Why it Will Soon be Important to Say: "You Don't Need This"

In this case, the art of not recommending a product – because it’s true that recommending too much as well as too little can also cause you problems, and will increasingly come into focus when the new rules for financial advisers are applied at the end of this year. 

“Suitability testing” is the phrase used in the draft Code of Practice. It’s obvious from reading the Code that they are really thinking about investment products, but if you are a life insurance broker that will be seeking Authorised Financial Adviser status then you need to think about what a suitability test means for your clients. 

First of all, suitability means considering what the clients insurable risks are. You will need to define carefully the areas of expertise that you have, and hence the product categories you will work in. If you don’t have access to general insurance products then in your adviser business statement you are going to specify only the areas where you will operate – let’s say life insurance and personal risks cover such as disability income insurance and medical insurance for the sake of this example. 

But you don’t always recommend some of every product to every client. For a variety of reasons a recommended cover package will have some categories of cover present and not others – perhaps you know that because of pre-existing conditions current medical insurance should be retained, so you confine your recommendations to other cover areas. Perhaps you are dealing with a person who has no dependents, so you focus on disability and medical insurance areas and leave life insurance to a subsequent review. Whatever the reason, there are situations where you will make a high level call about the suitability of a category of cover. 

It is now critical that you have a method for doing so. That method should be defensible in some way other than “well, I thought about it and figured…” Whatever your logical reasons you need to have a ‘test’ of some kind that you apply. You also need to figure out how strongly you stand by your assessment – that’s because the draft Code says that the suitability test is paramount. If it says the client should not have a product then you should not sell it – even if they say they want it!

So to return to our examples, you need to have a test and a set of reasons. These come in three categories:

Why? – A recommendation that you should have, say, disability cover, should be accompanied by a reason why you think the client should have it. The stronger the reason, the better your chances of making a sale – but unlike mere selling, this reason forms the heart of the defence of your recommendation when the Securities Commission folk open up your file. So it’s best for everyone if the reason is strong!

Why Not? – So you decided not to recommend life cover. Remember, from a compliance perspective leaving cover out is far more dangerous even than recommending inadequate cover. With low cover levels you can at least demonstrate that you discussed the area with the client. You can nearly always point to a budgetary reason for low cover levels. With a cover left out of a plan the question has to be – was it considered? It’s far safer for you to have a comprehensive list of cover considered, and identify why you decided not to recommend cover in some cases. 

Why maybe? - Sometimes it’s just not clear cut – you can argue for or against the inclusion of trauma cover alongside disability income insurance. Or a buy back of life cover alongside accelerated trauma cover and so forth. You may wish to place some covers in this category and include in your recommendation a summary of the pros and cons of a cover.

This is about categories of cover – we still need to make a positive recommendation on what specific company’s product we may select, and what levels of cover and cover options we may include in the package. That recommended package may also need to be amended based on the specific budgetary constraints that the client has. The criteria you apply to the companies you select will also be the subject of much scrutiny. 

Although software systems have tended to focus on helping you develop a sound criteria for the amount of cover required they tend to be less good at providing tools for deciding when to include or leave out cover categories – often leaving this to the operator to set as a starting parameter. But this is an area where you will need to demonstrate your rationale for inclusion or exclusion. I suspect that initially reviews of sales process will tend to focus on the presence or absence of suitability discussions rather than on the quality of the specific suitability test applied – especially as there is hardly any consensus on what the criteria might be. But we’ve been told that it’s about raising standards, so in time ‘discussions’ about suitability are going to need to become evidence-based statements. Especially about when you need to say, “I don’t recommend this product…”

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