“Sometimes love just ain’t enough”
— ASIC Consultation Paper CP 215 “Assessment and approval of training courses for financial product advisers: Update to RG 146” (or, possibly, Patty Smyth ft. Don Henley “Sometimes love just ain’t enough”)
Zen and the art of product replacement
Even for people with a romantic view of financial advice, product replacement can be a little tricky sometimes.
Even without the additional complexity imposed by the Design and Distribution regime, the increasing number of product and platform options, the sheer variety of product research and increasingly onerous stakeholder expectations for qualitative, quantitative and objective analysis is almost paralysing.
Even those who prioritise strategy, and see products as only partial tactical solutions to complex needs, understand that product matters. In fact, product replacement remains a key source of risk for many advisers including advisers who otherwise exceed common practice.
Despite the popular criticism of financial planning, few advisers prefer a “one-size-fits-all” approach to product replacement but, for a variety of reasons, struggle to find a research methodology that reconciles commercial realities with their aspirations and external expectations. This is, in some respects, both surprising and depressing. After all, this has always been a core obligation for advice professionals.
We can’t guarantee to solve the over-arching problem in less than 500 words but we can share our views on how to conduct a reasonable investigation into financial products that “might .. meet the needs of the client”.
Learning from Harbourmasters
“In his final report, Hayne recommended that the Safe Harbour provision should be repealed at the end of 2022 “unless there is a clear justification for retaining it”. ”
— The Fold, “What’s next for the financial advice safe harbour provision?” (poetry) 25 September 2019
If you’ve been reading Three Hit Tuesday for some time, you’ll know that we were “anti-safe-harbour” before Commissioner Hayne made it cool; and for exactly the same reasons.
As terrible as s961B(2) is for promoting quality, agency and independent thought, it does (like all checklists) provide clear expectations and a clear methodology for advisers trying to understand their obligations.
You know, I’m sure, that s961B(2)(e) suggests that, prior to recommending a financial product, an adviser acting in their clients’ best interest will:
(i) Conduct a reasonable investigation into the financial products that might achieve those of the objectives and meet those of the needs of the client that would reasonably be considered as relevant to advice on that subject matter: and
(ii) Assess the information gathered in the investigation.
Of course, the adviser also needs to “base all judgements in advising the client on the client’s relevant circumstances” and “take any additional step that….would reasonably be regarded as being in the best interests of the client” but the need to investigate possible product solutions, before recommending them, and to consider the results of that investigation are at the heart of an adviser’s professional duties.
Now, we’ve always held the position that the best interest duty is not just a process (but the result of intent, process and outcome) but process, and, in particular, consistent, predictable and considered process, is what differentiates advice professionals from their peers .
One of the key steps, that is frequently overlooked by many advisers, is critically assessing the information they obtain as a result of their research process- s961B(2)(ii). This is a shame because these advisers’ files often record the time spent discussing and considering investment styles, preferences, options and strategies.
Knowing details, understanding inner workings, and mastering mechanics
“Sometimes it’s a little better to travel than to arrive”
— Robert M. Pirsig, Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values
Uncovering a client’s objectives, needs and preferences yields critical information (and anchor-points) to support strategy you’ll construct to help them reach their goals; more fundamentally, these conversations set the direction you’ll travel and guide you towards better product selection.
If, during your discussion around options, you realise that your client wants (and needs) a simple, low-cost approach to their investing; then your product selection process has a clear starting point and defined parameters for your consideration of alternate strategies and products. This insight, tempered by an objective, considered and methodical process will inevitably lead you to an appropriate recommendation. Conversely, if you start with the product to be recommended (as some advisers do) the solution will appear confected and the recommendation forced and inappropriate.
In our experience, it’s the quality of these discussions, and the breadth of the adviser’s enquiry, that is the best lead-indicator of their professionalism; their product selection process is generally more reflective and more tightly focused on effective execution. They’ll also more consistently consider and record alternative products and strategies.
Beyond demonstrating the qualitative and quantitative assessment undertaken by the adviser BEFORE providing their recommendations, the law requires an adviser (recommending a financial product) to conduct a “reasonable investigation” (961B(e)(i)) and “assess the information” (961B(e)(ii)) they gathered as a result of that investigation.
The trouble with principles, apart from their inconvenient nature, is that they lack the prescription some advisers want and others desperately need. Far be it for us to presume to set standards for product replacement but, after reviewing over 12,000 advice files, we’d suggest that a “reasonable investigation” should at least consider:
- The current product (as is and with changes)
- An alternate but not recommended product
- The new and recommended product
Most times, the above approach will be sufficient, but we wouldn’t recommend that you rely on a static method in lieu of your own professional judgment. At the risk of upsetting the lawyers, we’d also suggest that it’s insufficient to refer to this analysis in the absence of any proof, on file, that you’ve actually considered the research and analysis you did. Frequently, lawyers explain to us that the law doesn’t mandate the scope of the investigation and that it’s perfectly appropriate to assess the “current product” against the “inhouse product” and the default “alternative product”. This is, they assure us, ASIC’s preferred approach.
We don’t (generally) provide legal advice but, from a practical perspective, we don’t think that simply listing three options satisfies 961B(e)(ii). It doesn’t prove the adviser’s consideration of the options and, by using two default options, you’re more likely to be selling financial products than providing financial advice which requires, in our view, the bona fide consideration of genuine options and alternatives.
Context, as Bill Gates asserted in 1996, is King. I appreciate that he wrote “content is king” but I’m sure he’d agree that context matters more.
From an advice perspective, context is critical to assessing ‘reasonableness”. In my view, to be satisfied with the adviser’s research and investigation, I’d expect the adviser to have considered, not three options, but as many options as necessary to support the recommendations and to manage any potential conflicts. I’d also expect them to take further steps if required.
As a general rule, clients that do not have complex circumstances or complicated needs, generally may require less research to be conducted. The existing product and a couple of others may be enough.
However, if a client has a higher level of complexity within their situation (or additional needs), you may need more.
I’d also suggest that where the adviser (or their Licensee) has an existing relationships or association with a product provider, there’s a desperate need to undertake additional research and analysis. The adviser has to prioritise their clients’ interests, so, depending on the specifics of these relationships, and their impact, additional steps may need to be taken if these products are recommended or compared.
If a platform service is being used to hold the portfolio, then the same principles need to be applied to the service and portfolio. Considering one platform, and one portfolio alone, is not sufficient to demonstrate compliance with your professional obligations.
We’d like to reiterate, and emphasise, that your research process does not have to include every product available, but it’s very difficult to confirm the adequacy of your approach if your file only contains a ‘to’ and ‘from’ comparison.
Your approach doesn’t have to be perfect, flawless or unchallengeable but your file should demonstrate that you considered, tested and validated (or discarded) a reasonable number of strategies and products, before recommending any replacements.
- Be very clear what the strategy is and how it was arrived at prior to commencing the product research process.
- Conduct independent research.
- Don’t rely solely on one source.
- Go above and beyond the minimum (but focus on quality over quantity).
- Step outside the APL if required.
- Uncover the drivers behind client preferences.
- Prioritise with the client and consider the features which they are willing to forgo, or pay extra for.
- Include quantitative and qualitative assessments.
Why comparing comparable options matters
Do I always have to do a like-for-like comparison?
A better way to approach this is to ask is whether the existing product is meeting the client’s needs and objectives, or whether it might (or come close) after changes.
It is difficult to demonstrate that adequate consideration has been given to the existing product if it is compared ‘as is’ against new alternatives instead of comparing the ‘changed current product’ against new alternatives. If you decide that the existing product cannot be made suitable, or it can, but your experience and knowledge leads you to believe that there may be a better option, then this assessment is your starting point – not your end point.
Whatever criteria, and strategy, you applied to the existing product should now be applied to the alternative products (like-for-like).
Please appreciate that in our view, a bona fide assessment process needs to include comparisons and an analysis of the information collected. Simply noting alternative options (or an APL) on file is not sufficient.
There are a few different views on what like-for-like comparison is, so here’s an insight into what should be on the file.
First and foremost, a thorough investigation into the existing product and hopefully some notes for context.
Secondly, an investigation into a number of alternative products that are consistent in the following aspects:
- Values of the investment(s).
- Client’s risk appetite.
- Asset weightings between products assessed.
- Type of service and style of product that is being recommended (SMA vs SMA).
You might choose to address some aspects of the alternate strategy and product selection process within the commentary, but simply stating that something occurred is not sufficient. The commentary should support and clarify the information on file, not replace it.