There has been considerable debate about the practical impact that the introduction of a “best interests” test will have on the provision of financial advice.
The best place to start is the policy intent. The findings of the Parliamentary Inquiry into the collapse of Storm Financial concluded: “Present conduct standards are useful in that they prohibit clearly inappropriate advice being given to consumers, but the threshold is low enough to allow advice that favours the adviser’s interests above those of the client. ..”(p87)
While we are yet to see a finalised formulation of the best interests test from the Future of Financial Advice (FoFA) consultative process, it seems that there is general acceptance that the duty will focus on the conduct of the adviser rather than the quality of advice delivered. In combination with the measures which will create a prohibition on receipt of commissions or volume-based payments from product providers or platforms, the best interests test is likely to spell out that a planner will be expected:
• To act in good faith;
• Not to have a material personal interest in the subject matter of the advice;
• Take reasonable steps to consider a range of products when making a product recommendation.
The following are some thoughts about how the best interests obligation might apply in practice:
• The test will have to apply not only to the financial adviser but also to the dealer group and licensee. Given the commercial and legal frame-work within which financial advice is delivered, the licensee and dealer group effectively control the scope and quality of advice, and product and systems used to deliver it. So the best interests obligation must apply to the individual financial planner as well as the licensee and dealer in order to be effective.
• Obviously there are a lot of advisers who work for a vertically integrated brand. Current research reveals that around three quarters of funds under advice flow to a related party fund manager. Even after the best interests obligation is legislated, there will still be commercial pressure for an adviser to prefer the brand(s) which are produced or sponsored by his or her employing entity. However, under a best interests test, once the adviser has determined the client’s needs, risk profile and circumstances and devised a strategy to satisfy those needs, and before they make a product recommendation (if the strategy requires a product recommendation at all) they must undertake a competitive analysis of products on online casino the market to ensure that the products recommended are not only appropriate but that the product recommended best fits the client’s interests, particularly their financial interests.
• While the “reasonable steps” defence will mean that they do not need to consider every product on the market, they cannot exclude whole classes of product. So if approved product lists do not include a reasonably broad range of product types, planners will have to refer on clients whose needs they cannot satisfy. Advisers and dealer groups will not be able to shield their selection as “the most appropriate on the group’s APL”.
• There should be no capacity for the adviser to contract out of his or her best interests obligations.
• The best interests obligation will not prevent an adviser from providing limited scope advice. In fact, there may be situations where it is in the client’s interests to limit the scope of the advice – that is, where their situation and needs are straightforward and their budget is limited. However, where the scope of the advice is limited, the adviser must take responsibility for ensuring that any limited scope advice is in the client’s interests. Given the asymmetry in knowledge which would typically exist between client and planner, the planner is in a better situation to judge whether a limited scope will be in the client’s best interests.
Once the financial planning industry is transformed into a profession, the trust and confidence of consumers will follow. But the transformation has to be legitimate and comprehensive.
David Whiteley is chief executive of Industry Super Network.
