The best interests duty is a duty owed by a financial planner to a client. A key part in discharging that duty is the ability to source and supply investment solutions best suited to a client’s needs and circumstances. This is where the researcher comes into the picture.
As the full impact of the best interests duty becomes apparent, so financial planners’ demands of the research that supports investment recommendations will change. It will lead to greater consideration of how to deal with products that are not on an approved product list (APL); how portfolios are constructed; and how to assess the products that are used to implement investment solutions.
At a Professional Planner forum last month, sponsored by Zurich, leading dealer group research figures explained how the role is changing as planners’ demands change, and how the parallel influences of professionalism and the Future of Financial Advice (FoFA) reforms may play out for researchers in both institutionally aligned and non-aligned licensees.
“The transition period we’re going through now is the advisers getting their heads around what is the [client’s] best interest, how do I ensure that I fulfil my best interest obligations, what does it look like in a SoA [statement of advice], things like that,” says Aman Ramrakha, executive manager of research in Commonwealth Bank of Australia’s wealth management advice division.
“It’s probably early days to see the impact on the approved product list in terms of requests that we get from advisers, [to] go off-APL,” he says.
“But what we’ve emphasised is that we have a very robust process under which we put stuff on APLs, [we’ve] gone through [and] tested it out, and we think it holds up well in a post-FoFA world.”
Demand for non-APL products could arise if a planner believes a particular product is the best solution for a client, but it’s not on the licensee’s APL. Or it might arise if a practice joins a licensee, and has previously been using products that are not on the new licensee’s APL.
And all of this has to be conducted within a framework that allows genuine independence of thought and independence of action by researchers, avoiding conflicts that can arise from the existence of in-house products.
Piers Bolger, head of research and strategy for BT Financial Group, says a clear effect of FoFA has been to force researchers to take a close look at potentially conflicted remuneration.
“Even though obviously there’s some provisions there that don’t change until July next year, as a group we wanted to ensure there were no conflicted rem products on our APLs across any of the dealer groups,” Bolger says.
“I take Magnitude and BT Select as an example: there’s no BT products at all in any of the portfolios at the moment. So I consider that an actual case in point, that we’re totally unconflicted in genuinely putting the best solutions forward. So I think it’s been good from a research point of view; it’s been an extra piece of work, but I think the benefits actually will start to come through, through time, once the advisers get their head around what they’re meant to be doing, how they’re meant to be doing it.
“That will absolutely take time, you know, 12 to 18 months. We had a lot of regulatory change very quickly, and many of them, they have to reshape their businesses; a lot of them are already changing dealer groups, all these sorts of things.”
As advisers move between licensees – generally, but not exclusively, gravitating towards the larger, vertically integrated business – there’s a job to be done in assessing the products that the incoming adviser or practice has been using for its clients. Jeff Mitchell, head of investment research for Australian Unity Personal Financial Services, says one of the first things he needs to know is, “What has the client been told about this product – and what is it in that description that demonstrates to me that the adviser actually understands the product?”
“Know your client, know your product, have a reasonable basis [for giving advice] – those common law factors are all enshrined in the legislation, [but] the gas is being turned up.
“So the one thing I want to know is that, if it is a product that’s not on my APL, how’s it been described to the client? And is that description creating a risk, does it demonstrate ‘know your product’?”
Will Burkitt, head of investment product and research for ANZ Global Wealth, says it’s a “subtle but critical” shift in the way investment solutions are assessed.
“A lot of the enforceable undertakings that have come have somewhat been around this issue,” he says.
“Research and product suitability has had to move away, and in many instances the hard way, from just looking at a product and thinking about the organisation – you know, the philosophy, process, so on and so on – to actually thinking about it from the fiduciary perspective. What does it actually mean for the client? And linking that product with the client suitability, as opposed to being two separate, distinct aspects to consider.
“And also I think the research houses that we all rely on have not taken that step, either. It’s actually been left up to us as organisations to try and bridge that gap. And the way that reports are written, these smaller nuances in the way that the guidance for the advisers is provided to them, is I think for me one of the key issues that we’ve been working through in the last year or two.”
Burkitt says the in-house research operations are probably best placed to consider products in a fiduciary context, but such an approach requires resources that are not available to all.
“Particularly for the smaller groups, I’d imagine that’s pretty hard in terms of having the right infrastructure to be able to deal with that; and so, you then need to rely on external sources,” he says.
“But if the external sources aren’t bridging that gap, or able to bridge that gap, there’s a problem.”
The issue of researching individual products – whether on an APL or not – inevitably feeds into the issue of portfolio construction. CBA’s Ramrakha says the company has spent “a lot of time over the last couple of years in educating advisers”.
“We’ve seen lots of instances where people are putting a bunch of highly rated – whether it is ‘gold’, or whatever the rating is – funds together without necessarily understanding what that construct delivers,” he says.
“I think that that’s an area where we’re continuing the education process with our advisers. We see lots of portfolios that are well intentioned from a pure portfolio construction point of view, but are poorly executed.”
At the end of the day a financial planner’s role is to meet the client’s financial objectives. Ben McBride, investment research manager for Centric Wealth, says that means “moving away from that individual investment approach to a portfolio that we know has a higher probability of actually meeting the client’s objectives”.
“So when the adviser sits down in front of the client, they can have a greater level of confidence to say, well look, yes these investments here might be investment-grade investments, but in terms of actually being able to deliver a solution to you that I can be confident about meeting your objectives, I think these groups of investments are actually better,” he says.
“[But] the adviser doesn’t really have the ability to necessarily run the portfolio through BARRA analysis, or to do the stress testing on their portfolio that the [in-house dealer group] investment team could do; but at the same time, the client actually has that expectation, that that intellectual knowledge actually gets passed down to them.”
The head of ThreeSixty Research, David Wappett, says that today there is obviously “a lot more thought going into the way advisers are constructing portfolios, a lot more focus on the outcomes”.
“That is also a challenge for us,” he says.
“We’ve got to make sure that the governance frameworks we have around the advice, that we allow our planners to use, fits in to those new ways of constructing portfolios.
“The challenge for us, as well, is to make sure that our advice process deals with the newer ways of constructing portfolios, and also the new sorts of products that have come in to the market with these very specific objectives, and how they can be used in portfolios.
“More and more, it’s about saying here’s a product that states it’s going to do X and Y, but the key is how to use it in a portfolio and what role should it play and what should we complement it with?”
BT’s Bolger says portfolio construction and model portfolios throw up some interesting challenges for researchers and for planners alike – particularly how a planner can meet the best interests duty if they lack the resources to construct and test portfolios adequately.
“If FoFA was being really honest, it would actually say to advisers, you can’t build model portfolios because you don’t have the tools or resources or the time to do it,” he says. “I don’t think FoFA has addressed that.”
Ramrakha says FoFA provides clear enough direction on what to do if a planner is unable to provide advice, due to a lack of expertise: they should either refuse to advise a client and/or refer them to someone who can.
“That’s where some of the challenges come in around portfolio construction,” he says. “The majority of advisers are unlikely to have the degree of skill that we exhibit, or members of our teams exhibit in portfolio construction, so it does raise the question, am I an expert when it comes to putting [forward] investment solutions, or insurance solutions for my clients?
“And if I’m not, what do I do? Do I default to something that my licensee has produced for me, a multi-manager or model portfolio, or – as reluctant as advisers would be – do I decline to give the advice [and] suggest that they seek the expert down the road, or within the organisation or somewhere else?
“That’s a component of best interests that’s still to be somewhat tested. What does ‘expertise’ entail? I know within our organisation our [regulatory] reform teams have done a lot of work on what are the areas of expertise. So it’s SMSFs [self-managed super funds], it’s planning, aged care, and there’s some areas where there’s general consensus that, to give advice on SMSFs, you have to be a bit more than RG 146-qualified to give it. You need specialist accreditation. So we have those; but interestingly, portfolio construction at this point is not necessarily one of them.”
Matt Dellit, manager of research for Professional Investment Services, says that while external research firms “are part of the process and they’re partially accountable, being a service provider”, ultimate accountability to the planner resides with the dealer group and the dealer group’s research capability.
“We continue to have multiple relationships with research providers, but that’s to give us a broad cross section,” Dellit says.
“It’s an input, it forms our view – whether that be a report, through direct meetings, advice at a committee level. But they’re an input, they’re not the decision-maker – in my view they shouldn’t be.”
ANZ’s Burkitt says external research also comes into play when assessing in-house investment products.
“For much of the internally manufactured product, we use external support in those instances to provide that barrier from the conflict, as a mitigant,” he says.
Wappett believes that the criteria used to assess investment products should be the same, irrespective of the manufacturer.
“It’s absolutely appropriate to put the group product through exactly the same filter,” he says.
“To me that helps the process. When you start chopping and changing, saying, well I’ve got rules over here for one and rules over here for another, I think that inherently sort of creates some question marks about it. To me, put it through exactly the same filters.
“We’ve spent a lot of time and documented exactly what the APL process is, the role of the research function, the role of external consultants, and as well the role of the licensee heads. We’ve become very transparent on exactly what the role of the various parts of the process are. So I think it’s a good thing actually. It’s available for every adviser in the network to see exactly how it works.”
McBride says Centric has gone a step further, and each of the group’s advisers has had exposure to Centric’s internal investment committee.
“We’ve actually rolled nearly all of our advisers through both our investment committee and our portfolio construction committee on at least an observer basis, so that they can actually get some engagement, some understanding of the depth of the process, through to the end result they see in their portfolios,” he says.
In all of the issues round best interests, placing the client at the centre of the advice process, and the impact of greater professionalism, it remains the case that the research community continues to regard the financial planner as its client
“They are the primary client,” says PIS’s Dellit.
“We refer to the end client as a secondary client. So every decision we make at dealer group level has to first be conscious of what impact it has on the end client. But the primary client, that’s the adviser.”
As a result, says Wappett, “we provide all these tools to the advisers, but we spend a lot of time on the conversation with the client element of the research, back to the point of portfolio construction”.
“So yes, we absolutely produce this stuff as part of the dealer services, provide it to all of our advisers; but at the end of the day we try as much as possible to put it in the language that they can then use w ith the client,” he says.
