Fiduciary duty could add to advice complexity and cost

Not many financial planners and dealer groups have thought enough about the practical implications of fiduciary duty on advice processes and systems, says the managing director of E & W Strategic Partners, Lap-Tin Tsun (pictured).

The practice management consultant said while the middle bulk of the financial planning community was facing up to the likelihood of a fee-for-service world, not many had thought too deeply about proposed mandatory fiduciary duty.

Tsun said while the details of the Future of Financial Advice reforms had not yet been worked through, looking at other professions with a fiduciary duty, there was a likelihood it would require advisers to act in the best interests of the client. It was therefore an interesting discussion point as to whether there would be a shift away from what was ‘appropriate’ advice and product to meet the client’s needs, to what was the ‘best possible outcome’ for the client based on a variety of options.

“It changes the standards of the way advice is assessed,” he asserted.

Tsun said that in terms of current business models, financial planners would give a client a recommendation based on their needs and objectives.

“That’s fine,” he said, “but in a fiduciary duty world we’re talking about always working and delivering advice in the best interests of the client. Just because you’ve given me a recommendation that ‘helps’ me achieve my goals, is that the ‘best’ way to achieve my goals? It’s a subtle difference. Do planners need to start comparing or demonstrate by giving the client various options of how they can reach their goals?”

Tsun also questioned whether, when it came to products, an adviser would have to demonstrate that there were no other products available in the market that would achieve the client’s goals more quickly or cheaply.

“I haven’t seen any financial planners compare or provide different options or scenario situations in this way,” he said, adding that it would be a significant change and he doubted whether any financial planning software currently on the market would be able to support it.

“This is all hypothetical because we don’t know what the legislation will say when it comes to fiduciary duty, but we need to debate these things because no one has given any guidance, had any discussion or painted a picture as to what fiduciary duty will look like. Therefore, no one has prepared for it,” he said.

At the end of the day a comparison tool was required, he said, which would add time and complexity and, from a fee-for-service point of view, the advisers would have to cost it into their business.