If there’s anything that should set a professional financial planner apart from others who would purport to give financial advice, it should be that the financial planner clearly and unambiguously acts as a fiduciary. To use the vernacular, the financial planner acts in the client’s best interests.
It means a bit more than just finding the best strategy, setting up the best structures and developing the best solutions to help a client achieve their financial goals. Those are admirable technical skills, but they do not a fiduciary make. It means the financial planner must consciously subordinate his or her own interests to those of the client. That’s what can make it so challenging, but it’s also why it is such a worthwhile and worthy requirement. Even so, this idea of adviser-as-fiduciary is under attack in the US. And in Australia, exactly what it means still seems to be a bit unclear.
In the US, which in so many other respects leads (or perhaps drags around) the world on financial matters, the introduction of the so-called fiduciary law developed by the Department of Labor (DoL) has been delayed by 60 days.
To recap, the DoL fiduciary law would require anyone who advises individuals on retirement plans, employee benefit plans and individual retirement accounts (IRAs) in the US to act as a fiduciary. That is, they would be required to act in their clients’ best interests.
On February 3, US President Donald Trump directed the Secretary of Labor to have another look at the fiduciary rule, to see if it “may adversely affect the ability of Americans to gain access to retirement information and financial advice”. The delay in implementation is to allow this review to happen.
When the Obama administration put forward the fiduciary law, it cited Australia as an example of a jurisdiction that had already done the hard yards on exactly this sort of reform. And, indeed, opposition to the DoL fiduciary rule is virtually a carbon copy of the opposition to the Future of Financial Advice (FoFA) laws. It was said that FoFA would raise the cost of advice. It would put good advisers out of business. It would restrict access to advice (putting to one side for a moment the possible nature of that “advice”). And, naturally, institutions whose “advisers” push products into the retirement market were among FoFA’s most vocal critics.
Acute discomfort for planners
Acting in the interests of your clients is undoubtedly a good idea. The problem is, acting in clients’ best interests often puts the financial planner at odds with the interests of the product manufacturer, driven as that entity is by sales and volume. When the financial planner is, in effect, an employee of the product manufacturer, the discomfort can be acute. And since product manufacturers still, in many cases, view financial planners as “distribution”, and they make much, much more money out of funds management than they do out of advice, the product considerations rule. The financial planner is reduced to the role of salesperson.
(As an aside, if you come across any representative of a fund manager or institution whose job title includes the word “distribution”, you should be in no doubt as to how they view you and your profession.)
If the fact that US retirement advisers are not already required to act in their clients’ best interests comes as a surprise to you, then you may begin to get a sense of how many Australians felt when they learned that before FoFA came into effect, nor were Australian financial planners required to act in their clients’ best interests. It was not enough that many of them did so, or said they did; there was no penalty or sanction if they did not. In other words, it was optional. However, for an industry such as financial planning, essentially saying ‘trust me’ just wasn’t enough, so the government legislated the best-interests duty.
ASIC’s court win underscores ‘misunderstanding’
Some firms and financial planners in Australia still don’t quite get it. This week, the Australian Securities and Investments Commission (ASIC) won an important court action against a financial planning firm and subsequently banned two of its advisers.
The Federal Court ruled that NSG Services – which used to be called National Sterling Group, and which holds its own Australian financial services licence (AFSL) – had breached provisions of the Corporations Act by failing to ensure its representatives provided advice that complied with the best-interests obligations, and that those representatives failed to provide advice that was appropriate to clients.
ASIC banned Adrian Chenh and Bill El-Helou for five years each, after it found that the pair gave advice that was not in the clients’ best interests. It did not “leave them in a better financial position”, ASIC stated.
Furthermore, the pair “failed to provide advice that was appropriate to the clients” and “failed to provide financial services guides, product disclosure statements and statements of advice”, ASIC stated.
Both Chenh and El-Helou left NSG in 2015 to become authorised representatives of Dover Financial Advisers, and both left Dover in June 2016. ASIC commenced proceedings against NSG in June 2016.
An ASIC statement issued this week set out a range of deficiencies in NSG’s processes and systems, identified by the court. It read:
- NSG’s new client advice process was insufficient to ensure that all necessary information was obtained from, and given to, the client
- NSG’s training on legal and regulatory obligations was insufficient to ensure clients received advice that was in their best interests
- NSG did not routinely monitor its representatives nor identify deficiencies in the knowledge or skills of individual representatives
- NSG did not conduct regular or substantive performance reviews of its representatives
- NSG’s compliance policies were inadequate, and did not address its representatives’ legal or regulatory duties and, in any event, were not followed or enforced by NSG
- There was an absence of regular internal audits, and the external audits conducted identified issues that were not adequately addressed; nor were recommended changes implemented
- NSG had a “commission only” remuneration model, which meant representatives would be compensated only by way of commission for sales of life-insurance products and superannuation rollovers.
Apart from playing into growing fears about the ability of firms with their own AFSL to monitor and enforce appropriate compliance standards on their advisers, NSG’s predicament reveals a fairly fundamental, let’s say, misunderstanding, of the role of a financial planner, the nature of a fiduciary and the specifics of the best-interests duty.
Acting in clients’ best interests – acting as a fiduciary – is central to the task of developing financial planning as a profession and to winning the trust and respect of the public. Misunderstandings about the financial planner’s responsibilities and attacks on the concept of advisers as fiduciaries only impede this progress.
TOPICS: Adrian Chenh, asic, Bill El-Helou, NSG Services
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