Beware of…well…just beware when giving advice!
Best Practice Advice & Compliance

Beware of...well...just beware when giving advice!

September 18, 2012
by Tony Vidler

As financial advisers around the world get to grips with constant oversight and professional scrutiny, the question perpetually being asked by the advisers themselves is:   “What is “good” advice?”

What advisers are really asking of course is how does their advice to clients get judged by others as whether it was good or bad?

The expectations are clear: advisers will conduct themselves professionally…and place their client’s interests first….and do the   best job they can of providing good advice.  As an adviser, you had just better…well….you had just better beware!

But beware of what?

There is a perception held by many financial advisers that this means their advice to clients will be judged on a twofold basis:

1.  whether the process used in providing the advice is precisely as prescribed by their regulator

2.  whether the client achieved their desired outcome

Both of these standards fill financial advisers with dread.  The first because precise process is rarely explicitly prescribed, leaving the adviser to guess what this standard means.  The second, because clients often do not achieve their desired outcomes for many reasons – not least of which is the clients own interference with well thought out strategies -and the tendency of the universe to continually come up with unpredictable twists and turns that no client or adviser accurately predicted.

The good news for advisers is that neither of these standards really do apply to them, though it is easy to understand how financial advisers believe otherwise.  Advisers often believe that process perfection is the minimum standard because there is a lot of scaremongering by many stakeholders promoting their own interests.

Education providers, institutions, product manufacturers, lobby groups, consumer groups, politicians seeking publicity…..they all spout their visions of the perfect advisory process, though usually from quite different agendas, and confuse perfection with professionalism as it suits them.  Some organizations are trying to sell advisers courses or solutions to their apparent lack of perfection….some just want to scare advisers sufficiently to have them surrender their business independence and become a dedicated distribution force for the institution….some just want the 30 seconds of free publicity for their own ego or public standing and see a sector under scrutiny as being an easy cheap shot to help them get a headline.

Compounding the problem is that the regulators themselves are often attempting to apply an ideology or principles-based regime that requires them to simultaneously achieve a number of competing objectives.  Regulators are expected to educate the sector they are supposed to regulate in order to achieve the objectives of a fair and transparent market – yet, they have to do so without precisely telling the sector what a rule or piece of law means (as that is generally the domain of the courts ultimately, not the regulator) and the regulator cannot risk applying a precedent that is eventually found to be incorrect when later tested legally.  So regulators themselves are often faced with the same issue of trying to determine intent of the law they are empowered to manage, without specific guidance themselves.  Yet, they are expected to police the sector according to their own understanding of the intent of the law.

It is easy to see why advisers think that professional safety can only be achieved from perfect process.

Logic alone reveals that a good process does not guarantee good advice.  One can have the most compliant and thoroughly detailed comprehensive financial plan in the world that ticks all of a regulators boxes….but if it neglected to address (say) a relatively simple fact like “the client is spending more money than they have and they must stop that if they want to achieve all these other financial goals“, then it will not meet any objective “good advice” standard.  It is for this reason that critics do not look at process alone in determining whether advice was “good” or not.

A good process is just that – a process.  It is not in itself advice.  Process is not a “right way” or a “wrong way” of judging the actual advice.

It is only a method of approaching a problem that is applied consistently, in a logical manner, that ensures all critical requirements are at least considered – every time.  Good process doesn’t ensure consumer satisfaction.  It ensures that everything was checked to see whether it was needed to be done.  Good process ensures regulator and legislator satisfaction.  Consumers generally don’t give a damn how good your process is.  They care about outcomes….which perversely is not necessarily what regulators always care about.  They, indeed nobody that is rational and objective, expects advisers can entirely insulate or protect clients from adverse market performance, or poor decisions, or entirely negate risk of any sort.

A poor outcome for the client is not necessarily anything to do with the advice given.  A poor outcome, like a 5% loss of capital, might even be the result of some very good financial advice.  If the client was chasing aggressive returns, the market tanked and resulted in a 15% fall decline in equities, then that diversified portfolio the adviser argued for instead of the clients request to go 100% in equities suddenly looks like it was a good move…even though arguably a “poor” outcome resulted for the consumer.  Good advice can lead to poor outcomes, and good outcomes can be random events, and poor outcomes can still be good relative to other poor outcomes.  Outcomes are always relative.

Which leads us to the second standard referred to earlier, and the difficult question of how an adviser might try to meet the requirements to what is an ever-shifting standard.  From a client’s perspective, sometimes good isn’t good enough.  The client’s desired outcomes also change over time – sometimes slowly over years, sometimes in seconds.  It is an unfortunate trait of us humans – our satisfaction levels, or expectations, frequently shift.   Regulators generally get that too I’d bet.

In this environment how does an adviser provide good advice that will stand critical scrutiny?

Firstly, you do have to utilize A process that is robust and ensures you have minimized the risk of omitting important elements.  Your advice process ensures that you have considered all aspects of providing professional advice in each engagement…which is not the same as saying you have to DO comprehensive planning with everyone you work with.  There will be many clients many times who require only specific advice relating to a particular problem – but your process will ensure that each party knows precisely what is being undertaken and what limitations go with that.

Secondly, you need to have a method of ensuring the clients expectations at the time of obtaining the advice are clear.  The best method in the world of achieving this is by having a frank discussion about both the clients expectations and the advisers expectations of the client right at the outset of an engagement.  Your post-meeting documentation (part of your process!) summarizes that for posterity.

I have seen a number of good and bad client meeting agenda’s over the years, and know a lot of advisers don’t even use an agenda at all.  The format of an agenda doesn’t really matter a great deal, but an excellent structure would be:

Client Meeting Agenda

Client meeting agenda – Tony Vidler

The item that sets the scene for the entire engagement, if not the entire adviser-client relationship, is the second item on the agenda.  Having the client explain their expectations in clear terms – how they like to work, what their preferences are for remuneration & communication & frequency of review, what skills and areas of expertise they seek and so forth.  Just as importantly is the adviser establishing their expectations of the client. This may be as simple as “I expect clients to return my calls; keep agreed meetings; complete paperwork that is required to put in place any solutions agreed to; and; be as fair with me as they expect me to be with them”.

This is the moment in the advice process where you have the greatest opportunity to isolate the clients desired outcomes, by ensuring the expectations are clear for everyone.  Therein is the foundation for providing good advice that will bear scrutiny.

© 2012 Tony Vidler.  All rights reserved. All materials contained on this web site not otherwise subject to copyright of other parties are subject to the ownership rights of Tony Vidler.  Tony Vidler authorises you to make a single copy of the content herein for your own personal, non-commercial, use while visiting the site. You agree that any copy made must include the Tony Vidler copyright notice in full. No other permission is granted to you to print, copy, reproduce, distribute, transmit, upload, download, store, display in public, alter, or modify the content contained on this web site.

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Comments (7)

  • Hi Tony
    well said. It can be a minefield thinking about all these competing issues and addressing them- to ones own satisfaction. Of course there are a number of other issues that also add to the confusion and takes time- things like keeping up with markets/trends/education, staff, company returns, GST and other IRD/Govt requirements, keeping tedious logs of events attended, keeping updated with insurance product changes, industry/assocation meetings, remaining in touch with current clients, and maybe even trying to find new ones- to name a few!
    cheers Ian

    ian milligan
  • Thanks Ian, you make excellent points. The list of competing distractions and headaches could be MUCH longer…and that is one of the things that leads to us often losing sight of the simple and most effective ways of handling some issues. We are simply too busy being very busy.

  • Good comments from both of you – I believe the industry faces a new risk of “being swallowed up in process” at the sacrifice of available time to be able to provide advice to the wider community. The external demands on Advisers as Ian raises (IRD, legislation, CPD’s, product launches, updates, ABS’s) could well force small adviser operations into group scenarios so that they can cope which will see even more specialization. This means the client looses the ability to deal with just one adviser for different needs, rather having to deal with several dependent on what advice they require. I don’t see this as being a “client advantage” rather the only effective mechanism Advisers have to address compliance and regulation. I would hope this does not happen but the current environment does mean Advisers really do have to define who they want to / are able to work with and still keep up with those external requirements.

    Having said that, this remains an awesome industry to be a part of.

    Jeff Goldsworthy
  • I totally agree with your sentiments – and especially your final point Jeff!

  • Great article Tony. One point: As a life and health insurance adviser, when I deal with a new client, they have very few expectations – they have generally not thought through the financial implications of a death, serious illness or injury. The expectations will generally develop during the course of our meetings, and should be a natural evolution of the issues I raise and their reaction to those events and the potential financial implications thereof. The one time when this does not hold is when the client (to-be) has had a less-than-satisfactory relationship with another financial services operator. Then the expectations can be difficult to ascertain. We have used a couple of “Your Expectations” questionnaires for some years now. One for existing clients and the second for new people. They have been helpful.

    The medical profession provides the counter argument to Jeff’s point. A patient initially consults the generalist (GP) and then is referred to appropriate specialists for more focused specialist advice. I suggest that in the case of financial services, the client is well served by a team of specialists (who may work in one office or be independent operators who co-operate) providing specialist advice. The most important issue here is: “who is the halfback?” i.e. who identifies the need for the specialist?

    The benefit of this model is that each specialist is required to keep up with the external demands on a limited area of financial services rather than on the whole universe, and thus has more time to focus on the needs of patients and creating the “right” or “best” solution for each client case. Process then becomes a real advantage rather than an imposition.


    Graeme Lindsay
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