The ultimate and straight-forward goal of the new regulatory regime is this: To improve the financial well-being of New Zealanders. To achieve this will take a tremendous amount of work – and not only from the financial adviser community.
But while other stakeholders also have their work cut out, I want to take some time to focus on the real and meaningful role advisers have in improving the financial well-being of New Zealanders. In fact, we can see the importance of the adviser role very clearly in the new Code of Professional Conduct and FSLAA duties.
Aside from strengthening and applying conduct principles across the whole advice sector, the new regime has astutely identified the role of advisers in helping New Zealanders to better understand their financial choices and decisions.
There has been a considerable shift in concepts and language from the old code to the new, and of particular note is the move from informed consent to understanding. In the words of Albert Einstein – albeit rather pointed – “Any fool can know. The point is to understand”.
So what does this mean for advisers as we race towards 29 June and the start of the new regulatory regime?
…the new regime has astutely identified the role of advisers in helping New Zealanders to better understand their financial choices…
At February’s Get in Shape 2020 summit, our master class – Unlocking the Code – drilled into the FSLAA duties and the five conduct and client care code standards that advisers will be responsible for adhering to, and evidencing, post June.
It’s unlikely that anyone in the advice sector is unfamiliar with these at this point, but as a recap, those code standards are:
- Treat clients fairly
- Act with integrity
- Give financial advice that is suitable
- Ensure the client understands the financial advice
- Protect client information
While code standard four specifically addresses client understanding of financial advice, the importance of this concept shift is prevalent throughout the new code.
Ensuring that clients understand the financial advice you provide sounds simple. You may feel that you already do this, and that may well be the case. But can you evidence it? And have you given yourself the opportunity to stress-test whether your current processes and behaviours are delivering client understanding, or just knowledge?
Ensuring that clients understand the advice in a full and meaningful way is not simply a compliance obligation…
Consider this scenario for example: A husband and wife (let’s call them Amanda and John) come to you seeking advice. One partner is more vocal that the other, while one doesn’t appear to be engaging in the process. However, they tell you to go ahead and implement the advice.
What do you do to make sure they are both treated fairly, that they both understand the financial advice you have provided, and that the advice is suitable for both partners?
Keeping Amanda and John in mind – or another scenario you have experienced – how do your current processes and advice behaviours ensure that:
- You have created meaningful understanding of the advice that takes into account the client’s skills, experience, vulnerabilities, and the nature and scope of advice
- The client has sufficient comprehension of the content, risks and consequences of the advice, and ongoing service
- Clients are able to make timely and informed decisions about the advice, including whether to follow the advice, seek further advice, whether the advice is based on valid assumptions about their circumstances, and whether the fees and costs are acceptable
Ensuring that clients understand the advice in a full and meaningful way is not simply a compliance obligation – and I encourage advisers to take a step back and view it in the wider context.
Simply put: financial understanding underpins financial well-being…
It is an opportunity to add value to your client relationships (and in doing so, reinforce the value of your advice expertise), and plays a crucial role in achieving the big picture vision: to improve the financial well-being of New Zealanders. Simply put: financial understanding underpins financial well-being.
Processes and controls
Come 29 June, every time you give advice, there must be policy, procedures and controls in place that evidence consideration of and adherence to the code standards. This applies whether you join someone else’s FAP or establish your own.
If you choose to join someone’s else’s FAP, it’s important to understand whether your FAP is providing you with the processes and controls as relevant to the new regime – and to thoroughly understand those – or whether you need to put them in place yourself. Of course, if you are creating your own FAP, you’ll need to put your own processes and controls in place.
While for experienced advisers, it is likely that much of the groundwork exists already, it’s important that all advisers comprehend the shift from informed consent to understanding and how this relates to advice processes and evidence.
Getting clients to sign a ‘statement of advice’ or similar will fall far short of requirements come 29 June.