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

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

March 8, 2021
by Tony Vidler  CFP logo   CLU logo  ChFC logo

Times have never been more dangerous for giving advice..and it is a time for financial advisers themselves to beware of consumers.  Well, perhaps not consumers per se, but certainly all the interested parties who say they represent consumers interests.  It is not just the increasing oversight from regulators and professional scrutiny from peers and professional bodies that advisers have to concern themselves with now, but the incredibly subjective question perpetually being asked by the advisers themselves of “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?  How can we tell when we gave advice that it will stand scrutiny in years, perhaps decades, to come?


One problem is that “good” is subjective.  Good is determined differently by each stakeholder in the advice process.  The bigger problem is that “good” is allowed to be continually re-defined by each stakeholder in the process.  What is deemed good now, might not be good later. But then it might be good again later and become un-good….you get the drift.  The most common area where this occurs is in investment advice of course….”good” advice is often continually re-assessed by clients, and it is often re-assessed in light of overall market performance rather than the advice itself. But the same is true of lending advice where rates change over time as do consumers circumstances, rendering what was affordable a few years ago suddenly unaffordable now and so on.  It happens with tax, estate planning, insurance…it happens in all financial advice disciplines.


A “good customer outcome” is entirely subjective and can be defined at any point in time, and re-defined anytime the consumer decides to re-define it.  Most importantly though; being the subjective test that it is means that fundamentally it comes down to emotion: how the consumer feels about the outcome.


This is entirely unreasonable.  It is also bloody unworkable for a professional delivering advice.


Professional conduct and competence expectations are usually pretty clear: advisers will conduct themselves professionally…and place their client’s interests first….and do the best job they can of providing good advice within their areas of competence.  Whether the consumers product performance makes them happy or whether their changing circumstances render earlier advice obsolete and that results in things not quite going as they hoped for is the sort of thing considered a “good or a poor outcome”.  Essentially this focus on a vague undefined principle as being the ultimate test of professional advice results in the test becoming “is the customer happy?”


I’d venture to suggest that every customer can find something to be unhappy about.  If they had to pay a fee that will equate to some level of unhappiness.  If paperwork looked to laborious that will result in some level of unhappiness. If we dragged them away from their favourite soap opera for 20 minutes they will have a level of unhappiness.  And so on and so on.


Even when we step back from the vague wishy-washy subjective bullshit testing being applied by the I-want-my-15-minutes-of-fame-noise-makers and self-promoters selling consumer advocacy magazines we have some challenges at the professional assessment level.


At that level advice will generally be judged on a twofold basis:

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

2.  whether the client achieved their desired outcome




Even in jurisdictions where everything is over-prescribed and regulated (e.g. the Australian regime which is a total basket case of multiple federal regulators competing to create ever more ridiculous rules to expand their respective empires) it is rare for every conceivable step of advice to be precisely prescribed so their as absolutely no room for doubt or interpretation.


Because precise process is rarely explicitly prescribed advisers must guess what some standards or rule interpretations mean.  Hello…margin of error opportunity there.


But even if the processes were guessed well enough clients frequently do not achieve their desired outcomes for many reasons – not least of which is the clients own interference with well thought out strategies.  Then there is the tendency of the universe to continually come up with unpredictable twists and turns that no client or adviser accurately predicted…like a pandemic or two.


Compounding the problem is that the regulators themselves are often attempting to apply an ideology or principles-based regime which they didn’t write 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.




So….the test that the industry ends up applying to itself focusses upon achieving “perfect process” because we can sort of measure that amongst ourselves.


But 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 and peers 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 probably makes sure all critical requirements are at least considered every time.  Good process sure doesn’t ensure consumer satisfaction or happiness.   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.


And this is the key point really: 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.


We are left then with the difficult question of how an adviser might try to meet the requirements of an ever-shifting standard where 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.  Evidencing agreement on scope and any limitations to that scope are the critical element here in my view.


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.


The single step which captures this and sets the scene for the entire engagement, if not the entire adviser-client relationship, is a client meeting agenda which focusses upon each parties expectations.  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 as early as possible establishes what “a good outcome” is most likely to be.  Pin it down as early as possible.  Just as importantly though 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”.  Whatever your expectations of the client are though, don’t be afraid to tell them clearly and early.

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.  Or identify who is going to be unreasonable or a potential problem.


Therein is the foundation for providing good advice that stands a solid chance of withstanding future subjective scrutiny.


You might also be interested in this related article:
Are You Giving Good Advice, Or Giving Them What They Want?
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