Client advice records have recently come under fire for financial advisors failing to provide their clients with an adequate record of the advice as envisioned in the Financial Advisory and Intermediary Services (FAIS) Act. One of the key reasons for this could be because a financial needs analysis is sometimes conducted as a mere formality and as a means of “ticking the box” in compliance. From our experience, financial advisors do not always do an in-depth analysis of the client’s circumstances and financial position before making a recommendation, thus resulting in an inadequate client advice record.
Financial Services Providers’ obligation to comply
Financial advisors are compelled to comply with the FAIS Act and the General Code of Conduct for Authorised Financial Services Providers and Representatives (the Code of Conduct). Below are the specific sections of the Code of Conduct that are particularly relevant to client advice records and financial needs analysis:
- Sections 8(1)(a) – (c) requires a financial advisor to obtain appropriate information from the client regarding his/her financial position. The financial advisor is required to conduct an analysis based on the information provided, provide the client with adequate advice and identify financial products that are appropriate for the client’s risk profile and financial needs.
- Section 8(2) requires a financial advisor to ensure that the client understands the advice given and that the client is placed in a position which enables him/her to make an informed decision regarding the product selection.
- Section 9(1) requires a financial advisor to provide the client with a record of advice which contains a summary of the information and material on which the advice was based, the financial products which were considered, and the financial product or products recommended with an explanation of why the product or products selected, is or are likely to satisfy the client’s identified needs and objectives
Always keep a record of both – Client Advice Record & Financial Needs Analysis
When a complaint arises, the initial piece of information placed under scrutiny by the FAIS Ombud or legal counsel is the client advice record. A client advice record is unlikely to be deemed adequate by an Ombud or Court of law if a needs analysis of the client’s financial position is not properly conducted.
A documented record of advice and financial needs analysis is therefore not only important for the client, but of great significance for a financial advisor who has been accused of non-compliance and is now required to prove that the advice rendered was adequate and appropriate for the client’s risk profile and financial needs and circumstances.
The case below was highlighted in the FAIS Ombud’s 2016-2017 Annual Report in which a settlement was reached for failing to conduct a financial needs analysis resulting in inappropriate advice.
Mr S retired as a member of his employer’s pension fund. He was the sole provider for his family. Mr S had sustained a significant amount of debt, which he had consolidated by taking out a loan shortly before he retired. This had been done in the knowledge that he would have access to one-third of his pension benefit, which he could use to settle the loan.
On consulting an FSP, he was advised to buy an annuity, which resulted in his entire pension benefit being transferred into the annuity. When Mr S asked about taking a third of the pension benefit in the form of a lump sum, he was told that he was unable to access the money.
The matter was reported to the office of the FAIS Ombud. The FSP was asked to produce evidence that it had obtained all available information about Mr S’s financial situation. It was established that the FSP had not conducted a proper financial needs analysis resulting in an inadequate and incomplete record of advice. This failure led to the selection of a product that was inappropriate to Mr S’s needs.
The FSP was found to be in contravention of the FAIS Act and the Code of Conduct. The Ombud recommended that the FSP pay Mr S an amount equal to one-third of his retirement benefit in full and final settlement, which it did.
The value in keeping a record
Remember that keeping a documented client advice record and conducting a proper financial needs analysis is not only beneficial for a Financial Services Provider (FSP) when the Ombud comes knocking on the door, but will also add great value to those FSPs who want to run a sustainable business, create a reputation within the industry, and increase client retention and referrals. FSPs should not conduct a financial needs analysis and keep a client advice record only because it is required from them in terms of legislation. FSPs who do this, will only be acting to their own detriment.
The Registrar has published an invitation to comment on proposed amendments to the General Code and Specific Code for Short-term Deposits. These proposed changes introduce adjustments to how advisors engage with their clients and obtain information to provide suitable advice.
Amendments under section 9 provide that the Registrar may determine the format and content of the record of advice. Advisors will need to ensure that the advice provided is tailored to the specific needs and circumstances of each client. Thus, even if the record of advice has a prescribed format, the responsibility to record the information inside that format, remains that of the advisor.
For a comprehensive explanation of what needs to be included in client advice records, read “What should advisors include in a record of advice?”