This week we will be concluding our discussion on fiduciary responsibility by looking at the last two areas of fiduciary responsibility – Service & Pricing.

It is important when discussing service that there are two parts to make up the entirety of a service – quality of the service, and the service delivery (i.e. how the service is delivered).

Quality Service

When it comes to services, quality is always a difficult factor to quantify. Even ASIC’s current definition of the quality of financial advice, as related to the ‘suitability’ and ‘appropriateness’ of the advice, is widely open to interpretation.

However, putting the definitions of ‘appropriateness’ and ‘suitability’ aside for a moment, the bigger question in regards to fiduciary responsibility is whether, within the context of operating in a position of trust and confidence for the client, ‘appropriateness’ and ‘suitability’ of the advice are sufficient to meet the requirements of being a fiduciary.

And arguably the answer is that they are insufficient, as ‘appropriateness’ and ‘suitability’, although setting a reasonable standard, do not necessitate the provision of the highest quality of advice.

Akin to advising a client on climbing a mountain, ‘appropriateness’ requires only that the solution demonstrate that it can help the client reach the top of the mountain. However, there might also be 4 other ways, and delivering to the “best interests” of the client would require that the solution not only help the client reach the top of the mountain, but be the best of the 5 different ways to do so.

This would have a significant implication for financial planners, as the onus would extend to include not only demonstrating that the strategies recommended by the planner 1) help to achieve the client’s objectives, but 2) that they are also the ‘best’ way to do so – where best would be defined by the unique objectives of each customer, whether it be time, cost, etc.

To facilitate this would most likely require at least some form of presentation of a range of different solution “options” or “scenarios” to the client, to demonstrate how the recommended solution is the one that best achieves the client’s objectives in accordance with their requirements.

Most likely, this would add to the workload of most financial planners, increasing service delivery costs and requirements, or at least requiring a change in the current generation of platforms to allow for the consideration of different options for the client’s circumstances, with flow-on costs. This leads us on to…

Service Delivery & Pricing

Of course, one of the issues with increasing the service delivery costs is that this usually results in an increase of the price of the services to the end client.

However, as we touched on briefly in Part 1 of this discussion, there is a prevailing view that “a fiduciary must not profit from the fiduciary position”¹, which places us in a tight bind between the need to fulfill the fiduciary responsibility to clients, while still allowing financial planners to operate a viable business.

If we were to take a more balanced view and make the following assumptions – that 1) it is acceptable for financial planners to earn a level of income and profit for their efforts; and 2) in order to as closely align to the “no profit” rule as possible, the level of profit earned from clients should be of a reasonable, acceptable, and conscionable level, then this leads us to two conclusions, that a fiduciary responsibility requires a planner to:

1. Price their services in good conscience and as cost-effectively as realistically possible to the end client; and
2. Continue to improve the efficiency and effectiveness of their service delivery in order to, where possible, share (in whole or part) any efficiencies with their clients.

The first point is relatively straightforward. However, the second point has the greatest implication of all the points we have discussed to date, as it would mean that, from a service delivery point of view, under a fiduciary responsibility, there is an obligation for financial planners to be continuously aiming to be better in how they deliver their services (e.g. not completing the SOA in 10 hours when it could be completed in 8 hours), and to share such improvements with their clients in order to provide the “best” service, whilst maintain a commercially viable operation.

This in a way helps us to summarise effectively the implications a fiduciary responsibility would have on financial planners, which are the need to:

1. Set clear and realistic expectations of the benefits and outcomes of their services with clients, and ensuring that clients actually understand these expectations,
2. Offer the highest quality of their advice, by being able to demonstrate that their advice “best” helps to fulfill the client’s objectives, and
3. Continuously improve the effectiveness and efficiency of their service delivery in order to offer the “best” price for their services to their clients.

Ultimately, the running theme is that fiduciary responsibility requires planners to not just say “that’s good enough”, but to constantly be looking at how they run their businesses and to deliver their services to provide the most optimal service for the client – thereby helping to achieve as close to the client’s best interests as humanly possible.

So while the actual definition of a fiduciary responsibility as it applies to financial planners is still yet to be fleshed out by the FOFA committee, it is nevertheless useful for us to consider, in the on-going fight for consumer trust, what implications and impacts fiduciary responsibility might have on how practices currently operate and start to prepare for what changes might be needed in the near future.

Lap-Tin

1 – Meinhard v Salmon (1928) 164 NE 545 at 546

Disclaimer: This article is of a general discussion nature only and should not be construed as any form of advice.