An important question which advisors must ask themselves, is whether they have given their clients enough information about a financial product and explained the different aspects of the product in such a way that clients are placed in a position to make informed decisions.
Client’s should understand not only how a product is likely to meet the client’s needs and objectives at the point at which the advice is given, but also how the performance and the cost of a product could change over time as this may have consequences for the client at some future date.
Premium patterns and guarantee terms
To practically address this question, we will consider two important factors affecting life insurance premiums, these being premium patterns and guarantee terms (the period that the premium structure at inception of the policy will remain unchanged). Many clients may not understand how premium patterns and guaranteed terms work and how these could affect them later on.
Advisors have a responsibility to ensure that these two aspects – ‘premium patterns’ and ‘guarantee terms’ – are explained and fully understood by the client and that the client has had every opportunity to make a fully informed decision. Lack of understanding and/or mis-matched expectations could result in a FAIS Ombud complaint once the guarantee period expires.
This aspect of the advice should be recorded in such a manner that an advisor can provide evidence of this should a client lodge a complaint.
In most instances the client is given options by the provider of the product once the guarantee period expires. However, these options may not always suit the client’s needs and objectives, which may have changed over time and could, result in an ‘unhappy’ client and possibly a complaint.
One must also consider both aspects when policies are replaced, especially when the only reason for the replacement is that the premium will be lower. The benefits together with the premium pattern and the guarantee term must suit the clients’ needs, their financial situation and circumstances
If there is an unexpected increase in the premium at the end of the guarantee period, there is a possibility that clients could complain about the increase. The problem can also arise when the premium increases to a point where a retired client is not be able to afford to pay the premiums, the client is no longer insurable and replacing the policy with a lower premium is, therefore, not possible.
If an advisor needs to respond to a client complaint, there must be sufficient evidence that the client was able to make an informed decision after being provided with all the facts. A signed quotation may not be sufficient and advisors should be able to demonstrate with concrete evidence that this important information was explained to the client.
The best way of doing so is to clearly record this aspect in the record of advice and to confirm that the quote including the explanations and definitions of these two important contractual conditions were discussed with the client. Advisors should record the advice given to the client in respect of the important information about the financial product.
The FAIS General Code of Conduct, parts 2, 6 and 7, places specific duties on advisors. If advisors follow the requirements properly and these are properly recorded, the likelihood of a client complaining will be reduced.
This links strongly with Treating Customers Fairly (TCF) outcome 3 which states that clients must receive clear information during and after the sale and TCF outcome 4 which states that the advice received by a client must be suitable and take into account the circumstances of the client.
It is therefore important that advisors fully understand their duties in terms of the General Code of Conduct and how this links with Treating Customers Fairly. No professional golfer would be playing at top level without a detailed knowledge of the rules. The more Gary Player practised, the better he became! Know and practice the rules of your game!