Your financial adviser must, by law, take reasonable steps to ensure you are not sold a lemon or invest in a scam, and he or she cannot pass this requirement on to the company that provides the financial product.
This was emphasised by Charene Nortier, the Financial Services Board’s manager of financial advisory and intermediary services (FAIS) supervision, at the recent launch of the South African Independent Financial Advisers’ Association (Saifaa).
Nortier says the purpose of the FAIS Act and the Treating Customers Fairly (TCF) regulatory regime is to protect the interests of you and your adviser by ensuring you receive proper advice and are sold products that are appropriate for your needs.
TCF requires financial advisers to perform a due diligence on both the product provider and the pro-duct before recommending the pro-duct to you (see “TCF aimed at ensuring you can invest with confidence”, below). Your adviser cannot simply read the product information issued by the provider; instead, your adviser must apply his or her mind when assessing whether or not the product and the company are sound.
The due diligence process should reveal anything that may prevent the product from delivering on the undertakings made by the provider.
Nortier says if advisers do not understand a product, including its risks, they need to ask themselves whether they should recommend that you use the product.
Many complaints to the Ombud for Financial Services Providers are the result of advisers accepting the information in providers’ marketing brochures at face value and not thoroughly checking the providers and their products.
Derek Smorenburg, the chairman of Saifaa, says that if financial advisers had performed reasonable due diligence tests, many people would have been prevented from investing in inappropriate products, such as property syndication schemes that subsequently imploded, or so-called investments that were actually scams.
Many advisers’ failure to perform due diligence tests resulted in investors, including financially vulnerable pensioners, losing billions of rands, he says.
Many advisers do not accept that they are responsible for undertaking a due diligence on behalf of their clients, Smorenburg says.
Nortier says the General Code of Conduct under the FAIS Act requires your adviser at all times “to render financial services honestly, fairly, with due skill and diligence, and in the interests of clients”.
A due diligence can be defined as an investigation into a business or person before a contract is signed, or the application of a certain degree of care.
Advisers are required to provide you with factually correct information that will enable you to make an informed decision, Nortier says. Therefore, your adviser must have the correct information before he or she can help you to make an informed decision.
That an institution or an individual has been in an industry for a long time does not automatically mean he or she is ethical, Nortier says. A prime example is United States hedge fund manager Bernie Madoff, who swindled thousands of people out of their savings.
TCF AIMED AT ENSURING YOU CAN INVEST WITH CONFIDENCE
The Treating Customers Fairly (TCF) regime for the financial services industry is aimed at ensuring that you, the consumer, can have confidence in the advice you receive and the financial products you buy.
Charene Nortier, the manager in charge of financial advisory and intermediary services (FAIS) supervision at the Financial Services Board (FSB), says many of the TCF outcomes are linked to the requirements placed on advisers in terms of the General Code of Conduct issued under the FAIS Act.
The six outcomes are:
Outcome 1. Your adviser must ensure that treating you fairly is central to the culture of his or her business. The outcome requires your adviser to render financial services honestly, fairly, with due skill, care and diligence. This includes performing due diligence tests on any product provider with which your adviser has a contract to sell products.
Outcome 2. The financial services and products that your adviser recommends must be designed to meet your needs. To achieve this outcome, your adviser must do due diligence tests on both the product provider and the products. This outcome also requires your adviser to understand your financial situation and needs, and to know which products will be suitable for your needs.
Outcome 3. Your adviser must provide you with clear information and explanations, and must update you with relevant information after the financial service has been rendered.
Nortier says an explanation of a product does not simply mean telling you that a product has performed well in the past, or providing you with the type of information you would receive from a friend at a braai.
Your adviser must ensure that you actually understand how a product works and what it aims to achieve. All material facts about a product or service must be accurately and properly disclosed to you.
Outcome 4. Your adviser must ensure that his or her advice is suitable and takes account of your circumstances. This includes collecting information about your financial situation, your experience of financial products and your financial objectives. This also includes meeting the FAIS Act’s requirement that you are provided with a record of advice detailing why your adviser recommended certain products, in particular, when you are advised to replace a product.
Outcome 5. The products you use must perform in the way that your adviser told you they would. Your adviser must check the product’s past performance and expected future performance. Your adviser must ensure that a company provides service of an acceptable standard.
Outcome 6. The products your adviser recommends must not have unreasonable after-sale barriers that prevent you from changing the product, switching product providers, submitting a claim or lodging a complaint.
WHAT THE FAIS ACT SAYS YOU MUST BE TOLD
The Financial Advisory and Intermediary Services (FAIS) Act stipulates what a financial adviser must do when advising you or selling you a product, Charene Nortier, the manager in charge of FAIS supervision at the Financial Services Board, says. Nortier says your adviser must provide you with the following information:
* How the value of your investment is determined;
* The investment’s underlying assets;
* The past performance of the product;
* The adviser’s and the product provider’s charges and fees, and the implications of these charges on the value of your investment;
* Whether the adviser has a fee rebate arrangement with a product provider, and whether there are rebate arrangements among the providers of the products that he or she recommends;
* When and why the product will not pay out benefits;
* Whether the product has any guarantees;
* How easy it will be for you to access the money you invest;
* The consequences if you terminate an investment before the date of maturity;
* The tax implications of the product;
* Whether there is a cooling-off period within which you have the right to cancel the product;
* Any material risks associated with the product; and
* How the product is appropriate for your financial needs and risk profile.
Once your adviser has provided you with the above information, he or she must provide you with a written summary of:
* The information on which he or she based his or her advice;
* The financial products that were considered;
* The products that he or she recommended, and why; and
* How your risk profile and financial needs align with the recommended products.