Managed accounts could breach Standard 3

Financial advisers using managed accounts could be in conflict with the Financial Adviser Standards and Ethics Authority (FASEA) code’s Standard 3 on conflicts, according to The Fold.

An analysis by the law firm said the majority of managed accounts were white-labelled by, or associated with, financial advice licensees which made them in-house products. When advisers recommended them to clients they would generally receive a direct or indirect benefit and this created a conflict of interest.

The analysis noted that FASEA said Standard 3 only prohibited advisers acting in the fact of actual conflicts and did not apply to potential or perceived conflicts. Managing a potential conflict would ensure that it did not become an actual conflict.

It said advisers needed to manage any potential conflicts by ensuring the advice provided was in the client’s best interests.

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The Fold said advisers thinking about recommending a managed account should consider:

• How the managed account is likely to satisfy the client’s needs, objectives and preferences; and
• Whether the client is likely to be in a better position if they follow the recommendation.

“Many advisers have some form of ownership interest in the business that operates the managed accounts they recommend,” the analysis said.

“According to FASEA, sharing in profits generated by the provision of ancillary products and services (like managed accounts) doesn’t breach Standard 3 provided that the ancillary products and services are:

• Merely incidental to the adviser’s dominant purpose in providing advice; and
• In the best interests of clients.

“An adviser will breach Standard 3 if the dominant purpose for providing advice is to derive profits from ancillary products and services.”

The Fold said it expected that advisers who recommended related-party managed accounts would attract more regulatory scrutiny in future but that Standard 3 “isn’t a death knell for managed accounts”.

Advisers, it said, could still recommend managed accounts by following a robust advice process that included:

• Identifying the client’s needs and objectives. Ask questions to draw out the client’s preferences and priorities. Find out which product features and benefits (if any) are important to them;
• Researching investment solutions that are capable of satisfying the client’s needs, objectives and preferences. Learn about the benefits, risks and costs of each option;
• Investigating the client’s existing investment solution and conduct a detailed comparison of that solution compared to the managed account;
• Benchmark the fees and costs of the managed account you’re considering against the broader market. This is to ensure that the fees and costs are reasonable and represent value for money for the client;
• Tailoring advice to the client’s circumstances. Link each recommendation back to the client’s needs, objectives and preferences;
• Explaining how the managed account satisfies the client’s needs and objectives and why it is likely to leave the client in a better position; and
• Taking steps to ensure the client understands the benefits, costs and risks of your recommendation.