There has been debate over recent weeks about how advisers who are aligned to a provider can meet the requirements outlined in the Ministry of Business, Innovation and Employment’s recommendations for a review of the Financial Advisers Act.

It wants a conduct obligation to place the consumer’s interests first applied to all participants, consistent with the obligation currently placed on AFAs by their code of conduct.

“What would be required to place the interests of the consumer first would be determined by what is reasonable in the circumstances, but should be founded on what is suitable for the customer regardless of the differing incentives for the adviser or agent. This recognises that all advisers and agents have limitations on the services they can provide,” MBIE said.

“They would not be expected to consider the full range of products from across the market, but would be required to recommend the best product for the consumer from their suite. If no product that they can recommend is genuinely suitable, they would then be expected to advise the consumer on that basis.”

Adviser Brent Sheather has argued that advisers who work for an institution could find that more difficult.

“Most academics reckon that a key element to the success or otherwise of an investment plan is fees.  Therefore a key part of an adviser’s job is to ensure that the products that they put their clients into are fair,” he said.

“Given this scenario do you think that one can put client’s interests first if one works for a vertically-integrated organisation that only sells its own high-cost products?

“The standard wealth management solution provided by a typical private bank has an overall total fee structure of 2%  to 3% per annum, the forward-looking risk premium of equities over long bonds is 3% per annum and the average yield  on a high-quality bond portfolio locally is 3%.  So a 2% or 3% per annum fee structure appropriates most of the risk premium and delivers retail customers the return of bonds with the risk of equities."

But Liam Mason, director of regulation at the FMA, said putting clients first was a principle-based obligation that would mean different things in different circumstances.

“The AFA Code expressly states that …it does not require an AFA to provide services in relation to products that are outside that adviser’s scope of services.  Our data in the replacement business report and the recent AFA returns show that many AFAs, whether at a QFE or non-aligned, do not currently offer or advise on multiple products and in fact only offer from one provider they know well or a small selection. The law recognises that advisers may not offer from a wide range of products and that within those limitations you must still put your customer’s interest before your own,” he said.

Mason said the key factor would be whether the advice or product met the client’s needs, whether all fair and reasonable disclosures were made and whether the product was fit for purpose.

“A good conversation will include factors of risks, returns, costs, benefits and fees and remuneration, and we expect all types of advisers to help customers understand the impact of fees on total returns. If the product you are recommending is not appropriate or fit for purpose, even if it is the cheapest in the market, then you will not be complying with your obligations.”