5 techniques for demonstrating ‘putting client interests first’

Today, financial advisers and financial market participants are being bombarded by the phrase putting client interests first. Don’t ignore the phrase and just continue to do the same thing you have always done. Putting client interests first is a key cornerstone for our industry and will be part of legislation, regulation, codes and guidance notes into the future.

Now is the time to undertake a strategic assessment of your business and document how the business and those within it are demonstrating placing client interests first.

What does placing client interests first mean?

There are no prescribed requirements for placing client interests first. The Code of Professional Conduct for Authorised Financial Advisers states the requirements are ‘determined by what is reasonable in the circumstances, including any regulatory obligations binding the AFA in addition to the Code.’ However, this is fairly nebulous so a logical next step is to read A guide to the FMA’s view of conduct. This starts to give you a good sense of what is required. Don’t be put off by the document sub-heading which states: This guidance note is for directors and executives of licensed financial services providers. All financial advisers will need to move into a licensed environment in coming years so the comments in the FMA guidance note set the expectation for financial advisers to aspire to and surpass.

If you are still not sure if the FMA is serious about good conduct and putting client interests first, then read the Strategic Risk Outlook 2017 and the FMA Conduct Outcomes Report 2016. These documents will leave you in no doubt that a key focus of FMA is around ensuring all financial advisers and market participants are client focused.

Techniques

1. Governance and culture

The board and senior management should lead the organisational culture and place client interests first. Have a planning day to review the business from the top down and identify what clients want and need, how you are currently meeting that need and what needs to change to clearly demonstrate that client interests are being placed first. How does the board ensure it has client interests at the centre of business strategies? What reporting does the board receive around monitoring client interests? Does the language and personal behaviours of directors reflect a genuine commitment to putting client interests first, or is it purely around maximising revenue?

2. Informing and educating clients

A key way to put client interests first is to ensure clients have access to sufficient information to enable them to make an informed decision around the products and services available from your business. Undertake a review of all documents (including SOA templates) to ensure they meet the ‘clear, concise and effective’ requirements. Are documents accessible, inviting to read and understandable? Do they provide enough information to enable the client to be sufficiently well-informed to make a decision?

3. Conflicted conduct

On a global scale, the New Zealand financial services industry is small and akin to a village, so it is inevitable that actual or perceived conflicts of interest may occur. Conflicts are not necessarily all bad. It is how you deal with them that matters. Develop an ‘interests register’ and list all potential conflicts of directors and senior management. Assess the entire business and determine where conflicts exist and how they can be better managed. If you produce your own products, then assess how you ensure clients are impartially advised and how you ensure the product is suitable for their needs. If you receive commissions from providers, then assess how you ensure that the client recommendations are driven by what is most suitable for the client vs what remunerates the business the most. Review the level of disclosure that is made to the client. Are you fully meeting your disclosure obligations? Is there anything in your remuneration structure which is encouraging you to recommend one product or service over another? If there is, ask yourself if you would make the same client recommendation if all remuneration levels were the same.

4. Sales and advice practices

Undertake a review of your advice process. Is it outdated, technically focussed and orientated towards making a quick product sale? Assess what can be done to modernise the process (consider collaborative advice and new software tools such as Financial Driver). Confirm there are mechanisms in place to ensure that product suitability can be assessed and proven. How is the scope of service determined with the client? Does the client narrow the scope or does the financial adviser and is the client aware of the implications of narrowing the scope? Assess if financial advisers have the knowledge, competency and skill to advise on the products and services. Is the assessment of knowledge, competency and skill based upon your length of time in the industry or on attaining the minimum education requirement to become an AFA, ie: New Zealand Certificate in Financial Services Level 5?

5. Seek client feedback

A key to placing client interests first is to clearly understand what your clients want and how they want it delivered. What surveys are you undertaking to assess client needs? How do you gauge effectiveness in meeting those needs and how does the board and senior management track client feedback?

If you are uncertain whether you and your business are truly putting client interests first, and whether you can prove it, contact us and have a discussion about what you need to do.