Putting the Client’s Interests First

Imagine you’re seeing your doctor or lawyer and they tell you “just so we are clear, my duty is to put your interests first… but I won’t necessarily be acting in your best interests.”  How would you feel? Comforted and relieved?  Or surprised and confused? 

As Authorised Financial Advisers our Code Standard obligation is to “place the interests of the client first”. If the interests of the adviser and client conflict, then the client’s interests are to take priority. Unfortunately, the regulator and some large organisations such as banks regard the “interests first” duty as satisfied if the products and advice are simply “fit for purpose”. 

Independent financial advisers prepare their advice with the client’s best interests in mind. This is quite unlike tied advisers such as those who work for large institutions, who may settle for a solution they know to be the third best or even the worst.

The Code of Conduct, which we must adhere to, gives us little guidance on what “interests first” means.  It simply suggests that “interests first” will be determined by "what is reasonable in the circumstances”.  Effectively, it allows everyone to interpret “interests first” to mean whatever they want. This is great for the big players, who have incredibly deep pockets and who engage in a massive amount of lobbying with the regulator and politicians. They can get away with using their own managed funds in their recommendations, even if they know they may be poor performers, or other issues which Research Houses would downgrade them to not recommended or non-approved status.

For advisers who work for these firms, they must be in an invidious situation, having to toe the party line, and use the firm’s products. If they don’t they will lose their high paying jobs. History shows that bank advisers, when there is any hint of trouble, move on. This happened in 2008 – 2010 when too much high risk in-house product was used by incentivised advisers working for one large bank. How could they have been putting their client’s interests first, if they only considered, offered and recommended a product produced in-house that they knew to be inferior? Perhaps to be fair they didn’t know that at the time, nor did the bank and their in-house fund manager know the risks associated with the underlying investments being collateralized debt obligations (CDO’s)

Has anyone ever seen an adviser’s disclosure statement stating in words similar to the following “I choose not to consider funds or other products from third parties, even though many are clearly better than some in my narrow self-interested universe.  In the circumstances, I am putting my client’s interests first.” We have only seen this in comedy spoofs.

There is currently a “Code Working Group” which seems to be comprised of people with no or little experience in personal financial planning and investments. It is stacked with appointees strongly associated with major institutions such as Banks and their legal advisers. Unsurprisingly they seem to be acting in the best interests of their shareholders.

Currently, why is the standard for AFAs (client interests first and regulated by the FMA) different to client best interests of DIMs providers (regulated by the FMA), fund managers, medical professionals etc.?  Is the different standard an accident, or rather is it to accommodate institutions exclusively selling what could be considered as in-house or home brand product?  

For the good of the industry and especially investors, plain English documentation, complete with meanings should be the norm and should be used for what should be straight forward unambiguous statements such as putting the clients’ interests first.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.