As financial advisers, we are subject to a ‘best interests’ duty whereby we must act in the best interests of our clients when providing advice. It seems obvious, doesn’t it, but historically this obligation was being so overlooked by so many advisers that it has been enshrined in legislation and is overseen by ASIC.
Best interests duty is taken seriously these days, and rightly so. Our licensee has provided endless hours of compulsory training and guidance. Their regular audits of our files focus largely on this. If we get best interests wrong, we can end up in a whole world of trouble including losing our licence and in extreme cases, jail time.
The advice is up to me
I like to think that since becoming an adviser, acting in my clients’ best interests is something I have always done on the advice given. The ongoing training and audits are vital to ensuring that the advice is presented and documented correctly and in accordance with the law, but the advice itself, I believe, is up to me.
In our studies, we learn about Modern Portfolio Theory, risk/return trade off and diversification – all important for building an investment portfolio that meets a client’s tolerance for risk. In other words, a portfolio based on how well they can bear to lose money at any given point in time.
In our training, we are given the tools in the form of questionnaires to assess each new client’s tolerance for risk and from there consider time frame and the client’s goals and voila … build an investment portfolio. Years of brilliant minds have honed this methodology and it has been used for decades in best practice financial advice.
Not something from the textbooks
However, the longer I am an adviser, the clearer it becomes that understanding a client’s ‘best interests’ is not something that can be learned from text books or gleaned from a complex and often misunderstood questionnaire. It comes from experience as an adviser of not only technical knowledge but also knowing how to listen to and interpret what clients are saying through words, body language, nuances and any other signals. It’s about knowing the right questions to ask, recognising when there might be something they are not telling us.
Take the recent client who on the risk profiling questionnaire would tick all the boxes to be classified a ‘defensive’ investor, indicating a 30% allocation to growth investments such as shares and property. He is educated in financial matters, he understands the inflationary consequences of holding only cash over the long term, he understands that without exposure to growth assets, his money will lose value over time.
What the questionnaire doesn’t consider is that this investor is riddled with anxiety, is a deep thinker, an avid reader of world news and a natural pessimist. Recommendations to invest a small portion of his substantial wealth – even less than the benchmarked 30% – into growth assets resulted in sleepless nights and mental anguish.
He was consumed by cognitive dissonance and his discomfort was palpable. We abandoned the
recommendations and agreed to keep his money in cash. As such, he doesn’t earn us much in fees, but he sleeps well at night, and that’s just fine with me.
Then there’s the couple who came to us already established in their SMSF. It is now invested and performing well, but the trustees both work full time in busy, time-consuming professional jobs. They have teenage children that keep them busy and they both loathe administration and paperwork. The trustee duties and obligations that come with an SMSF drive them crazy. Whoever recommended they go down the SMSF path didn’t understand this aspect for a busy couple.
Not my portfolio, it’s theirs
For each and every client, best interests are a matter of perspective. As an interior designer must leave his or her own tastes at the front door to envisage and interpret their client’s desires, so too a financial adviser must put aside their own biases and knowledge and walk in their client’s shoes.
This skill comes from experience only, and after nine years as an adviser, I’m still honing it, I don’t always nail it. But I’ve seen it done well by very experienced advisers, and the difference it makes to a client’s wellbeing can be remarkable.
I do hope The Financial Adviser Standards and Ethics Authority (FASEA) doesn’t rob our industry of this vital skill.
By Alex Denham
(Alex Denham is a Senior Adviser at Focus Wealth Advisers. Prior to becoming an adviser, she spent 20 years in senior technical roles with several financial services companies. This article is general information and does not consider the circumstances of any individual.)
The FASEA was established in April 2017 to set the education, training and ethical standards of licensed financial advisers in Australia.
11 September 2018