Webfeature: Fiduciary duty – good for planners, good for consumers

The future of financial advice – the practitioners’ perspective.
Insights and analysis from leading industry figures.

Part 6: Fiduciary duty – good for planners, good for consumers

Jade Harkness
Counsel, advice and private banking, BT Financial Group

The first question you may have is: why would I talk about the proposed statutory fiduciary duty to act in the best interest of the client in a [discussion] around raising advice to a profession?

Well, I see it as one of the key elements to raising advice to a profession. I see that it can be a positive development, both for financial planners and for consumers, provided that the detail of that statutory duty is clearly set out.

To me, it really is a key element of formalising the professionalism of financial advice. I see that it can have three roles: the first is to improve consumer trust; the second is to give heightened focus to conflict management, and ensure that they are more appropriately managed; and the third is to give clarity and certainty to the obligations that financial advisers will meet, and from a consumer’s perspective, the obligations that consumers can expect.

All of this, if done properly, can assist in demonstrating the value of advice.

That all sounds very positive; of course, the difficulty is: how do we translate the words “fiduciary best interest” into a statutory duty that actually has clear meaning and will be positive, without becoming overly burdensome and potentially restricting access to advice?

So the next thing is then to consider: what is the content of the proposed duty? And for me, there are really three [elements]: there’s the fiduciary aspect; there’s the obligation to act in the best interest of the client; and then there’s the obligation to give priority to the interests of the client where there’s a conflict.

Stepping through those in a little bit more detail, a fiduciary duty at common…does not impose any positive obligations on the fiduciary; instead it imposes two proscriptive obligations. A fiduciary must not act in conflict, and they must not obtain any unauthorised profit.

“I see it as one of the key elements to raising advice to a profession. I see that it can be a positive development, both for financial planners and for consumers”

It’s the “best interest” obligation that can involve a positive obligation and, for me, this is the trickiest part of the proposed duty, in that we need to be clear what we mean when we talk about the best interest duty.

My view is that we can draw from the trustee situation. Trustees are fiduciaries, but also under the particular law that applies to trustees, they have the “best interest” obligation. In a trustee context, “best interest” means having proper regard to the interests of the beneficiary, and being motivated in your actions by that beneficiary’s interest.

These two elements, I see, can transpose neatly into the financial planning context. For financial planners, “best interest” could mean the financial planner must have proper regard to the interests of the client, and must be motivated by the interest of the client, as opposed to being motivated by any other interest.

Now, there are differences, obviously, between trustees and financial planners, and in working through the details, some of those differences would need to be catered for.

The third element – giving priority to the client’s interest in the event of a conflict – I see as positive. It helps to focus on how to manage conflict. Again, I see need for an express right for financial planners to be remunerated. Obviously, it’s difficult to give priority to a client interest where you’re talking about remuneration. All service providers, including fiduciaries, will need to have the right to be remunerated.

The “best interest” proposed duty has also got the proposed “reasonable steps” defence. Again, for me, this is crucial in ensuring that the right certainty is attained, and that we get the balance between improving standards, whilst not restricting the cost.

The “reasonable steps” defence, for me, should be about asking the question: in the circumstances at the time, did the financial planner act in the interests of the client, and then, were they motivated by the client’s interests?

That focuses on the process that the adviser has followed, as opposed to promising a particular outcome. We want it to be about the process that is followed, rather than having some sort of obligation to guarantee a particular outcome.