“It takes many good deeds to build a good reputation, and only one bad one to lose it.” Benjamin Franklin
Many advisors do not follow all the necessary steps when providing advice, which leaves them exposed to client complaints. If these are escalated to the FAIS Ombud, who then finds in favour of the complainant, the Financial Service Provider’s (FSP) reputation can be harmed.
Trends in FAIS Ombud determinations for the period 2015 to 2017 indicate that not all FSPs conduct a suitability analysis when providing advice. Furthermore, the instance of advisors “not adequately performing a suitability analysis” over this period increased from 78% to 94%.
This regression indicates that FSPs are unaware of the risks of advisors not following an advice process. The General Code of Conduct (GCoC) is clear about FSPs’ obligations in terms of conducting a suitability analysis for a client before advice is rendered. Non-compliance with regulatory requirements, as set out in the GCoC, leaves an FSP open to client complaints and possibly Ombud determinations in which claims are upheld.
An Ombud determination, one of the biggest fears in the advice industry, can negatively affect an FSP in many ways. Besides the FSP’s reputation being at stake, it hits at the heart of the business and affects its ability to deliver on business goals and objectives, such as client retention and growth, financial goals and meeting responsibilities to family, staff members and clients.
There is also an emotional impact. The sleepless nights and worry whilst waiting for the outcome can be debilitating. Thereafter, having the FSP’s name published can be devastating and severely damage its reputation. Would trust relationships continue thereafter? Would staff members want to continue working there? Would clients feel comfortable that the advice provided and product recommendations were of sufficient quality to deliver on promises made? Would clients still refer friends and colleagues to the FSP?
To help avoid client complaints based on the absence of a suitability analysis, you can do the following:
- Include ‘reputation’ and ‘risk of providing unsuitable advice’ in your risk management plan. If they are already there, review your current controls and adjust if necessary.
- Have a documented advice process at your FSP, which includes the suitability requirements set out in the General Code of Conduct (Part VII: Suitability s8(1) and s8(2)).
- Add the advice process to your Operations manual, under Business Processes. This should be accessible to everyone in the business.
- Conduct training to raise awareness and confirm adherence to the advice process.
As part of Key Individual (KI) responsibilities, you can also keep track of the documented advice process to analyse and track performance over time. The documented advice process should be the standard by which to monitor all new business transactions to ensure adherence to the suitability requirements.
By recording and analysing the information, the KI can identify gaps in the advice process, such as the percentage of:
- new business transactions that followed the required advice process
- transactions that were monitored
- documentation returned for completion due to insufficient evidence that the business process standards were met
- documentation that had serious errors, which could mean the advice may not have been suitable and the wrong product may have been recommended
- documentation returned in the last month that was not completed according to required standards.
You can also consider putting in place a process to monitor general business information such as:
- Persistency per advisor for the past 12 and 24 months (quality of advice)
- Client segments where most lapses occurred (client retention)
- Number of reviews conducted, including the number of new transactions based on changed circumstances (client retention)
- Impact on business goals and profitability, such as how many existing and future income opportunities were lost and how many new clients had to be sourced to replace the income lost.
In addition to the compliance aspect, adhering to the advice process also has benefits for your business. Clients feel valued and experience evidence that the advice provided is based on a process that takes their unique financial needs and objectives into account and delivers on promises made. When supported by ongoing service, delivered profitably per client segment, this process builds long-term relationships and client trust. This significantly reduces the probability of client complaints.
Resulting from this, referrals increase, and the new business growth contributes to business goals and objectives. Research shows that 57% of clients refer a friend more often if the friend has a financial challenge rather than because the friend asked for a referral. In other words, the top reason for referrals is that a client proactively reaches out to help a friend.
By paying attention to what takes place in the business daily, FSPs and KIs can detect and manage risk, the ultimate aim being retention of a strong, positive reputation and a thriving business that increases in value.
Please contact us if you need assistance with setting up an Operations Manual or documenting your advice process. If you would like more information on Key Individual Responsibilities, why not attend our KI Responsibilities seminar, click here to read more.