without any levels of expertise), the investor is significantly better off with the best-priced exposure.

That’s not to say that there aren’t active managers with the required skills to sift through the opportunities, and constantly deliver alpha. These managers do exist, albeit tend to get lumped in the “active” basket alongside the multitudes of peers who add no value at all. As with all things, it requires research to figure out who is who, and then when they’re discovered, they want to be paid.

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