Should you insist that a full financial needs analysis (FNA) be done when clients approach you for advice on a solution to address a specific need?
To answer this question, one must consider Section 8(1)(a) of the General Code of Conduct (GCOC) which states that financial advisors are obliged to obtain information from the client, before providing advice. This is because advice should be based on the analysis (meaning examination, investigation, evaluation, study, or consideration) of information obtained from clients.
The client information required in terms of Section 8(1)(a) of the GCOC, comprises the client’s needs and objectives, financial situation, risk profile – in the event of investment business, financial product knowledge and experience.
It is important to note that this section also states that the information collected should be as necessary for you, as the provider, to provide the client with appropriate advice. Specifically indicating, that appropriate advice takes into account:
- the client’s ability to financially bear any costs or risks associated with the financial product.
- the extent to which the client has the necessary experience and knowledge in order to understand the risks involved in the transaction; and
- the reasonably identified collective needs and circumstances of such members, employees or other natural persons of group clients pension fund, medical scheme, friendly society, employer, or other entity that is being advised.
In terms of Section (8)(1)(b) the GCOC, it is compulsory to complete an FNA based on the information obtained and for the purpose of providing advice. However, the extent of the information collected may vary, as this is determined by clients’ needs.
Section 8(4)(a) of the GCOC makes provision for these instances of addressing clients’ specific or limited needs. This section provides guidance on the extent of information which is necessary for the purpose of the FNA.
When conducting a specific needs FNA, the advisor must consider which information is necessary to analyse to ensure that appropriate advice can be provided. However, when considering necessary information, the advisor may also consider-
- Any specific objectives or needs of the client that the client has explicitly requested the advisor to focus on, or not to focus on, in performing the analysis.
- Any specific objectives or needs of the client that the client and the provider have explicitly agreed to focus on or not to focus on in performing the analysis.
- Applicable surrounding circumstances that make it clear that the analysis can reasonably be expected by the client to focus only on specific objectives or specific needs of the client.
- The fact that the client has explicitly declined to provide any information requested by the provider.
In the interest of protecting both clients and advisors, where a full FNA is not completed, Section 8(4)(b) further requires that clients must be alerted to the limitations and appropriateness of the advice. The client must be alerted to take care to consider on their own whether the advice is appropriate considering their needs, objectives and financial situation and any specific aspects that were not considered given the circumstances.
It is therefore not always necessary to conduct a full FNA, provided that an FNA that fits the purpose is completed and that where limited, appropriate disclosures and warnings are provided.
A practical example of a specific need is where clients require life cover for the bond on a property they have purchased. In this instance, it is expected from you as an advisor to not only accept this as their only need. Rather, you are also required to ask the following types of questions and document the information received:
- Is the bond only registered in the client’s name?
- What is the loan amount?
- Does the client have cover in place to present to the bondholder?
- Does the bondholder require cover for other events like disability, retrenchment, or trauma?
Another example is where clients indicate they can only afford a limited premium, such as R500 per month. This limits the recommended solutions you can offer them.
Where client requests or instructions limit the nature and extent of your advice, they must be alerted to the limitations and appropriateness of your advice. This can be achieved by including a clause in the record of advice.
You could enter into a Service Level Agreement (SLA) with clients who have specific needs. The SLA or record of advice must clearly set out and identify the needs and/or objectives those clients want to address.
When addressing a specific need, nothing prevents you from conducting a full FNA to ensure all of a client’s needs are appropriately identified and addressed. Conducting a full FNA may generate more business for you, as you could address needs that clients were not aware of in the process. Clients may also perceive the experience as a sign that you care about them and want to keep them informed.
Ultimately, the focus should be that clients are always given appropriate advice. There is a general onus on you, as a financial advisor, to render financial services with due skill, care, and diligence at all times, and in the best interest of clients. So, do the right thing and always conduct an analysis.