‘Best interests’ requires walking in their shoes

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As financial advisers, we are subject to a ‘best interests’ duty whereby we must act in the best interests of our clients when providing advice. It seems obvious, doesn’t it, but historically this obligation was being so overlooked by so many advisers that it has been enshrined in legislation and is overseen by ASIC.

Best interests duty is taken seriously these days, and rightly so. Our licensee has provided endless hours of compulsory training and guidance. Their regular audits of our files focus largely on this. If we get best interests wrong, we can end up in a whole world of trouble including losing our licence and in extreme cases, jail time.

The advice is up to me

I like to think that since becoming an adviser, acting in my clients’ best interests is something I have always done on the advice given. The ongoing training and audits are vital to ensuring that the advice is presented and documented correctly and in accordance with the law, but the advice itself, I believe, is up to me.

In our studies, we learn about Modern Portfolio Theory, risk/return trade off and diversification – all important for building an investment portfolio that meets a client’s tolerance for risk. In other words, a portfolio based on how well they can bear to lose money at any given point in time.

In our training, we are given the tools in the form of questionnaires to assess each new client’s tolerance for risk and from there consider time frame and the client’s goals and voila …  build an investment portfolio. Years of brilliant minds have honed this methodology and it has been used for decades in best practice financial advice.

Not something from the textbooks

However, the longer I am an adviser, the clearer it becomes that understanding a client’s ‘best interests’ is not something that can be learned from text books or gleaned from a complex and often misunderstood questionnaire. It comes from experience as an adviser of not only technical knowledge but also knowing how to listen to and interpret what clients are saying through words, body language, nuances and any other signals. It’s about knowing the right questions to ask, recognising when there might be something they are not telling us.

Take the recent client who on the risk profiling questionnaire would tick all the boxes to be classified a ‘defensive’ investor, indicating a 30% allocation to growth investments such as shares and property. He is educated in financial matters, he understands the inflationary consequences of holding only cash over the long term, he understands that without exposure to growth assets, his money will lose value over time.

What the questionnaire doesn’t consider is that this investor is riddled with anxiety, is a deep thinker, an avid reader of world news and a natural pessimist. Recommendations to invest a small portion of his substantial wealth – even less than the benchmarked 30% – into growth assets resulted in sleepless nights and mental anguish.

He was consumed by cognitive dissonance and his discomfort was palpable. We abandoned the recommendations and agreed to keep his money in cash. As such, he doesn’t earn us much in fees, but he sleeps well at night, and that’s just fine with me.

Then there’s the couple who came to us already established in their SMSF. It is now invested and performing well, but the trustees both work full time in busy, time-consuming professional jobs. They have teenage children that keep them busy and they both loathe administration and paperwork. The trustee duties and obligations that come with an SMSF drive them crazy. Whoever recommended they go down the SMSF path didn’t understand this aspect for a busy couple.

Not my portfolio, it’s theirs

For each and every client, best interests are a matter of perspective. As an interior designer must leave his or her own tastes at the front door to envisage and interpret their client’s desires, so too a financial adviser must put aside their own biases and knowledge and walk in their client’s shoes.

This skill comes from experience only, and after nine years as an adviser, I’m still honing it, I don’t always nail it. But I’ve seen it done well by very experienced advisers, and the difference it makes to a client’s wellbeing can be remarkable.

I do hope The Financial Adviser Standards and Ethics Authority (FASEA) doesn’t rob our industry of this vital skill.

 

Alex Denham is a Senior Adviser at Focus Wealth Advisers. Prior to becoming an adviser, she spent 20 years in senior technical roles with several financial services companies. This article is general information and does not consider the circumstances of any individual.

The FASEA was established in April 2017 to set the education, training and ethical standards of licensed financial advisers in Australia.

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6 Responses to ‘Best interests’ requires walking in their shoes

  1. Philip Carman September 16, 2018 at 10:26 PM #

    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!

  2. Graham Hand September 15, 2018 at 12:14 AM #

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

  3. Dane September 14, 2018 at 10:10 AM #

    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 .

    • Alex Denham September 14, 2018 at 1:44 PM #

      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.

  4. Andy September 14, 2018 at 9:48 AM #

    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.

    • Alex Denham September 14, 2018 at 1:46 PM #

      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!)

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