News
Committee argues for level playing field for advisers
Wednesday 12th of July 2017
The FMA is consulting on its plan to offer an exemption, which would allow roboadvice to be offered ahead of the looming law changes.
The Code Committee, which is responsible for the Code of Professional Conduct for AFAs, has made its submission public.
In it, it says that AFAs are required to meet minimum standards of competence, knowledge, skills, ethical behaviour and client care, and roboadvisers should be, too.
“The Code Committee’s position is that if an exemption is to be granted to facilitate peronsalised roboadvice, then the terms on which any such exemption is granted must be consistent with the terms on which AFAs must operate.”
It said, as a minimum, any robo service should have to meet no less a set of standards than would apply to an AFA offering the same service, and permitting roboadvice needed to be consistent with promoting the sound and efficient delivery of financial adviser services, encouraging public confidence in roboadvice.
The committee said the FMA would also need to be sure that the consumer protection involved was no less than that offered by personalised AFA services.
“As a consequence, as level a playing field as is possible is created for the mode of delivery of personalised services. Our primary concern is to ensure that the integrity and effectiveness of the code is not undermined through the grant of the exemption contemplated in the consultation paper.”
The FMA has suggested imposing limitations on roboadvice, potentially including a limit on the amount that can be invested, the total funds under management, or the types of products that could be involved.
The code committee rejected that idea. “Either the provision of personalised roboadvice is consistent with the purposes of the FAA and is able to be delivered subject to the same minimum standards as apply under the code, or it is not.
“The only limits placed on AFAs in providing personalised services are those driven by the AFA’s competency and abilities, as provided by the Code. A similar approach should apply to personalised roboadvice.”
The committee said roboadvice providers should be required to put clients’ interests first. “We disagree with the FMA’s comment that requiring personalised roboadvice to be provided with integrity is not directly applicable.”
It said roboadvisers should have any lesser standard applied when it came to presenting themselves as independent.
Comments (23)
Brent Sheather
Wow they have only been going for five minutes and already said something silly, illustrating a lack of knowledge. There is no existing “level playing field for advisors” in terms of standards. The FMA are on record saying as such. The regulator has told us that “putting clients’ interests first means different things to different organisations” e.g. if you are wearing an ASB polo shirt and only have relatively high cost products to sell that’s fine with us. Similarly if you are a robot programmed just to sell high cost Westpac products (“would you like insurance with that”) presumably that’s all good with the FMA as well.
This is disappointing stuff from the Code Committee but not at all surprising: about a quarter of the Committee appear to have no clue whatsoever as to what best practice looks like and a good number of the rest appear to be more familiar with bad practice.
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7 years ago
Stephen O'Connor
The only one who has said something silly is you Brent. This submission is from the Code Committee, not the Code Working Group! Also fyi the Code Committee (of which I am a member) is independent from the FMA and may not agree with everything they say.
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7 years ago
Clayton Coplestone
Whilst I don't want to be "that guy", this announcement from the Code Committee smacks of marketing 101: attempting to provide comfort to an already disinfranchised audience
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7 years ago
Clayton Coplestone
From another perspective- perhaps the starting point is to define what is roboadvice... with many of the current interpretations simply "marketing calculators" by another name
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7 years ago
Regan Thomas
Thanks Barry.
Qeustion: Who writes the algorithms, chooses the products and provides the tech?
ASB's robots aren't going to use OneAnswer are they.
The client may not have "direct involvement with a human adviser", but the outcome is absolutely the same.
What we are going to end up with Robots wearing Polo Shirts. Sounds like a great Emmerson cartoon, actually.
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7 years ago
Brent Sheather
Hi Stephen
Thanks for that and thanks for putting your hand up. I think it is great that this issue is at last being publicly debated by a member of the Code Committee. My view is that either way whoever implied that “we have a level playing field for advisors”, it was a stupid thing to say given the reality in NZ.
In light of your comment that “the Code Committee is independent from the FMA and may not agree with everything they say” do you think that “putting clients’ interests first” can mean different things for different advisors? Secondly can an AFA who only sells a vertically integrated organisations higher cost products be putting clients’ interests first given that all the institutional investors in NZ invest through a mix of passive and low cost active funds and diversify over different managers? Put another way would you invest your own money through one particular NZ fund manager who employs AFA’s and who’s funds have an average MER in excess of 3% pa? Is this putting clients’ interests first? Wait to hear from you.
Regards
Brent
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7 years ago
Stephen O'Connor
Hi Brent
I am happy to respond with my personal views as I am not able to speak on behalf of the Code Committee.
Do I think that “putting clients’ interests first” can mean different things for different advisers? No
Can an AFA who only sells a vertically integrated organisations higher cost products be putting clients’ interests first? No
Would I invest my own money through one particular NZ fund manager who employs AFA’s and who’s funds have an average MER in excess of 3% pa? Highly unlikely
This issue could have been addressed during the review of the FAA had there been a distinction created between ‘advice’ and ‘sales’. Given that this has not been done the issue remains unresolved.
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7 years ago
Alan Kelly
It really is difficult to argue with Brent on this one. He is quite right.
All that the Code Committee have done here is to expose their deep lack of understanding of what it means to put clients' interests first. And not only that. The Committee seems to have little understanding of just how diverse the financial services industry is.
The irony in all this is that, if they really want to put clients' interests first, financial advisers might one day be compelled to refer many client requests for advice to a roboadviser.
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7 years ago
Brent Sheather
Hi Stephen
Thanks for that and it is good to hear that at least one Code Committee member is putting clients interests first. What is sad however is that your views don’t seem to be the Code Committees view. That would explain why the Code Committee would make the ridiculous statement that “we need a level playing field for robo-advisors” when the level playing field is not level. Advisors who are not wearing “polo shirts” are required to put clients interests first whereas those who are dressed in polo shirts are allowed to put their employers interests first.
The really sad thing is that if you put this information in front of any sensible person they can see that the regulatory system has indeed been captured by the vertically integrated organisations who benefit from this ruling at the expense of retail investors. My view is that this sort of regulation brings the industry into disrepute just like the finance company debenture debacle did. It’s hugely ironic that a number of FMA members are on record as saying they do not invest their own money with the polo shirt wearers and instead opt for low cost products. Very embarrassing for New Zealand and everybody concerned. My guess is that the FMA is between a rock and a hard place - the only hope for a resolution is that we embarrass the government into doing the right thing.
By the way I don’t think a distinction between advice and sales would sort things out for retail investors. Sales people are not going to tell their clients that they could get a better deal somewhere else. The rule to put clients interests first should apply equally to everybody. Peoples retirements are more important than bank profits. The FCA in the UK and other European regulators at least appear to be moving in the right direction.
Regards
Brent
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7 years ago
Stephen O'Connor
Thanks Brent.
An interesting discussion but let’s get back to the Code Committee submission, the document makes no claim that a level playing field currently exists. The key point is that the Committee doesn't want any exemption granted to tilt the playing field to allow roboadvise to be offered on a lesser set of standards than are imposed on AFAs.
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7 years ago
W K
pls allow me to use this example - maybe just hypothetical to some but real to others.
client insisted using a particular rfa, and no one else for his kiwisaver because he is an honest bloke and has genuine interest in all his clients.
client opted to invest in funds which the rfa knew is not suitable to this client. rfa can't tell client because he is not an afa though he is qualified to be one and the law does not permit to tell his client.
is the rfa putting his client's interest first?
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7 years ago
Murray Weatherston
@w k
Nothing is simple. Let me muddy the waters and demonstrate.
First, the answer depends on what you mean by "putting his clients interests first" - the thorny perennial issue.
1. Under Exposure Draft FSLAB, PCIF is restricted to conflicts of interest.
If Kiwisaver manager is providing rfa a trail, and rfa has told client, and there are no other conflicts to disclose, then the answer is yes, he has PCIF'd.
2. If PCIF means something else? Then first you have to define what that something else is, before you can have a guess at the PCIF answer.
Second there are several advice issues in these simple facts
3. If engagement is Execution Only - i.e. the client has decided what he wants and rfa has merely implemented, then FAA doesn't apply.
4. Class advice - not true rfa can't advise about unsuitable fund. Since he's not AFA he can't give personalised advice. But he can give class advice like a bank teller - "Mr Client, people who are like you (in your class) would normally not do that; rather they would do this". Then to see whether rfa had PCIF, solve 1 and 2. But under FAA answer doesn't matter because rfas not subject to the Code.
5. Of course, nothing to stop rfa referring client to an AFA (or his local bank....just kidding). Of course rfa should disclose whether AFA is cutting a deal with the rfa.
Dog's breakfast?
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7 years ago
W K
wow .. thanks murray. all that for those trial comm? i am assuming those with under $50k in kiwisaver (i think majority of ksavers fall under this category) will find it expensive or can't afford to pay $1-2k fee for an afa advice - assuming to make an afa's time + responsibility + liability + compliance worthwhile they're have to charge more than $1k for their advice.
just my thoughts.
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7 years ago
Brent Sheather
Hi again Stephen
Let’s think about what you just wrote. You said “the document makes no claim that a level playing field exists”. Then you said “…….a lesser set of standards than are imposed on AFA’s”. Which set of standards imposed on AFA’s? Are you referring to the standards that are imposed on AFA’s without polo shirts i.e. that products must be suitable and chosen from the entire universe of options, as nicely explained by Mr Everett? Or are you referring to the standard for an AFA with a polo shirt on, again set out so clearly by Mr Everett, that the product must be suitable but may be limited to their employers limited portfolio of unsuitable, i.e. higher cost, products? By referring to a common set of standards the silly old Code Committee, in its naivety, is making a claim that a level playing field exists when it demonstrably does not. There is no level playing field – one group is held to a different standard than the other. Obviously this interpretation of the law has been made to suit the vertically integrated organisation. It is very obvious to the man in the street when I explain it to them that the law has been captured and, as I said before, it brings the industry into disrepute. Compare the situation in NZ to how it works in the UK as per the RDR. Does that makes sense to you?
I have always argued that, starting from the very first Code Committee, the selection of members has been very poorly undertaken and this is one of the reasons we are where we are now. We all remember what happened to that first Code Committee don’t we! It was hilarious.
Regards
Brent Sheather
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7 years ago
Peter Smith
Thought I might dip my toes on the subject. Specifically, “best interests of the client”. A simple and seemingly innocuous statement, though it seems to have been interpreted to suit both sides of the argument.
The vertically integrated society, uses this to “manage” their offerings by masking their selections of related companies under the guise of “we know their business”, economies of scale, we can manage the risk for our client.
The independent adviser uses the term to attack the vertically integrated companies on the basis that they cannot deliver advice in the client’s best interest as they limit the selection to their own products, which are characterised by an average return less costs.
Personally, I don’t think either side is right 100%, but there is a balance.
An adviser can comfortably meet the needs of a client using their own products. The client of course has the ability to choose who they work with. I think this whole fuss could be solved over time, as investors become more astute with regards to mediocre performance and the costs they pay to achieve it. The client can vote with their feet.
It really depends how far down the rabbit hole you want to go. You can manipulate the term “best interests” to suit any number of arguments, both for the affirmative and the negative.
Personally, the client’s best interests are aligned to their goals and what they want to achieve. Do I care if they choose an index strategy over an active strategy to help them get to their long-term goal? No, they key point is that they are participating.
Let me pose a question to all here: In the client’s best interest – should this also extend to when an adviser decides to sell their business? If you answer with the fact it is the customer’s choice to stay, then that is also your answer for “best interests when they are contemplating an investment service”.
Robo-advice? Well it is another form of advice, and whilst the bank’s will be well placed, and no doubt be poised to go live with their offerings, it will be another avenue of service, that’s all. You can find examples now, perhaps the largest NZ active manager, where they happily use the “class advice” process to circumvent giving personalised advice. Yet no-one suggests that this is not in the “client’s best interests”.
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7 years ago
Murray Weatherston
@smitty
I don't mean to demean your contribution.
But it illustrates clearly one of the major problems in the ongoing debate.
Your comment is replete with references to "best interests" and "best interests of the client". However the standard/duty in both the current Code and in the ED of FSLAB is "put the client's interests first".
I will keep pointing out until my dying day that these two duties are not the same.
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7 years ago
W K
@murray: "best interests" and "best interests of the client". hahaha, i agree.
if i may follow this up with the analogy posted earlier - if the rfa is qualified enough (ok, ok, ok, disqualified by law because he didn't pay fee$ to get himself registered as an rfa) to advice his client, is it then to the client's best interest to pay an afa for the same advice which the rfa would have given for free???
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7 years ago
Murray Weatherston
@w k
You're not confusing BI with PCIF as well in this question, are you? "Best interests of the client" is not the same as PCIF!
So i will answer your question as though it addressed the PCIF standard.
My guess is if the client wanted "personalised advice" then the rfa is home scot free because the law does not allow him as an rfa to give personalised advice. How could you ever be held to be in breach of a duty that applies to an activity the law prevents you from carrying out?
If however the client would have accepted "class advice", what duty anyway says the rfa was obliged to provide that advice to that client.
If you take the line (which to be clear I don't) that PCIF means the rfa was so obliged, then what is the rfa's defence against the other regulator who says that says "class advice was not sufficient in this case and the client needed personalised advice - you're pinged for not PCIF by referring him on to an AFA who is allowed to give that advice!
And where would those interpretations leave us? I'd say fishing and/or playing tennis (but not at the same time.....)
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7 years ago
Peter Smith
@ Murray W - Forgive the apparent incorrect use of the best interests term. It's a shame that the thrust of my comment has been lost to not using the correct phrasing.
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7 years ago
W K
@murray: ummmm ... let me guess ... it leave us between a rock and a hard place? and i suppose that's where "they" want us to be?
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7 years ago
Natasha Silvestri
and all of you are talking about investments - what of insurance? where the vertically integrated insurance adviser's solution may pay nothing for a particular level of cancer when other provider's policies might pay the full sum insured, potentially millions of dollars! policies mioght pay the
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7 years ago
Murray Weatherston
@Tash
Same will apply to insurance (and every other type of financial advice if FSLAB is passed in its current form.)
Once again the answer depends what the enforcers (and ultimately the FADC) believe the standard means.
But beware of using this debate simply to bash the VIOs.
Tash compares the situation between a non-tied's preferred insurer and a VIO insurer - and suggests the former may have better cancer cover.
But since not all lifies use the same carrier, what happens if you advise the client to buy Company A's policy, whereas I would have advised Company X's policy, and company X would have paid out a lot more on the same facts than your Company A.
Have you have met the standard to which you were holding the VIO?
We advisers should be very wary about signing up to any standard that has the word "best" in it - grammarians will recognise that "best" is a superlative - the top of the tree. There can only be one "best". If you start advocating for "best" be very sure that everything you recommend would meet that superlative criterion.
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7 years ago
Natasha Silvestri
Thanks Murray. My point is simply that life, trauma, income protection etc policies are most definitely not equal and one should not assume less generous policies come with lower premiums.
Selecting the right provider's policy is an issue where good advice can make a massive difference come claim time. As a policy holder paying a premium, who would not want the greatest possibility of getting a claim paid when poor health strikes?
Objectively justifiable advice, without prejudice, adviser self-interest or obligation to use a particular provider, is what everyone needs (but most don't understand that).
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7 years ago
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