Article 4: Standard 3 – Avoiding conflicts of interest and duty in risk advice (SMSF, Business, Estate planning)
By Marshall Ross, Acenda Life Partner Education Manager
Financial advice deals with a myriad of complexity across different kinds of clients. From individuals to families, businesses, and Self-Managed Super Funds, this complexity results in a variety of entities and interests to consider when providing advice.
The Financial Planners and Advisers Code of Ethics 2019 (code of ethics) specifically speaks to not just conflicts of interest but also conflicts of duty. The standard set in the code of ethics is clear in its prescription that where such a conflict exists the provider cannot advise, refer, or act - creating a need for financial advisers to effectively identify and avoid any potential conflict before it arises.
This is often easier said than done as conflicts may not be immediately obvious. Conflicts may be unspoken or implied in client engagements, and an adviser will need to thoughtfully probe deeper to make a true professional assessment.
The first step to successfully navigating conflicts is to identify who the client(s) is. In the case of an individual or couple this is often straightforward, but as more variables are considered in the advice conversation, such as related businesses, SMSF trustees, family trusts, corporate trustees, and estate matters, there needs to be clarity of:
- Who is the client (individuals and entities)?
- In what roles are they a client (e.g. as an individual and/or as a director of a corporate trustee)?
- What are their primary interests in each role?
- Does this conflict with the interests of another client role?
Mapping out the overall structure of the advice being provided can help with identifying potential red flags where a conflict may exist and give clarity as to how this conflict may be avoided.
If a conflict of duty does exist, such as in the case of a marriage break-down or distribution of an estate between beneficiaries from superannuation where two or more parties are dividing limited assets, the code of ethics is clear – the adviser cannot act. This may mean:
- Moving one or more clients to a different adviser within the practice if confidence exists that there is no overlap between the two advice providers and their client engagement.
This option requires rigor in the separation of those advisers and the information the advice teams reviews. This referral and separation should be clearly noted in the client file and communicated to the client in a transparent manner with a documented understanding of why and should include consent to the change.
- Referring one or more clients to an external third party to provide further advice. This may require the forming of trusted relationships with other advisers in a licensee or local network where the ability to refer with confidence of service exists. Again, this process should be done with transparency, without any financial gain or commercial benefit, and with the needs of the client at the centre.
- Communicating to one or more clients that the advice relationship will cease temporarily and may be re-engaged after a period of time to allow for resolution of any conflict.
If taking this path, the adviser should consider the impact on their client not receiving service during this time and whether a referral would be more appropriate if significant short-term need exists and the client may be disadvantaged if they didn’t receive advice during this period.
Any cessation of the advice relationship should be accompanied by a subsequent cessation of any fees and a clear documentation trail of exact dates, conversations, rationale, and what services were provided prior to the advice relationship being suspended.
The financial adviser code of ethics is unique in its threshold for conflict - clearly stipulating that all conflicts must be avoided. In other professional codes there is frequently the ability to disclose and manage conflicts – allowing the provider to act transparently and declare any conflict while documenting how the conflict will not impact the advice or services given.
Without this flexibility, financial advisers do not have the option to manage conflicts, and when a conflict is identified, a clearly documented action must be taken to avoid the conflict.
Conflicts of duty are complex and not always immediately apparent. Advisers must show a high degree of care to appropriately navigate their client relationships in line with Standard 3 of the code of ethics to deliver the best possible outcomes for clients.