There are those who would argue that compliance requirements restrain a business from flourishing. This is not the case where the practices of the financial planner marry their obligations with business development, to the effect that their common practices equate to best practice.
Let us consider Ms Client for a moment. Ms Client has $5000 to invest. She sees a financial planner in an effort to find the best investment. Planner A asks her a couple of questions and then starts talking to her about different products. Ms Client now feels she has some idea about investing. She walks away with a recommendation to invest in what seems like a sound, suitable product.
On the recommendation of a friend, Ms Client also meets Planner B. Planner B spends time getting to know her and getting to know what she wants to achieve. He talks to her about investment markets, asset classes and risk and return. Ms Client is extremely comfortable with Planner B and feels he is really interested in helping her. She is surprised at how much information he collected and how informed she feels about the concepts they discussed.
After another meeting Ms Client walks away feeling full of knowledge and confident in her financial future and Planner B has created an environment where he truly knows his client.
As a result, Ms Client now has recommendations in relation to an investment for her $5000, risk and general insurances, estate planning, and superannuation.
What is the issue here? In both cases the client has walked away with an investment, which is what she wanted.
The issue centres on what is the most appropriate advice for the client and the extent to which she is placed in an informed position.
In the first situation, the client is left exposed due to the lack of consideration of her insurance, estate planning and retirement situations. This exposure extends beyond the client, though, and to some extent, may also rest with Planner A, who has failed to recognise and make efforts to address these issues with the client.
ASICguidance on the issue indicates the importance of making reasonable inquiries in order to obtain information from the client.
A client that presents with only one outcome in mind isn’t necessarily a client without other needs. In the same way that we expect doctors to analyse our symptoms to diagnose and treat all of our ailments, financial planners are expected to address all aspects of their clients’ financial health and advise them of remedies where appropriate.
Ms Client has also been provided with a recommendation during her first interview with Planner A. For most clients the first interview will not be the most appropriate time in which to receive advice. The client’s situation and experience may dictate the need to spend more time collecting information and understanding the client’s circumstances in order to provide the most appropriate advice. Ensuring the client returns for a second or third interview is an exercise in pre-positioning the client and selling to them the merits of spending more time ensuring everything is addressed.
This is not only a method to ensure the client is placed in the most informed position but a powerful needs-based sales tool. By identifying and addressing the gaps in Ms Client’s financial situation, Planner B has also drawn out more business from the client.
In discussing the need to ensure the client is in an informed position about their situation and the potential implications of the recommendations we need to consider whether merely informing the client is enough.
Best practice would indicate it is not. A planner can provide the client with as much information as they can find, but it will still not mean that the client has any better understanding or is any more informed. Therefore it is extremely important from a consumer protection and relationship building perspective that the clients are educated through the financial planning process.
Educating a client needs to encompass a ‘teach and test’ regime whereby the financial planner delivers the information and gauges the client’s understanding and acceptance of the implications for their situation. This method is never more important than in discussing with a client their tolerance to risk.
To a financial planner a conservative investor is someone who is generally risk averse, opting toward defensive, income-generating asset classes. A conservative investor from the client’s perspective however, may be someone who only invests in blue chip shares. This not only illustrates the requirement to educate the client but also the obligation to adequately assess the client’s risk tolerance.
Well-educated, well-informed clients are invaluable, they are the ones who refer their friends and colleagues to their financial planner and who ride through the market downturns safe in the knowledge that their planner had warned them there would be times like these.
As a client, nothing makes you feel more empowered than a financial planner who has educated you through the process and as a compliance officer, nothing makes you feel more confident than a financial planner who chooses to accompany their clients on their life journey.
It is imperative to remember that embodied in all best practice is the general obligation for financial planners to conduct business “efficiently, honestly and fairly”. Stepping back from the detail to examine compliance with this requirement is a worthwhile exercise.
Whether we choose to refer to it as holistic planning, lifestyle planning or financial planning the fact remains that educating clients and addressing their entire situation will always be best practice, and thus should always be common practice.
Jennifer Smith is assistantmanager compliance, financialplanning, with HSBC.
