Do clients take the time to read disclosures? If not, what’s the point? Are disclosures really that important? The short answer is yes. It’s a common misconception in the industry that clients pay little to no heed to disclosures, or that disclosures aren’t really that important. In terms of regulation, disclosures are seen as a protection mechanism, and providing appropriate and clear disclosures is a critical step in ensuring informed decision-making.
One aspect of disclosures that often goes unnoticed is how disclosures can benefit and protect advisors. We look at how disclosing information can boost your business.
Clients must be properly informed:
As an advisor, you are required to act professionally and adhere to regulations and comply with professional outcomes, like Treating Customers Fairly (TCF). This requires you to not only provide your clients with disclosures but to also ensure that the information is clear and in plain language. Clients must be able to make informed decisions on whether the recommended product or products suit their needs.
Simply handing your client an information pack to read won’t do – you need to ensure that they understand how the financial product works, as well as any terms and conditions related to it. According to Section 8(2) of the General Code of Conduct (GCOC) of the Financial Advisory and Intermediary Services (FAIS) Act: “The provider must take reasonable steps to ensure that the client understands the advice and that the client is in a position to make an informed decision.”
In addition, clients with no background or knowledge of financial products or the financial industry will need a more thorough and clearer explanation.
What must be disclosed?
Sections 4, 5 and 7 of the GCOC sets out what information providers must disclose when rendering a financial service. In a nutshell, you must share the following with your clients:
- Information on your role as a financial advisor.
- Information regarding the product provider.
- Information regarding the financial service.
How disclosures can benefit your business:
Disclosures are so much more than information on pieces on paper – they are an introduction to you as a professional, and establishing a great relationship with a client starts with a good, strong introduction.
You should take pride in your disclosure letter and use it as an opportunity to discuss what services you can offer your client. It can also help put your client’s mind at ease. In addition, if your client understands how the product (plus the fees involved) works from the get-go, chances are you won’t have to field as many follow-up questions later, and this can also improve client retention by ensuring that your client understands the benefits of the product and your services. In other words, they should know what they are paying for.
A conversation starter: Section 5(d) of the GCOC requires a Representative to share details on the financial services they are authorised to provide. The mere disclosure of this can benefit your advice process.
Consider this scenario: A client approaches you because they want to take out life insurance and disability cover. It would benefit you as a Representative to inform the client that you can also render financial services on other products. For example, you’re licensed for short-term insurance products as well, which may address the client’s need to insure their valuable belongings. By informing your clients of what financial services you’re authorised to provide, you can create a discussion around their additional needs and how you can assist.
Putting the client’s mind at ease: For many clients, taking out insurance or purchasing financial products can be a daunting experience. How can they be sure that they are being assisted by a professional, capable advisor? How can they be certain that their advisor is connected to suitable product providers?
Section 5(b) of the GCOC requires that concise details of the legal and contractual status of the provider must be shared in a manner which makes it clear to the client which entity accepts responsibility for the actions of the advisor in the rendering of the financial service involved and the extent to which the client will have to accept such responsibility. This is also a good time to explain your contractual arrangements with product providers, and your professional indemnity cover (and/or fidelity insurance or guarantees).
These disclosures help build trust because the client is assured that they are working with a professional advisor, and they know that the FSP will accept responsibility for the actions of its Representatives.
Helping clients understand the product: Clients are generally not well versed in reading policy or investment documents, and this is why disclosure during the advisory and intermediary service process is crucial. How can they be sure that the product will cover them or whether it’s suitable for their needs? Always be clear on the terms related to the product and identify that it has exclusions. The client must be informed of the nature and material terms of the contract or transaction. In general, this includes full and frank disclosure of any information that would be reasonably expected to enable the client to make an informed decision. This also includes contractual information, material illustrations, projections or forecasts.
The more information you can provide about the financial service, the easier it will be for clients to understand it, and the fewer queries you will have regarding fees. Always ensure that your clients are aware of the scope of your services and any fees and commission earned for your services. The provision of clear disclosures is clearly linked to TCF Outcome 3 (provision of information) and TCF Outcome 5 (services and products perform as expected) and sets the tone for an advisor’s initial engagement and ongoing communication and experience with the FSP and advisor.
Disclosures are mutually beneficial because it demonstrates the fair treatment of clients by enabling clients to make informed decisions about their financial products and financial service to ensure a better fit – so the FSP benefits from it too.