News
'Client first' right standard for the industry: Everett
Thursday 28th of July 2016
The FMA is today releasing a good conduct guide for financial services participants.
While authorised financial advisers have had conduct requirements for many years, many participants are only now encountering conduct obligations for the first time through the introduction of the Financial Markets Conduct Act.
The revised Financial Advisers Act is also set to introduce a requirement to put a client’s interests first, across the entire financial adviser population.
Murray Weatherston, of SiFA, said it was an “apple pie and motherhood” statement that had not yet been backed up by an explanation of what it would mean in practice.
“It’s a fundamental tenet of the code and it’s the sort of thing someone should be able to tell you what it means. It’s almost like trying to debate the meaning of life. Everyone knows what it is until someone is asking them to describe it.”
But Everett said it was not necessary to describe a checklist for putting clients first in every circumstance.
“It means different things for different people in different circumstances. What it means for an AFA holding themselves out as a non-aligned individual is different to someone with an ASB polo shirt on, offering ASB products.
“But if you take the requirement that was imposed on AFAs through the code of conduct, it can be meaningful anywhere else in the industry. I can’t see why the rest of the industry can’t be held to the same principles.”
He said he understood it would be a challenge in some cases for people to understand. But he said the details of each circumstance would be worked out in practice, over time.
“Conduct is particular to each business or person. A regulator cannot, and should not, prescribe how that happens.I feel strongly that this is the principle that the entire industry should be applying.”
The guide says good conduct would include things such as the purpose of products and services being clear, consumers being able to understand how performance was measured, staff incentives and remuneration being disclosed, fees being made obvious and customers being communicated with regularly.
The guide suggests questions that providers can ask themselves to ensure they are operating with the right mindset. These include: How do you know that customers will have the same or better outcome with your services and products as they would have with similar services and products offered elsewhere? How do you demonstrate that your customer and business strategies are aligned? Do you have an appropriate whistleblowing process?
Submissions are being sought on the guide, until the end of October.
Comments (15)
Brent Sheather
Maybe I am a bit stupid but I have a major issue with Mr Everett’s statement that “someone offering ASB products” can put their clients’ interests less first than “an AFA holding themselves out as non-aligned”. This is fundamentally wrong. I vaguely recall from first year law study back in 1976 a comment by some UK law-lord that it was more important that the law be consistent than right. This is obviously inconsistent and wrong and we won’t speculate on the reasons why this has happened.
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8 years ago
Murray Weatherston
I need to provide the context about my quoted comment about what the words actually mean, lest anyone is misled into believing that I am bashing the FMA and the standard..
To make things crystal clear, I am not against the "putting the interests of the client first" (PTICF) standard per se.
But when I read a lot of the commentary on industry regulation, I see a big mixing up of PTICF with two other concepts that it is definitely not. These other concepts are "Best interests of the client" (BIOTC) and fiduciary
standard.
For several months now, I have been trying to find out what the actual obligations of the adviser under PTICF. I have studied the Code Committees published documents, and all the FAAR papers. I have consulted Mr Google, not as an necessarily authority but rather to see if I can find others who have the same understanding difficulty as I have. But nowhere, repeat nowhere have I seen anyone even try to define PTICF.
I can see that the client can't prefer to recommend product A which costs the client more and pays the adviser more, cf Product B which does the same job, costs the adviser the same but pays the adviser less.
I can also see that the adviser has to execute client orders ahead of their own.
But what else?
I do intend doing a bigger piece on this to promote debate on the topic "what is the meaning of putting the interests of the client first."
I am as incredulous as Brent with REs comments that PTICF means something different when an ASB adviser wearing an ASB corporate uniform recommends an ASB product than it does when a non-aligned adviser who has a choice of product is talking to the same consumer.
Who explains to the ASB customer that if they had gone to a non-aligned adviser, the duties owed would be different?
In another forum I have said that IMO the FAAR legitimises banks and other institutions to "sell" with gay abandon under the guise of advice, and frankly I read RE's comments in the same vein. Perhaps you could ask RE for a followup interview and ask him to expand on how PTICF might differ in those two defined contexts.
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8 years ago
Allen Hoffman
Let's just be honest here and quit giving lip service to putting the client's interests first. Let's change Code Standard 1, the FAA and FMCA to read that the Bank's interests come first and everyone else lines up after that. We now have proof that that is the standard imposed by FMA.
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8 years ago
W K
Question (perhaps Mr Everett would like to answer too):
client invest $100k each with 2 advisers.
adviser a: client got 8% nett return and was charged a 1% fee.
adviser b: client got 10% nett return and was charged a 3% fee.
which adviser do you think has put the client's interest first?
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8 years ago
Clayton Coplestone
Lets start calling this what it is:
The delivery of any product or service by a large financial institution is for the betterment of their stakeholders & shareholders. To think otherwise, is missing the point.
The delivery of any product or service by a non-aligned financial practitioner is for the betterment of the client.
Irrespective of the dress code, there should be a fiduciary duty by all financial services participants to provide products & services for the betterment of consumers (or at least inform them ahead of time that they are being flogged a product or service, complete with vested interest).
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8 years ago
Ivonne Teoh
Interesting to read both of your comments. Sometimes it's not advisor's fault. I recently had a bad experience with Sovereign. My advisor tried to help but only to limited extent. Please check my post on LinkedIn about it.
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8 years ago
Murray Weatherston
I see I have garbled one of my paragraphs. I hope everybody could understand the point I was trying to make, but if they couldn't, that paragraph should say:
I can see that the adviser can't prefer to recommend product A which costs the client more and pays the adviser more, cf Product B which does the same job and is expected to earn the same gross, but costs the client less and pays the adviser less.
Sorry about that.
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8 years ago
Peter Smith
Let's frame this first by saying that I am not aligned to a bank in anyway, but I will play devil's advocate here. Why is the advice provided by a bank not in the client's best interests? Do they capture their financial information and their goals? Do they undertake a risk profile? Do they diversify the funds so spread risk? Do they make use of fund managers that have been vetted? Do they make use of direct securities where they can? I’m pretty sure they do all the above, granted what they don’t do is say, “you'll have our solution and Mr Client you can look to the market and find better solutions.” Some commentators here seem to believe that their solution is the only one in town because they don’t charge fees at the same level, or they use index methods because you can’t beat the market. There is no right or wrong product solution – it is the one that the client chooses to fit their situation and their perception of trust in an Adviser. The right solution provided you have performed the necessary quantitative and qualitative process to truly understand your client. I will add the slight proviso that there is an incorrect product solution when the product seizes and the client loses their shirt in the process!
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8 years ago
Murray Weatherston
To Smitty
2nd/3rd line you talk about "clients best interests". That's not the same as "putting the interests of the client first.
And if that was the standard, how do you think an institution who implied (or worse explicitly said) “you'll have our solution and Mr Client you can look to the market and find better solutions” would be able to say they had advised in the best interests of their client?
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8 years ago
Brent Sheather
Smitty its not just about index funds. Google Glass-Steagall. This happened in the 1930s… a few year before index funds.
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8 years ago
Mike King
@Ivonne Teoh - can you give a specific url for that post you mentioned? I can't locate it.
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8 years ago
John Makowem
At last a debate that gets to the crux of the issue.
As a non aligned advisor you have the entire investment universe to choose from, be it active, passive, direct, through funds etc.
As an aligned advisor in general that universe is hugely limited eg look at any Westpac advice....it is full of BT Funds, ANZ full of OneAnswer etc.
Is it spelt out to the client that that is the only universe that has been considered and that the Bank in this regard are taking the advice and fund management fees, and possibly even a platform fee?
How can any one institution ever be best of breed across all the different investment styles and sectors and how is this ever in the client's best interest.
Not only Banks though...there are a fair few other larger institutions that utilise vertical integration which can never be in the client's best interests....only the shareholders win unfortunately, not the investor that knows no better.
Hardly putting the client's interest first. If the legislators really wanted to show leadership that is where they would be focussing their time and attention, not merely giving them a free ride through their up to now QFE status.
Quite disheartening actually for those that really do have their client's at the heart of what they do as opposed to merely paying lip service to it.
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8 years ago
Alan Schofield
Smitty, to give a real life example of how the banks are being let off the hook; a prospective client has a portfolio of investments with a bank and the entire Australasian equities component is invested in the bank's Australasian Equities fund which has only 15 Australasian companies in it anyway. In the appendices (if the client cares to read the 62 pages - they did not) the Australasian Equities fund is in fact invested via a high cost, local fund manager (with their fees undisclosed). Similarly the international share portfolio is managed by an Australian international fund manager and the fees are not disclosed. The bank has disclosed a 'joining fees' of 0.45% (on top of brokerage to buy the assets)and management and platform fees of 1.6%pa on top. The client wants income and the adviser, bank and fund manager are eating most of the income in fees. Why would they not at least just buy the equities via their broking arm and save the client some fees? Better still, why not just buy a couple of index and active funds, own the market and pay a lot less fees? But the AFA is putting the client's interests first because that is what the bank allows them to offer. How can such a person be an AFA in the first place? With the FMA choosing to interpret the PTCIF standard differently for different AFAs I am breaching my duties by recommending such a portfolio (not that I ever would) but the bank AFA is not. How can an investor be happy with that, let alone me!
Regulatory capture is alive and well and getting more apparent in NZ as the government continues to tweek the acts and regulations in favour of the banks and large firms. I wonder what the response would be if 'non-aligned AFAs' collectively protested on the street of Wellington? Perhaps that is what is required to get the public aware of this travesty.
Note the characters on Sam Stubb's new board as an example of where regulators end up working for those they regulate!
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8 years ago
Murray Weatherston
What are the PTICF duties?
I have tried two ways to capture the elusive meaning of PTICF .
The first, and the way I started looking at the question, was to define or say what PTICF is.
Apart from the “apple pie and motherhood’ formulation of PTICF, I pretty much drew a blank on this.
It now seems to me that formulating a rule from this perspective requires a clear and objective dividing line; e.g. speeding. If the speed limit is 50, then travelling a speed above 50 is speeding, and this can be determined in an objective fashion. (e.g. by radar gun).
Maybe the problem with positively defining PTICF is that there isn’t such a clear cut dividing line between Yea and Nay.
So the other (negative) way I have approached the problem is to try and specify some situations where we could say “this conduct doesn’t seem to be PTICF”. And analogously, we could try and define what wouldn’t be not PTICF. I have had much more success looking at the issue this way, and offer the following.
The following is not all original; it’s drawn from a variety of sources and contexts. The list is not intended to be the final say or comprehensive, as other readers will be able to find other examples.
What is not, or might not be, PTICF?
[If you prefer, this could be restated as when might an adviser be found in breach of the duty to PTICF]
1.The most obvious starter is commissions; the adviser had two possible products, A and B. Assuming both of them have the same expected (i.e. ex ante) return. A costs the client 3% and the adviser is paid 2%; B costs the client 1.5% and the adviser gets paid 1%. The adviser recommends A, the one that pays him more.
2.Order of Execution – the adviser doesn’t execute client orders before his own;
3.The adviser doesn’t have suitable product on his approved list that fully meets the needs of his client; however adviser doesn’t tell client to go elsewhere, but rather recommends client buys something different, and which doesn’t meet all of the client’s bill but is on the adviser’s approved list
4.The adviser actively discourages client from withdrawing lump sum out of portfolio (to buy a new car/take a big trip) because it would reduce FUM or AUM
5.The adviser discourages client from selling low yielding bonds/term deposits to pay down debt that has a higher interest rate than the deposit pays, and second the debt interest is not tax deductible
6.The adviser encourages client to keep working till 65 (or in general later) rather than retiring early if it means that the client will have to draw down capital in the meantime.
7.The adviser pushing client to save more when spending might give them more pleasure – balance between living and saving. Remember “no-one gets out of life alive”, and we typically don't have a choice in our end date.
8.The adviser discourages client from distributing early to heirs because it would reduce AUM or FUM. Mum seeing her heirs getting the benefit of Mum’s money now rather than having to wait until she is cold may actually give Mum more pleasure now than counting her larger investment portfolio.
What is probably not not PTICF.
[The restatement here is when might the adviser not be in breach of PTICF].
1.Where the adviser works off a very limited range of products (maybe only his employers products) then not picking a better product from outside of the limited list available to him.
This seems to me to be the “get out of jail free” card for institutions provided that:
(a) The adviser makes it clear to the client that he is restricted to a narrow range of products; and
(b) The adviser picks the product off the list that both meets the customer’s needs and is the best deal for the client (and not the one that incentivises the adviser the most).
My challenge to Good returns readers is to debate this, to add and subtract so that in the end we can all recite what PTICF is [just as we can recite the 10 Commandments (or at least some of them).]
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8 years ago
Brent Sheather
Hi Murray
There are lots of other scenario’s where client’s interests aren’t put first and I see them every day. For example, most private banks buy individual stocks for clients – maybe 10 or 15 “good ideas”. They therefore ignore best practice and the benefits of diversification not to mention inevitably underperforming the index. Classic example of client’s interests not being put first so why would they do it? Obvious answer is that you can make more money regularly shuffling the deck and, because your clients are a bit silly, you can give the impression you know what you are doing thereby justifying your high fees. Another example – the average risk premium of equities over long bonds is about 3% so the standard wealth management proposition has a total expense ratio, including bid/offer spreads etc etc, of 2.5% - 3.0% so an all equity portfolio, even if it performs as well as the index, which is unlikely, delivers the return of bonds with the risk of equities. Not obviously fair and certainly not putting client’s interests first is it? You can argue the numbers but even a 2% total expense ratio confiscates 2/3rds of the risk premium. No institutional investor would put up with that so why should retail.
Those are just two common examples but unfortunately the good old regulator and the fools at the MBIE and government conveniently choose not to recognise that there is a problem. We can speculate why that’s the case but it is pretty obvious – the regulators position is, at best, constrained by the law, the fools at MBIE don’t know what’s going on, the Code Committee is busy lobbying the FMA in favour of performance fees and government ministers are on the net searching for their next job at a bank.
The simplest way to differentiate what is putting client’s interest first and what isn’t is to, as I have argued before, have regard to what the average pension fund does. For example little or no exposure to finance company debentures, little or no exposure to Feltex, diversified portfolios, and in the equities space 50% index and 50% active.
All this is academic however because you can make more money for your firm and personally by not putting client’s interests first so it is never going to work. The public needs to be clear that most firms do not put their client’s interests first where “putting client’s interests first” is how a reasonable person would define it rather than compromised players in industry/regulatory/government.
Reality is that the retail investment scene is a big trough where all the pigs feed whilst periodically raising their heads to assure their client’s that their interests are being put first.
Regards
Brent
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8 years ago
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