What does it mean to bring the financial advisory industry into disrepute?

I've recently been granted Authorised Financial Adviser (AFA) status. This enables me to give personalised financial advice in relation to investment products and provide investment planning services, on top of insurance advice. 

Because I'm now an AFA, the Code of Professional Conduct for Authorised Financial Advisers (the Code) applies to me. 

The code prescribes a number of minimum standards. Very broadly, they fit into the following categories:

  • Ethical behaviour. For example, the interests of clients must come first, and conflicts of interest must be managed effectively. 
  • Client care. Clients need to be provided with sufficient information to make informed decisions; the nature and scope of service needs to be agreed upon; and personalised services need to suitable for the client. 
  • Competence, knowledge, and skills and continuing professional training. 

I'm used to adhering to codes of this nature. I'd like to think that I've internalised a lot of these standards of conduct as a lawyer and professional services provider in other capacities.

I've been giving a lot of thought to one of the standards in the Code lately. It says:

"An Authorised Financial Adviser must not do anything or make an omission that would or would be likely to bring the financial advisory industry into disrepute."

The commentary relating to this standard explains that it:

"prohibits an AFA from conduct that would undermine public confidence in the professionalism or integrity of the financial advisory industry. However, this Code Standard does not prevent an AFA from commenting in good faith on the business, actions, or inactions of any person (including any other financial adviser, financial adviser group, financial service provider or industry body) or from [reporting breaches to the Financial Markets Authority in accordance with the Financial Advisers Act 2008]". 

It's worth pointing out that this type of code is not unique to financial advisers. The rules of conduct and client care for lawyers notes that "The preservation of the integrity and reputation of the profession is the responsibility of every lawyer".

There are a couple of reasons I've been thinking about this particular standard in the context of financial advice recently:

  • I'm establishing my own business, and I'm working very hard to build a business model that aligns my interests with the interests of my clients. I won't be satisfied unless I'm "best in class" in this respect.

Part of communicating my value to prospective clients and referrers is by contrasting my business model with other providers in the market. For example, I'm proud to provide a fixed-fee service. If I explain the inherent conflicts with the common remuneration structures in the industry, such as commission-based remuneration for insurance and asset-based fees for investments, and contrast my business model with the traditional model, am I bringing the industry into disrepute? 

The author of this article isn't an adviser and as such isn't subject to a code of professional conduct. She doesn't need to worry about bringing the industry into disrepute from that perspective. But if her points are factually accurate and point out issues that need to be addressed, is she bringing the industry into disrepute?

The more I think about it, the more I think that it's the industry participants who have sub-par business and advice processes, or who set the conditions making this sort of conduct systemic, or are complicit, that are ultimately doing the industry a disservice and bringing it into disrepute.

(I'm not saying I agree with the author's points. Most advice I've come across is of good quality and is likely to put clients in a better financial situation than they would have been if they hadn't received advice. But it is true that I've seen advice that has broken my heart.)

The sign of a healthy profession is one that encourages its members to call out the practices that need to be addressed so it can become an even better profession. The sign of a healthy profession is one which enables and encourages its participants to be vocal about what is good for clients and the industry as a whole.

It is in this spirit that I will sometimes make hard calls on this blog and when I speak with people about financial advice. I believe passionately about good quality financial advice. It's why I'm in this industry, even though I could be focusing on areas that are arguably more prestigious and better remunerated.

My starting point is what is good for clients.

My end point is being a part of this industry which is a profession that is aligned with clients and helping them achieve their financial goals and manage their risks.

The best way to build up the reputation of this industry is to put clients first and be vocal about whether and how this is done. 

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.