Collecting information on your client’s specific financial needs, and determining their knowledge on financial products, can mean the difference between giving good advice or bad advice and is crucial in terms of product suitability.
What information should be gathered?
This can be divided into two broad subcategories. Firstly, what is the client’s current financial situation, risk profile, and financial product knowledge and experience. Secondly, what are their financial objectives – that is, their desired future financial situation.
To get to the crux of the client’s goals, needs and priorities, the financial advisor should ask the client open-ended questions.
When it comes to short-term financial goals, the Representative can ask the client what they hope to achieve in the next few months or in the next one to five years? For example, do they want to pay off their credit card debt while still saving for retirement? Do they want to go on planned holidays, access savings at a certain time of the year to pay school fees or save so that they have funds available in emergency situations?
Long-term ambitions – financial goals that will take more than five years to achieve, like paying off a mortgage, planning for their estate, retirement or saving for their dependant’s tertiary education – also need to be discussed.
The specific information that must be gathered will depend on the extent of the mandate, the circumstances of the client and the purpose of the advice.
Generally financial advisors need to gather the following information from clients:
- Assets and liabilities
- Financial situation
- Financial product experience
- Savings
- Debt
- Investment portfolios
- Tax liability
- Objectives
- Reasonably assumed level of knowledge
- Information relating to pension fund, provident fund or retirement annuities;
- Any information in accordance with the requirements in terms of the Financial Intelligence Centre (FIC) Act
After establishing the client’s financial needs and what the client wants, a financial advisor can help them set financial targets that are realistic, measurable and time based. In addition, advisors must use the information that was gathered to inform the advisor’s process of determining which product or service is suitable for the client.
The advisor also has a responsibility to ensure that the client is treated fairly by ensuring that they understand what the financial product entails and how it’ll fit into their financial plan, by providing them with a record of advice, which is written in plain language and in a manner that helps the client understand why the product is suitable and, where relevant, point out any shortcomings or risk areas for the client.
Legislative requirements
Section 3(1)(a)(iii) of the Financial Advisory and Intermediary Services Act (FAIS) General Code of Conduct states that representations made and information provided to a client by a financial advisor must be adequate and appropriate in the circumstances of the particular financial service, taking into account the factually established or reasonably assumed level of knowledge of the client.
Furthermore, Section 8(1)(a) of the FAIS General Code of Conduct requires that before providers can offer advice, they must obtain from the client such information regarding the client’s needs and objectives, financial situation, risk profile and financial product knowledge and experience as is necessary for the advisor to provide the client with appropriate advice.
Additional requirements relating to information
Remember that before you can start gathering information or share that information with third-party product providers, you need your client’s consent to access, obtain and keep and share their personal information, as per the Protection of Personal Information Act (POPIA) and Section 3(3) of the FAIS General Code of Conduct.
What does the Ombud say about information gathering
The cases below illustrate how FSPs can land in hot water with the FAIS Ombud if they don’t gather adequate information or establish a client’s financial product experience or knowledge.
Grobler vs Direct Axis (Pty) Ltd
In this case, the respondent, Direct Axis, rejected a death claim related to a credit life policy (underwritten by Hollard Life Insurance Company Ltd) because the deceased client allegedly failed to disclose a pre-existing medical condition.
The deceased had borrowed R25 000 from WesBank, and a credit life policy was instituted through direct marketing channels to cover the outstanding liability to WesBank in the event of death and certain other eventualities. About two months after the policy was incepted, the deceased passed away from heart failure.
In his determination, the Ombud questioned whether the policy’s terms and conditions were properly explained during the rendering of the financial service and whether the deceased was able to make an informed decision about the transaction and disclosure conditions which would affect the risk in a material way.
The respondent, Direct Axis, claimed that the deceased was advised and understood the exclusionary terms. These were explained to him in the telephonic conversation during which the policy was sold to him and were listed in a terms and conditions flyer that was distributed with the finalised loan and a copy of the credit life insurance policy. Also, the deceased had taken out a previous loan from WesBank, which was subject to a similar credit life policy. Therefore, he should have understood the terms and conditions of the new policy.
The Ombud did an in-dept analysis of the conversation between the deceased and the respondent’s call centre agent. What is critical, the Ombud points out, isn’t the mere disclosure and acceptance by the deceased but establishing whether the respondent complied with its duties in terms of Section 3(1)(a) of the FAIS General Code of Conduct, which requires that disclosures must be appropriate. In other words, the deceased must have understood the disclosures.
The Ombud ruled in favour of the complainant, stating that that the process that was followed was simply not adequate or sufficient as envisaged by the FAIS Act. Before making the recommendation for cover, the respondent should have obtained more information on the deceased’s “pre-existing conditions” and level of knowledge.
Naidoo vs SA Home Loans (Pty) Ltd
This complaint dealt with a rejected claim made by the complainant on a SA Home Loans bond protection plan that insured her life and that of her deceased husband.
In the case of the death of either, this policy was meant to cover the amount the couple still owed the respondent (SA Home Loans). The policy was sold to the complainant by a call centre agent through telephonic direct marketing, and the agent never spoke to the husband even though he was listed as one of the assured on the policy.
Six months after the policy was incepted, the complainant’s husband died due to a pre-existing heart condition, and her subsequent claim was rejected by SA Home Loans Life because of the pre-existing conditions clause.
The FAIS Ombud, who ruled against SA Home Loans, stated that the disclosure about the pre-existing conditions clause made by a call centre agent was inadequate. The complainant was an “unsophisticated” client with basic education, according to the Ombud. “Whilst this may not have been known to the respondent … some simple questions would have led respondent to understand that this is a vulnerable consumer.
“I believe that with this type of consumer more than cursory attention should have been paid to explaining terms, conditions, exclusions, limitations and other restrictions on the policy sold in order for complainant to make an informed decision.”
In addition, the call centre agent never spoke to the complainant’s husband during the financial advice process. “Logic would demand that any discussions relating to the pre-existing conditions of the deceased ought to have been discussed with the deceased himself.”
Furthermore, nowhere in the recorded telephone conversation between the complainant and the call centre agent did the latter ask her to disclose any information that would be relevant to the assessment of the risk and premium. The call centre agent therefore failed to collect sufficient information around the client’s needs and circumstances.
No two clients are the same, so it’s crucial for financial advisors to take the time to talk to their clients and obtain pertinent information on which to base their financial analysis and advice.