‘Best interests’ requires walking in their shoes

(UPFRONT DISCLOSURE: I'm a financial adviser with 25 years in the industry. That may make it impossible to be entirely impartial here but I'll try to let the facts and questions speak for themselves. I am also not going to argue that there is nothing wrong with our industry. The Royal Commission has shown there's been a lot of mistakes, some deliberate. String them up. But I am going to have dig at the "Best Interests" duty and how it threatens rather than saves the people who own the shoes)

THE COMPLIANCE IS UP TO ME
Alex, while you've captured the moral high ground you also missed a harsh reality. The legal implications of the Best Interests Duty as imposed by ASIC is not a requirement to do what is morally right, but to do what they suppose is procedurally correct. Laws that attempt moral change are always danger in being bad law. It’s been said that bad law is one that makes good people into criminals. This may be one of those cases and it may make the Royal Commission, at least as far as financial advice goes, quite unnecessary !

Alex, you say that you "like to think" that acting in your clients interests is something you have always done. Don’t we all. Like every industry we have some bad apples and I suspect that with more money involved we're going to get a few extras. But if that theory of averages holds true then so too must it be reasonable to expect that *most* of us are doing the right thing. As such the “Best Interests” law should primarily change the minority that act badly and on the face of it you (and I) should not have needed any of those "hours of countless training and guidance" ( because we were already doing the right thing).

So have you had to change anything because of the introduction of this law ? I suspect that like most advisers you are becoming increasingly aware of just how much ASIC expects even the good people to change. Quite a lot. And if we don’t, we become criminal (and maybe are already since this law has been around for a few years). Since other readers may not I’ll elaborate.

Before I do I should probably point out that I do I understand that we all have to respect the law, change isn’t always welcome and that sometimes you just have to cop it and move on. That’s not my issue. The problem here is that the net result may well be the opposite of the goal: that we see a considerable reduction of advisers acting in the best interests of clients.

NOT SOMETHING FROM THE TEXTBOOKS
To illustrate have a look at ASIC's audit of SMSF recommendations released this year. They reviewed SMSF recommendations given in 2017 primarily is respect to how that advice met (or did not meet) ASICs interpretation of the Best Interest Duty. They concluded that more than 90% of "advice" failed! That's a shocking result. How many of those advisers "like to think" they had been doing the right thing? Is everybody's moral compass really that bad? Seems today everyone would like to think so, but 90%, really? However if you read further ASIC also conclude that less than 15% of the cases actually left the client worse off. Dont get me wrong, 15% is a horrific number but it’s a lot different from 90%. Does anyone find that odd? How can the advice have been bad if it didnt produce a bad outcome! And does that mean that some of that advice that ASIC failed actually put clients in a better position? If it’s an improvement the client would not have had without advice then why is ASIC trying to stop it? Is the regulator focused on the wrong thing?

The first fundamental problem is the requirement embedded in the corporations act that advisers "prove" they have acted in the best interests of the client. Its subtle but ASIC is pushing this hard. It seems that if you don’t *prove* your advice is good it is automatically assumed to be bad. Generally speaking the rest of the civilized world honours the doctrine of innocence until proven otherwise. Can anyone else think of an industry that is regulated by an assumption of guilt?

And then there is question about what constituted "proof". ASIC's audit considered the written records only. They did not interview either the adviser or the client before determining what was in the mind of the client and should have been in the mind of the adviser. You may well ask, how can the thought police be so clever that they can determine guilt without interviewing the two first hand witnesses to this so-called crime? Indeed, even if you regard the adviser as an unreliable witness, in any court of law he/she would still be entitled to take the stand in their own defence. But that did not happen. They reached their conclusion, by their own admission this was frequently because of a lack of proof, and announced it as a fait accompli: near all of us should hang.

YOUR INDUSTRY OR MINE
Let me draw a parallel scenario. When framing the new education standards of financial advisers comparisons where made with the ethical and educational expectations the community has for lawyers and doctors (GPs). I went to my GP recently, he spent 15 minutes with me, told what he thought I should do, wrote a prescription and a 2 line story in my file that he (and possibly only he) could read when I revisit. He charged me $82 and I went on my merry way thankful for his help. What would I do if he made a mistake? Well, it turns out that if he were governed an the equivalent "Best Interest Duty" he's in trouble even if the prescription healed me!

ASIC standard means they expect advisers to *write* an extended dissertation of their investigation of the client, the products they recommended *and* an the analysis of the alternative products they didn’t recommend. Can you imagine what the world would look like if my GP could be charged by the industry policeman, even if the prescription healed me, simply based on inadequacy of the notes in the file and he not be given opportunity to speak in his/her own defence! Moreover, ASIC is pressuring the licencees. If an individual adviser gets as few as three cases his employer is under pressure to rescind his licence which leaves him almost unemployable in the industry. Gone.

And there is the big problem. The simple fact is that the "Best Interest Duty" in its current form is framing good advisers as criminals which will force people from the industry. Reinforcing that are the huge numbers of hours of training are going into telling advisers the extraordinary requirements to "prove" their innocence. And after licencees lose a string of cases the insurance costs will go through the roof too. The industry will soon realise that we have to ramp fees or simply refuse to provide services to a vast number of current clients. Ironically, the cost of getting advice will have to be so high that its simply not in the clients best interests to get advice anymore. And thus there will be less, possibly a lot less, advisers around to act for clients.

Some of you will say "good, be gone". To you I put this question: who do you think will leave? the good ones who want to do the right thing but realise they cannot be both successful and law-abiding? Or the crook ones who figure out how to make money by gaming the system and measure their choice not by what was right or wrong but by what they could get away with?

P.S. If you're wondering who stands to win out of this the answer is simple: Industry Funds. They have long refused to support financial advisers and promoted heavily the notion that the public should deal direct with the product provider. Eventually someone convinced the Labor party to introduce the "Best Interest Duty" legislation and guess who doesn’t have to follow it! There's a lot to like about their products but their position is as self-serving as the rest whether they created this battle or not they will be the winners. Using our parallel that leave us with this: How comfortable would you be with the idea that you couldn’t afford to visit your GP anymore and would have to ask the drug manufacturers to figure out what's wrong with you and what medicine to take? We already know that banks employing advisers and having them sell their own products while parading as impartial has broken the moral code and probably the legal one too. But if what happens if ASIC succeed and 90% of the industry leave? For most clients that will mean that where will be no-one left to stand in their shoes!

Hi Alex - another insightful and clearly empathetic article from a young woman I've watched grow and develop over well over two decades.
Here's an "older" version of what you've discovered and perhaps one that Dane could consider. The best "risk tolerance question is "How do you like losing money?" The next best question is "Do you know exactly how markets work?" The first opens a client's eyes to actual risk rather than just the concept of risk and the second sheets home the fact that they (and most often, we) don't know everything, even about the past and we certainly can know nothing of the future - because it hasn't happened yet...and we should all ponder the undeniable fact that all investing is about the future, not the past. My own preference with ALL clients is to start with 100% in cash and then gently work our way towards the portfolio (risk) that they can tolerate. It takes longer, but hey, they have the rest of their lives to invest for and (by definition) they need help and advice to understand finances and investments rather than to be sold stuff that we can't guarantee WE know very much about.
What we DO know is the rules of things like tax, superannuation and even the THEORY of investing (I can drive a truck through Modern Portfolio Theory - but it's still the closest approximation to a workable understanding of what we can try to do about guessing what will happen to invested money... And when you put it like that, it makes you think more carefully about what you're about to do with Other People's Money, doesn't it?
We should firstly educate our clients about the rules, so they have an understanding of what they can and can't do and then take them as far as they wish (or are able) to go with an understanding of the various theories and mysteries of investment...which is a mix of maths, psychology, history and folklore. We can only take them as far as we have gone ourselves, but a good adviser (like Alex) is a good communicator and because it takes us so long to learn so little we can usually get those with an aptitude for it about up to or close to our own level of knowledge and skill. Remember, if they have no interest or aptitude they probably should NOT be investing. For them, 70-80% in cash and the remainder in some simple managed funds would be as far out on the limb they should go.
So, what would we be doing with these clients who aren't up for investing?? Ever heard of estate planning, tax planning, superannuation planning and even lifestyle counselling (those approaching retirement need help to face that adjustment; those in career midstream need help to get life/work balance and learn good savings and spending habits). That can take a lot of our time but add a lot of value and carries no risk to them or us! Enough from me for now. Thank you Alex for being who and what you are. Keep on teaching and sharing!

Thanks, Alex, Assyat is writing an article for us on this subject. Graham

Hi Alex, I enjoyed reading your piece. Especially when you talked about recognising a client's tolerance for risk in real life not through some questionnaire. I must admit, I would have been tempted to try and educate the client as to the benefits of risk assets over the long-term, using academic research and history as a guide. But if putting in place a plan that you genuinely think is in there best interests, comes at the cost of increased mental anguish, then whose interests are you really serving?? Perhaps in these cases empathy needs to kick in and override all else and recognise that you can still help the client in a way other than what you would normally have gone for .

Thanks for your comments, Dane. Yes, I agree, education is so important and an essential part of my advice process, far more useful than a questionnaire. For the sake of brevity, I didn't go into the detail of the education process we went through, but probably should have mentioned that this client was very educated on investing and the historical long term performance of growth assets over cash etc. hence the cognitive dissonance he experienced! He's a complex character, and intellectually he knew he should invest, but his emotional well being just couldn't get there.

Thanks, Alex, great insights. Another reason for the personal approach and a closer understanding of a client is it's not just about investing. And it's not only how long clients will live, but their health and disability while they are alive. The increasing cost of care and possible future reductions in pensions mean the client's health becomes a major planning issue.

Doesn't it just! I just read a great article by Assyat David on this but I can't remember what publication it was in! (sorry Assyat!)