The problem with providing the ‘best’ advice

Standard five of the 2019 FASEA Code of Ethics states: “All advice and financial product recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s individual circumstances.

“You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied.”

Likewise, section 961B of the Corporations Act also states that advisers “must act in the best interests of the client in relation to the advice”, while section 961G requires advisers to only provide advice that could reasonably be considered appropriate for the client.

Speaking with ifa, partner education manager for MLC Life Insurance, Marshall Ross, explained that, while the requirement to act in the best interest of the client is included in both the Corporations Act and the Code of Ethics, what is actually necessary to meet this requirement has been greatly exaggerated over recent years.

“The intention was never that the word ‘best’ was to be conflated with the recommendation itself. That was basically born out of this requirement that the government at the time and the industry at the time sought the need to show that the advice was putting the interests of the client ahead of the interests of the advice provider,” Ross said.

“Therefore, it was the client’s interest that was being prioritised. And I think gradually over time, that use of the word ‘best’ became conflated with the actual recommendation itself, which was more the recommendation needs to be the best.

“It needs to be the best product, needs to be the best price, the best rating, all of these kind of objective measures that we might want to lean on, when the Corps Act has only ever asked us to give recommendations that are appropriate.”

Michelle Levy’s fourth recommendation in the Quality of Advice Review final report suggested the introduction of a good advice duty requiring a financial adviser to provide advice that is fit for purpose and reasonably likely to benefit the client, among other things.

To this point, Ross explained that exchanging best advice for good advice would remove some of the confusion that results from using such an ambiguous word as “best”, as it is simpler to showcase how advice was good for the client.

Where are we and what can we do now?

As the situation currently stands, he said, advisers are left relying heavily on the monetary factors of their advice to provide tangible proof of the validity of the advice given.

“It leaves me falling back on external pieces of data to validate my decision,” Ross said.

“Things like price become a lot more important, because I need to show some kind of objective measure that this dollar figure shows that it’s the cheapest, the most cost-effective recommendation, or that I’ve used some kind of research or ratings and that kind of thing to show that it’s the best possible product that’s available when, again, it’s not necessarily what the law actually requires us to do.

“The law requires the recommendation to be appropriate, which simply means it aligns to the circumstances of the client.”

As such, he argued that the word “appropriate” has been somewhat lost in recent years, making it harder for advisers to meet the compliance standards.

“A lot of focus, when it comes to regulation and compliance, has got onto the word ‘best’, which has made it quite challenging for advisers to meet that duty. It’s quite a high and difficult threshold to meet,” he said.

Discussing the merits of cricket players, as an example, Ross explained the challenges that come with using the word “best” in the context of financial advice.

“If I was to come out and say that Steve Smith is the best bat we’ve ever had, I’ll probably get a fair bit of debate and people with different opinions, but if I say Steve Smith’s a good batsman, I’d probably get 99 per cent of people to agree with me,” he said.

“So, you can see that it becomes a lot easier to form consensus based on the language that we use.”

While the government has said that the second tranche of the Delivering Better Financial Outcomes (DBFO) reforms will modernise the best interests duty, there are currently minimal details available and no timeline for delivery of said reforms.

As such, Ross said that Australian Financial Services (AFS) licensees may be in a position to address this issue, at least in part.

“It does require the way we view the compliance process to change a little bit. So it is up to, I suppose, the AFSL, to a degree, to really look at how we view this and look at it through that lens of appropriateness, not necessarily best. And it’s a big shift,” he said.

“We’ve spent a number of years, I think, in an environment where we’ve become quite cautious, and that has led to this kind of gravitation towards best and needing to recommend the best and things like that. But I think changing the way we actually approach it is the most important thing we can do today.

“So, what we require in terms of justification of advice, what we expect when it comes to recommendations, looking at what the law actually says, looking at what our recommendations actually need to be – appropriate, not best – and thinking of best interest instead as this overarching requirement.”