Published on October 13, 2014
1. The Role of Price and Product Comparison in the Sales Process required of Authorised and Registered Financial 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity Risk Compare, comply – with technical help! 10.45-12pm Presented by: Alan Rafe Thanks to the support of our Premier Business Partners: Advisers
2. The Foundation Requirement to Act with Care, Diligence, and Skill in all Financial Advice Services •The Financial Advisers Act 2008 requires all financial advisers to act with care, diligence and skill in providing their services to clients. •The overarching purpose of the Financial Advisers Act 2008 is to “promote the sound and efficient delivery of financial adviser and broking services, and to encourage public confidence in the professionalism and integrity of financial advisers and brokers.” 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity Advisers must: •Act with reasonable care, diligence and skill. •Ensure they are not misleading, deceptive or confusing. This session looks at: 1.The examples given and explores what they mean, and considers areas where practice standards which were once common may need to change. 2.Functional requirements to meet each recommendation and mechanisms you can use to meet them .
3. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity FMA Requirements This introduction to what the FMA expects clearly identifies three requirements: 1.Assess suitability 2.Explain key features as well as limitations 3.Explain limitations on the service It is then explained that: •There must be records to show that this has been done, and in case there was any doubt, the requirement to disclose and manage conflicts of interest arising from commissions or their remuneration is reiterated. •Additional requirements apply to Authorised Financial Advisers, which also serves to highlight that these requirements apply to Registered Financial Advisers.
4. Code of Professional Conduct Previous Code Standard 6, Explanatory paragraph stated: “When providing fina nc ia l a d vis e r s e rvic e s to a c lie nt, an AFA must: (d) make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation, or analysed by another person upon whose analysis it is reasonable, in all of the circumstances, for the AFA to rely. Current Code Standard 6, Explanatory paragraph states: “When providing fina nc ia l a d vis e r s e rvic e s to a c lie nt, an AFA must:” (c) “make recommendations only in relation to fina nc ia l p ro duc ts that have been assessed or reviewed by the AFA to a level that provides the AFA with a reasonable basis for any such recommendation, or by another p e rs o n if it is reasonable in all the circumstances for the AFA to rely upon that other person’s assessment or review. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
5. Institute of Financial Advisers Codes, Standards and Rules The Code of Ethics, Practice Standards and Rules of Conduct make up a package of requirements for good practice for IFA members. Code of Ethics •There are no specific provisions in the Code of Ethics directly referencing research conduct in relation to products or solutions. Provisions of the Code of Ethics are only applicable in a generic way to research conduct, as captured by the principle headings in the document, Client Interest First etc 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
6. Practice Standards There are some statements in the Practice Standards that might be applied generically to research conduct relating to products but the key provisions appear to be 4.1, “Identify and Evaluate Financial Advice Strategies,” and 5.2, “Identify and Present Product(s) and Service(s) for Implementation.” Under 4.1, the key explanatory phrase is, “The financial adviser evaluates the ability of each strategy to reasonably address the client’s objectives, needs and priorities.” Note that this relates to evaluating a strategy rather than a product. Under 5.2, the key explanatory phrases are: “The financial adviser uses professional judgment in identifying the products and services that are in the client’s interest. Professional judgment incorporates both qualitative and quantitative information. Solutions identified by the financial adviser may differ from those of other professionals since more than one product or service may meet the client’s needs.” 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
7. Rules of Conduct There are a number of statements in the Rules of Conduct that might be applied generically to research conduct relating to products but the key provision appears to be: Paragraph 43: “Co ns is te nt with the s c o p e o f the e ng a g e m e nt, a fina nc ia l a d vis e r sha ll und e rta ke a re a s o na ble inve s tig a tio n o f the p ro duc ts a nd s e rvic e s to be re c o m m e nd e d to c lie nts . A fina nc ia l a d vis e r m a y re ly up o n a n inve s tig a tio n und e rta ke n by a third p a rty p ro vid e d it is re a s o na ble to p la c e re lia nc e o n the q ua lity o f s uch inve s tig a tio n” 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
8. Financial Advisers Disciplinary Committee Decisions Rodney Ian Bourke-Shaw, Finding on 26 Sept 2013, Summary of facts •Breach of (the old) Code Standard 6, findings – (noting that the part of Code Standard 6 relating to analysis has now changed) •Paragraph 41 states: “This Code Standard (6) also embraces an AFA’s obligation to transparently manage conflicts of interest and to only make recommendations in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for such a recommendation •Paragraph 42.3 states: “In FMA’s view, a reasonable AFA in Mr Bourke-Shaw’s position would have made further inquiries and would have continued to analyse RAM after the referral of clients and on an ongoing basis, to ensure that he or she was satisfied that it was appropriate for Oxford to recommend RAM Portfolios to clients.” 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
9. Financial Advisers Disciplinary Committee Decisions Stephen Musaphia, Finding on 16 August 2013, Summary of facts, and Adviser X, Finding on 30 May 2014, Summary of facts. •Both of these cases reference breaches of Code Standard 12, in failing to keep adequate records, but neither directly references failure to keep research records, nor does either case specifically record a breach of Code Standard 6 in relation to failing to conduct adequate analysis. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
10. Authorised Financial Advisers Monitoring Report 1 January – 30 June 2014 • The FMA recommends all AFAs refer to their obligations under Code Standard 8(a)-(c) and that they should be able to justify the rationale of their advice at all times. This means AFAs must be able to show their advice clearly meets the needs and goals of their clients. (pg • Code Standard 9: Put benefits and risks in writing We expect AFAs to set out the principal benefits and risks to their clients where a Category 1 product is being recommended. Given the revisions to this Code Standard, these should always be set out in writing as opposed to just verbal conversations with the client. AFAs should tailor the risks and benefits to their client to ensure that the information is relevant. As good practice, AFAs should consider including information on the principle benefits and risks of following advice regarding Category 2 products too.
11. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity Fair Trading Act 12A Unsubstantiated representations • “(1)A person must not, in trade, make an unsubstantiated representation. • “(2)A representation is unsubstantiated if the person making the representation does not, when the representation is made, have reasonable grounds for the representation, irrespective of whether the representation is false or misleading. “If y o u s a y o ne p ro duc t is be tte r tha n a no the r, y o u ha ve to s ubs ta ntia te tha t, ” Da vid Ire la nd , o f Ke ns ing to n Swa n, s a id . “Eve n if the p ro duc t is a c tua lly be tte r, if y o u we re n’t a ble to s ubs ta ntia te it, y o u’d be in bre a ch o f y o ur Fa ir Tra d ing Ac t o blig a tio ns . Tha t’s the s ting in the ta il. ” “Ad vis e rs c o uld us e ra ting a g e nc ie s o r re s e a rch ho us e s to he lp ”, he s a id . (Go o d re turns a rtic le , 1 8 Aug us t 2 0 1 4)
12. Re a s o na ble Assessed 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity Reviewed Qua lity Qualitative Quantitative Benefits Risks
13. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity Product Replacement Advice “Whe n a d vis ing a c lie nt to re p la c e a n e x is ting p ro duc t with a ne w o ne , a n a d vis e r sho uld c o ns id e r whe the r s /he is g iving (o r the c lie nt m ig ht re a s o na bly e x p e c t the a d vis e r is g iving ) a n opinion o n the d is p o s a l o f a n e x is ting p ro duc t, a s we ll a s the p urcha s e o f a ne w p ro duc t.
14. Product Replacement Advice cont For personalised advice, the adviser should: •Ma ke a n a p p ro p ria te c o m p a ris o n o f the c lie nt's e x is ting a rra ng e m e nts with the ne w re c o m m e nd e d p ro duc t. This will re q uire kno wle d g e o f the te rm s o f the c lie nt's e x is ting p ro duc t. The c o m p a ris o n sho uld be clear, reasonable and balanced. It sho uld no t jus t fo c us o n the be ne fits o f cha ng ing , fo r e x am p le , " the ne w p ro duc t is che a p e r" . Hig hlig hting o nly the be ne fits c o uld be m is le a d ing . •O r, if no c o m p a ris o n is m a d e , info rm the c lie nt o f the lim ite d s c o p e o f the s e rvic e . The a d vis e r sho uld e x p la in tha t no c o m p a ris o n ha s be e n m a d e , the ty p e s o f a d ve rs e c o ns e q ue nc e s which m ig ht o c c ur a s a re s ult o f cha ng ing p ro duc ts a nd tha t the s p e c ific c o ns e q ue nc e s fo r the c lie nt ha ve no t be e n c o ns id e re d . •Fo r AFAs , the s e p o ints will a s s is t with c o m p lia nc e with the Co d e re q uire m e nts , inc lud ing tho s e re la ting to s uita bility a nd lim ita tio ns o n the s e rvic e (Co d e s ta nd a rd s 8 a nd 1 0 )”. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
15. Insurance Replacement “If re c o m m e nd ing re p la c e m e nt o f a n ins ura nc e p o lic y , the c o m p a ris o n sho uld inc lud e : •the m a te ria l d iffe re nc e s in the p o lic ie s re le va nt to the c lie nt, inc lud ing a ny lo s s o f be ne fits s uch a s va lue o r ty p e o f c o ve r •the s p e c ific a d ve rs e c o ns e q ue nc e s o f cha ng ing p o lic y o r p ro vid e r. The adverse consequences m ig ht inc lud e : •a re duc tio n in c o ve r, fo r e x am p le due to a cha ng e in the d a te fro m which p re -e x is ting m e d ic a l c o nd itio ns o r p ro p e rty s ubs id e nc e will be e x c lud e d •the am o unt o f fe e s cha rg e d to c a nc e l the p o lic y •a s p e c ific p e rio d o f re duc e d c o ve r, fo r e x am p le 're dund a nc y c o ve r will no t be a va ila ble fo r the firs t thre e m o nths '. •If no c o m p a ris o n is m a d e , the g e ne ra l ty p e s o f a d ve rs e c o ns e q ue nc e s a bo ve sho uld be c o ns id e re d in e x p la ining the lim ite d s c o p e o f the s e rvic e ”. 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
16. Quotemonster Research Approach •Client Perspective •Pesonalised Research •Provides Quantitative and Qualitative •Fit For Purpose Approach •New Replacement Business Report •Independent (do not pay to play) 24th IFA Professional Development Series – September 10-25 Providing Professional Services with Integrity
17. Personalised Pricing Accuro AIA AMP - Lifetrack AMP - RPP Asteron Fidelity nib OnePath Partners Life Southern Cross Sovereign Product Research AA Life Accuro AIA AMP - Lifetrack AMP - RPP Asteron Fidelity nib OnePath Pinnacle Life Partners Life Southern Cross Sovereign ASB BNZ Kiwibank Westpac Unimed MAS CIGNA ANZ
18. FMA Requirements Insurance advice must be balanced - providing a clear explanation of both the benefits and the exclusions or limitations of the product's cover. Examples of Problems You cannot, therefore: •List only the advantages of a policy •Fail to disclose exclusions •Fail to disclose limitations Limitations may include: •The age-range of available cover •Limitations in individual benefits such as dollar limits •Features only included at an extra cost – but now included in your recommendation Other issues may include: •Failure to disclosure financial stability ratings •Applicability of features to specific groups – such as limitations on certain occupations Causes of problems: •Relying on marketing material or illustrations •Disclosing, but inconsistently, or selectively Solutions •Use standardised comparisons consistently. •Use comparisons prepared by third parties who have no interest in the individual sale. •Ensure your recommendations are based on the client’s specific circumstances. •Keep copies of the comparisons on the client file. 18 www.chatswood.co.nz
19. Personalised Advice For personalised advice, consider the eligibility of the client for the product and the suitability of the product for that client. Examples of Problems Solutions You cannot, therefore: •Ignore client eligibility •A robust fact-find and needs analysis. •Make recommendations without considering suitability on an individual client basis •A standardised process for developing the client recommendation and calculating cover amounts. Suitability may include: •Whether the client needs this cover •A review of features and benefits that is tailored •How much cover the client needs to each client. •Whether certain features of the cover are required Other issues may include: •Whether you have collected enough information to assess suitability (fact find) •Suitability of features to this specific client Causes of problems: •Lack of a systematic process of recommendation leads to inconsistent recommendations 19 www.chatswood.co.nz
20. Advice in Conjunction with Another Product If providing insurance advice in conjunction with another product, advisers providing personalised advice should establish whether the client needs the insurance. 20 www.chatswood.co.nz Examples of Problems You cannot, therefore: •Assume a requirement for cover based on a related product sale •Make a recommendation without testing the requirement for cover Personalised advice means: •Looking at a client’s situation more broadly than for one product Other issues may include: •Keeping up to date with a client’s situation because it may have changed Causes of problems: •Assuming no change •Assuming a need Solutions •Fact finds must include information necessary for all the products being recommended. •A new fact-find and recommendation may be required if it was too narrow or too long ago.
21. Making Comparisons Make an appropriate comparison of the client's existing arrangements with the new recommended product. 21 www.chatswood.co.nz Examples of Problems You cannot, therefore: •Ignore the client’s existing cover •Recommend replacement without advising on the disposal of existing cover •Focus on only one reason for change, such as "the new product is cheaper" Knowledge of the existing product means: •Being able to identify the strengths and weaknesses of the cover Other issues may include: •Addressing non-contractual issue of change – such as disclosure through underwriting the replacement contract Causes of problems: •Assuming no change in health status Solutions •Use a comparison of the existing cover with new cover in a standardised framework which prevents inconsistency between recommendations. •Ensure that your comparison reflects the actual options or features applicable to the client. •Conduct a new needs analysis when advising on replacement.
22. No Comparison If no comparison is made, inform the client of the limited scope of the service. 22 www.chatswood.co.nz Examples of Problems You cannot, therefore: •Provide no comparison without limiting the scope of your service Causes of problems: •If your service normally involves an assessment of needs, then the client may assume that such an assessment has been done. Solutions •Always doing an assessment of needs looks more robust than selectively changing your advice process.
23. The Comparison Should Include ….comparison should include: the material differences in the policies relevant to the client, including any loss of benefits such as value or type of cover the specific adverse consequences of changing policy or provider. Examples of Problems Solutions You cannot, therefore: •Prepare a comprehensive comparison in all •Ignore any material difference cases. •Ignore negative consequences Material means issues that: •Could affect whether a claim is paid •Could affect the amount of claim Other issues may include: •Considering the provider, not just the policy Causes of problems: •In sales the focus is on only the issues critical to the client, and the decision to change. This requirement asks you to consider every material difference 23 www.chatswood.co.nz
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