Here's the link to the SST piece Rob Stock did on the subject, quoting yours truly. Link.
One of the features of the draft code of ethics and customer care is the suitability test. Based on this test a service may be provided to a client - or the adviser may decline to provide it. Leaving aside the question of the primacy of the consumer's rights, let's consider the question of the suitability test.
Can suitability tests be conducted with any reliability? If they can be conducted with a great deal of reliability (say, more than 9 out of 10 financial advisers would choose the same test and come to the same conclusions - unlikely, but hold the thought) then they look like being a great tool for financial advisers - but consumers might be less happy. Consumers often want to do things that are bad for them.
On the other hand, if such suitability tests were very subjective things, with planners rarely agreeing on the nature of the test, let alone the answer, then we have the reverse problem. Consumers have no issue with limitations of service, they can simply shop around until they find a planner with a view of risk, say, that matches their own. However, planners are stuck with a requirement to produce a test on which no-one can agree, and which seems to serve no purpose. Which on it's own is fine, we often do things that are only marginally useful at work, but should we decline to serve people on the basis of them?
Sure, some question of suitability is central to providing advice. You can't give advice without it. I am in firm agreement with the code committee on this point. Advice minus suitability is merely description. What I am concerned about is that the consumer appears not to have the right to override a test which will probably be pretty subjective anyway. This brings us back to the question of consumer rights.
One of my clever friends says it doesn't matter because you can provide a service without advice. But that's not how I read the code. Anyone care to post a comment on this point?
The news from Australia, and the comments from our own regulators, seem to suggest that they may. They seem to be thinking primarily about investment business, but thinking about my clients - insurers - they would be in an awful fix if commission were suddenly removed as an option for paying for distribution. Here are your links:
The Auusie Ripoll report in summary.
The IFA has been doing a good job with their code for some time. Here's the link to their documents. One correspondent - who wishes to remain anonymous - says that she thinks the IFA documents are better than the ones the Code Committee have come up with. David Hutton has done a comparison (available to IFA members) which he describes in essence as showing that an IFA member who is meeting the requirements of their current code will have little difficulty meeting the proposals in the draft code.
I just read this piece over at Kiwiblog, and it raised a good point, something I've found difficulty explaining to some people - but which others have assumed without question - that is: my three main kinds of writing are quite different. I put the difference in expectations down to the usual difference of opinion between people - and also, crucially, that as websites (think goodreturns) and blogs (this one) are new media we do not yet have established social norms about the kind of writing that is required. To give an example, there is an expected difference between the way you write on the back of a postcard, versus the way you write in a letter sent in a envelope.
BLOG: My blog tends to be a mix of brief tid bits, some of which are nothing more than the equivalent of drawing a circle around an interesting article and forwarding it to some one who might be interested (I assume if you are reading the blog that you are interested, although do know of a couple of people who read the blog regularly only because it annoys them - but heh, whatever flicks your switch).
SHORTS: Then there are short pieces which are like the shorts in newspapers. The equivalent of 'man bites dog in Waikickamukau'. My pieces in goodreturns are similar. They are limited to 250 words generally, so I have no space to properly discuss an issues, no analysis - these are deliberately meant to wave a flag, toss a grenade, and are meant to be lighthearted. Philip defensively names them 'Opinion'. In fact they are probably more accurately "stirring".
ARTICLES: Then there are longer pieces - like those in Asset. Although it has been known for me to take an irreverent approach to a number of subjects, space allows me to introduce a couple of facts, quotes from people, and a bit more balance to the subject. I like to do that whenever I can. But it's still only 800-900 words. It almost seems unfair to discuss, say, a 40 page ethics document in that space. Yet we do try!
CLIENT REPORTS: Finally we get to reports. I recently completed one for an industry body, so that's on my mind. When we prepare these our gold standard is that every statement of fact can be referenced to a source, or more than one source. Research sections dominate. Opinion and recommendations sections are clearly identified. These documents vary in length from 3,000 to 30,000 words and usually have lengthy appendices for reference purposes. Humour has very little place in such work - the closest we may get a little light irony in a footnote.
These writers think so - check it out. Link.
Those of you working your way through the discussion paper on ethics for AFAs may wish to draw on this FPA Code of Professional Practice (which inclsudes an ethics section) by way of comparison. Link.
Are consumers allowed to choose? This issue - because of the code of ethics discussion paper - is going to keep coming up. So here's another perspective, from the US, where in the land of the free they are debating whether to ban the use of Home Equity Release for certain uses of funds.
This seems a little silly for a couple of reasons:
(a) How to police it? what if the borrower just lies? How do you know? Are you going to require the funds be handled in a certain way or obtain evidence of how they were spent?
(b) Alternatives and control issues. So a person wishes to use some of their asset to pay for a trip to Vegas to indulge in gambling, drinking, and whatever comes when you've had too much to drink... they can either do that with an equity release loan, or sell the house and rent using the balance of the proceeds. Do lawmakers intend to ban the latter as well?
Usually, we respect consumer wishes, no matter how nonsensical to us, because we believe that most people (apart from those too young, or not deemed legally competent) have a better idea of how to look after themselve than we do - they do, after all, have to live with the consequences.
Another short piece - one of my favourite subjects on advice process. I have a lot of resources on the life and personal risks advice process including:
- Step by step summary
- Consumer-based issues list (i.e. what consumers raise through the advice process, not what we think they should raise).
- Company-based issues list (i.e. our view, informed by regulation and expertise)
- Adviser-based issues list (i.e. the priorities for an adviser trying to make a sale, the right kind of sale, and get the right kind of information our of the sales process
I am working to expand the list to include better resources on suitability testing and company selection components. Such testing has been given a huge boost by the recent discussion paper on ethics and may form a significant part of the future for risk advice processes (as a part of financial planning).
On the subject of the code committee work, consider the following: if the consumer decides that they want to take the life insurance, but do not want income protection insurance - but your suitability test reveals that they should not have life insurance (say, because they have no dependents) then are you, or are you not, allowed to sell it to them? (Question assumes the seller is an AFA operating under the code as per the discussion document).
First correct answer from anyone other than Rob Dowler will receive Tim Harford's latest book "Dear Undercover Economist".
This from scrappleface. Link.