Ask your advisor what they do, not who employs them


We read with interest the article by Michael Haldane of Global & Local Investment Advisors titled: ‘Financial advisor vs broker: the key differences‘, which raised some interesting points. However, we believe that the article missed the mark in some key areas.

  • We do not believe that the term ‘broker’ has relevance in the professional advice space any more. Over the years financial advice has continued to be professionalised, either through increase regulatory requirements, or by financial advisors voluntarily deciding to pursue professional designations like the CFP® professional or FSA™ designation, and recognition must be given to this.
  • A financial advisor’s job title should not be defined by where they are employed, as employment does not change the essential activities of the financial advisor.
  • The employer would set expectations of their advisors based on their objectives. This could either be the delivery of advice or the sale of products.
  • It is common knowledge that even in the independent advisor market, some firms focus on the sale of a product, not holistic advice. Similarly, some tied agents focus on holistic advice as opposed to selling a product.

Financial advice vs information provided to sell a product

We believe that the real problem is that financial product information often gets positioned as ‘financial advice’. This creates enormous confusion in the marketplace. While the product seller may indeed go through a more detailed process of getting to know the client and understanding the client’s fact situation, the focus for the transaction is the eventual sale of a product.

The ‘advice’ provided to the customer typically tends to be information about one or more products that are intended to result in a product purchase by the buyer.

Financial advisors must be clear in their engagements with consumers on what their advice philosophy is:

  • Do they follow a holistic advice-led approach, where the focus is on understanding you as a client, or
  • Do they follow a product-directed approach where the focus is on finding a suitable product to fill a pre-determined need?

Product-led approach

Financial advice as it is currently defined and largely practised, is typically delivered to address a client’s stated need, and is of limited duration. Usually, the solution involves a product.

Holistic financial planning approach

The financial planning process consists of developing strategies to assist clients in managing their financial affairs to meet life goals, and can involve reviewing all relevant aspects of a client’s situation across a large breadth of financial planning activities (including inter-relationships among often conflicting objectives).

The client-centric process of financial planning may address and focus on the client’s unstated goals or needs, be comprehensive in nature, and may result in the delivery of a financial plan and not necessarily a product sale.

Which one do you need?

When engaging a financial advisor, the first question that should be answered is which approach do you need? Are you looking for:

  • Product information providers, whose primary focus is to sell from among a set of products, who possess information on the pros and cons of the various product lines
  • An advisor whose primary focus is to sell the product of a manufacturer or distributor, who possesses information on their product line, or multiple product lines
  • A financial advisor who meets regulatory and/or professional advice obligations, and focuses on the consumers’ needs and objectives before recommending products,
  • A financial planner who meets professional financial planning obligations, and focuses on the client’s needs and objectives before developing strategies which may or may not result in the delivery of products.

Additional questions 

Once you have determined your high-level need, and you need to engage a financial advisor or financial planner (as opposed to just buying a product). We suggest that you interview two or three advisors to find the right fit and ask the following questions:

  1. What are your qualifications?
  2. Are you a CFP® professional?
  3. Are you a member in good standing of a SAQA-recognised professional body?
  4. How can I verify your professional status?
  5. How many years’ experience do you have giving advice?
  6. Can you explain the services that you offer?
  7. How are you remunerated for your services?
  8. Are you licensed with the Financial Sector Conduct Authority?
  9. What service do you offer with regards to the implementation of solutions and financial products?
  10. After implementation, what ongoing services do you provide?

Conclusion 

We believe that the principal reasons a financial intermediary or firm provides a customer with an unsuitable product are due to:

a. A lack of knowledge of one’s own abilities and obligations to the customer;

b. A lack of understanding of the client’s goals, needs and objectives (and to a lesser extent risk tolerance);

c. A lack of knowledge of the product and its potential to impact the customer’s financial situation adversely; or

d. The product seller’s external obligations or motivation for personal gain (resulting in an unsustainable conflict of interest), which compromises the duty of care owed to the customer purchasing the product.

The situations described in (a), (b) and (c) above speak to the practitioner’s professionalism, competence, an understanding of his or her own abilities, obligations to the customer, and an understanding of the customer’s needs and the products being sold.

The situation in (d) speaks to an insufficient duty of care afforded to the customer by those whose personal interests or external obligations conflict with public expectations and the customer’s needs, which can be exacerbated by the absence, or by a limited form, of remuneration or other disclosures.

 If we as a financial services industry and financial planning and advice profession want to (re)build the consumer’s trust we need to be clearer on the services that we offer and not try to disguise the selling of a product as holistic financial advice.

David Kop is director of relevance at the Financial Planning Institute of Southern Africa