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Adam Samuel: When to say no to clients


In compliance, many things never change. Advisers still defend transactions that have been put through their firms’ books on the basis that the client wanted that type of fund, regardless of whether it was suitable for their needs.

The textbook example often repeated is the adviser who was deeply upset when the FOS upheld a complaint concerning his recommendation of a reputable property fund to a customer who had asked for one.

The client was planning on buying a property the following year. The fund went down in value due to initial charges and a turn in the market and the money available for the purchase was not there. The Ombudsman pointed out that with the clearly stated need for cash in a year’s time, investing in a property fund in this way was not in the client’s best interests. The adviser had acted like a waiter in a restaurant, not an adviser.

Meet the client’s wishes

The Ombudsman was following a long line of comments from the FOS and Personal Investment Authority Ombudsman Bureau to the effect that advice must both meet the client’s wishes and aspirations (the subjective view) and be (objectively) sensible in the circumstances of the customer.

IFAs are uniquely well equipped to reconcile what the client wants with what he or she needs. The inter-personal skills come into play here. The adviser has both to explain the limits of what can be achieved financially and work with the client to modify their wishes to bring them into line with their needs if there is a mismatch.

Firms run into difficulties when they rush to give advice and fail to bottom out things like attitude to risk first. If an adviser makes a recommendation without having a clear idea of what the relevant levels of risk tolerance are and the particular needs of the customer, they will undoubtedly hit trouble if something goes wrong with the underlying investment.

Ombudsmen and regulators will always assume the clients had the lower attitude to risk if there is any doubt about this subject. Similarly, one still finds advisers justifying higher-risk recommendations on the basis that they cancel out lower-risk holdings of the client without checking that the investor is comfortable with an out-of-range recommendation of this type.

Compliance officers and advisers regularly face the same problem. Advisers want to achieve things that cannot be done safely. Good compliance is about helping people to achieve their objectives. However, at times, a real adviser just has to say no.

Veterans of the pensions review should recall the way in which the industry transferred Mineworkers Pension Scheme benefits to personal pensions in the late 80s and early 90s.

The miners often felt that their employers could not be trusted after the 1984 strike and pit closures. Life insurance agents exploited this to damage the retirement income of these people. Almost all the transactions were advised; even those that were not were a disgrace to the industry. The compensation and admin cost of the pensions review was part of the penalty paid.

Advisers sometimes say they could not recommend a product or course of action but since the client wanted to go through with it, they could do it on an execution-only basis. This is wrong in a number of ways. First, if a course of action is not in the client’s best interest, why is an advisory firm putting this business through its books, doing something that it expects will harm the client?

The Institute of Financial Planning’s code of ethics chimes with the FCA’s COBS 2.1.1R(1) in requiring firms to act in the best interests of their clients. MCOB 4.8.2G has said since 2004: “A firm selling what it considered to be an inappropriate product would be in breach of Principle 6 as it would be conducting a regulated activity without regard to the customer’s interests.”

A form of self-deception

Technically, if the client asked for or received any advice from the firm on what to do (on subjects such as provider, fund or contribution level selection), the transaction is not an execution-only one.

Misclassifying it in turn breaches the “clear, fair and not misleading” rule. It is also a form of self-deception. This is an insistent customer case. Since advice is given, disclosure of the risks and disadvantages must be provided to a client who almost by definition is not interested in listening to or reading the disclosure. These, though, are technical answers. The important feature of all this is the adviser’s equivalent of a Hippocratic oath. “I will not harm my customers.”

The type of clients you want will respect you all the more for observing this and the ones that do not should not be your customers.

Adam Samuel is an independent compliance consultant



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