Why the best interest duty is in our best interests

BT’s Bryan Ashenden explains why the best interest duty is in everyone’s best interests.

“It gives me great pleasure to announce significant reforms to the provision of financial advice, which I believe will improve the quality of advice, strengthen investor protection and underpin trust and confidence in the financial planning industry. These reforms should ultimately encourage more people to seek financial advice.”  

With these words, the then Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP released the Government’s initial response to the Future of Financial Advice (FOFA) reforms on 26 April 2010. 

Many of the Government’s announcements since that time have focussed on restoring trust in the financial planning industry that may have been eroded as a result of the global financial crisis (GFC) in 2007/08.

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In fact, it is a clear foundation underpinning the FOFA reforms that people should have transparency over what they are paying (and what for) and trust or faith in what they are receiving. 

Whether or not you agree with the final formulation of the best interests duty, or the seven steps in the safe-harbour approach to fulfilling it, I have yet to find a single person (adviser or client) who doesn’t believe that acting in the client’s best interests is the right thing. Many would also argue that they have been operating at this standard in a pre-FOFA environment. 

If this is the case, then do we really have a trust issue at all? The answer to that is definitely – yes. And the evidence for this is clearly evident from an annual survey conducted by Roy Morgan on the image of different professions (see Graph 1). 

When asked from what they know or have heard, how would they rate or score financial planners for honesty and ethical standards, only 25 per cent of the respondents rated the answer as “very high” or “high”. 

Financial planners ranked only 18th out of the 30 professions mentioned. This must be concerning for the financial planning industry overall. 

There are plenty of ways to try and spin statistics.

For example, if the survey was prefaced with the question “do you currently seek (or have you ever sought) advice from a financial planner?” and then only those who answer “yes” are asked to rate financial planner’s honesty and ethics, there is no doubt that the rating would be significantly higher. 

Many studies in the past have shown that people who have an adviser have felt more comfortable during difficult times, such as the GFC or during more recent times of market volatility. 

But we also know that advice is out of the reach of far too many Australians, and that of even those who could afford to obtain it, not enough do. Why is this? 

There is no doubt that the financial planning industry has often been portrayed in a bad light. We often hear about those situations where a client has not been treated appropriately by an adviser and has lost substantial savings.

After all, bad news sells. And for those who have not yet sought advice, it does scare many of them away. 

Is it a bridge too far? With such a low starting base, is it possible to turn around this overall perception? The answer is yes. In fact, some of the answer lies in the results from Roy Morgan’s research itself. 

 When you look at the top three professions – nurses, doctors and pharmacists – it is no surprise that these professions are very favourably viewed. 

Most people have had an exposure to someone in these professions, and so can make an honest self-assessment, rather than being unduly influenced by negative press etc. 

Even when we hear stories in the news about a poor, or even disastrous experience someone may have had with a doctor, it doesn’t change the general public perception.

But also think about what it is that these professions do – they look after people’s health, helping them to live longer and, hopefully, a better quality of life over a longer period of time. 

The next grouping of professionals covers teachers, university lecturers, judges and police. These people are involved in education, conveying complex topics in a way so that people understand, defining the rules which we agree to live by and holding us accountable to those. 

Then consider the role of a financial planner. What is that we do as an industry (today) but with a view to be a profession in the future? 

Financial planners do many of things covered by these highly regarded professions: 

• We help people plan their financial health, diagnosing problems and recommending solutions. 
• We aim to assist clients to have the quality of life they want, both today and in retirement. 
• We recommend solutions, such as insurance, to act as safeguards in the event that things don’t go to plan. 
• We take complex topics and legislation and try to convey it to our clients in a way they will understand. 
• We educate clients – about their choices and options, about how the financial system works. 
• When we successfully engage our clients to enter into an on-going advice relationship, we have a role in holding them to account to ensure they stay on track with their plans. 

By clearly demonstrating our role as a financial planner in educating, assisting and guiding our clients to their future financial health goals, financial planners can definitely regain the trust and faith of the broader community. 

Of course, this is not to assume that any of this is easy. But the introduction of a duty to act in the best interests of our clients when providing advice is a step in the right direction. 

I’ve deliberately left out the narrowing terms of ‘retail clients’ and ‘personal advice’ – why should that actually make a difference? Shouldn’t we have the same duty to all clients? 

The use of “best” in this duty has created a lot of concern as it tends to imply perfection.

But the regulator has been helpful in this regard, explaining that their interpretation and enforcement of the best interests duty (and other related obligations) will come down to a broader test of whether, if they were to act on the advice, the client would be in a better position?

Not the best, not necessarily cheaper, not necessarily financially better off – but in a better position. 

It puts such a strong focus, and rightly so, on ensuring that any strategy and product recommended can clearly be tied back to the goals and objectives that client is trying to meet. 

If, as is expected of most of the industry, you are going to approach the best interests duty by targeting the seven safe-harbour steps, there is a single requirement that stands out.

Throughout the majority of the seven steps, there is an emphasis on the client’s objectives, financial situation and needs, or alternatively referred to as “the client’s relevant circumstances”. 

The clearer you are able to be on these, the more defined they are (the use of SMART goals etc), the easier it should be to demonstrate compliance with the best interests duty. 

And again, it makes sense – we are here to assist clients with their goals, not ours. Clients should take priority. 

The best interests duty should not be seen as an impediment to providing advice in the future. Sure, it helps us to ensure we do things right, but it really puts the emphasis on doing the right thing. 

It should lead to shorter Statements of Advice, but supported by more comprehensive file notes. The best interest duty looks to process, not outcomes. 

But at the end of the day, can it lead to an increased level of trust? For the broader community, they will now start to see that financial planners need to adhere to a much higher standard. 

When they see that in action, and it’s incumbent upon all of us to share the good news stories, trust will start to return. As stated at the outset, many planners already operate at this level with the right intent. 

If you are in this group, then the changes should be minimal for you. But your clients will now hear that you have to operate at a higher level. 

Don’t let them think you didn’t in the past – show them that you were. 

After all, it’s not your clients that view financial planners poorly – it’s the majority of Australians who to date haven’t sought or had the ability to access good quality financial advice. 

If what for many amounts to change in legal definition helps restore this trust, then isn’t in our best interests to applaud and support it? 

Bryan Ashenden is head of technical at BT Financial Group Advice.