Which is the riskier business? Advice or Product?
Russell Hutchinson ponders what is more risky: Giving advice or making products.
Wednesday, October 18th 2023, 1:51PM 
19 Comments
by Russell Hutchinson
Perhaps we should say – which area presents the greater compliance risks: providing advice or providing product?
It is something of a truism that insurers, for example, tend to prefer the risks of supplying product, and view the giving of advice as risky.
Advisers on the other hand, find that insurer reluctance to undertake any advice risks as strange – they, obviously, prefer the risk of providing advice.
But the point is more sharply made when you consider those large financial institutions which have left the advice market: for example, many banks had life advisers and have shifted from the provision of advice to straight referral, deeming this to be lower risk.
Few advice businesses invade the product segment, some who have offered product in the past, have also withdrawn from the market – consider Southland Building Society, for example, who now maintain an adviser group, but do not offer their own insurance products.
We know that there are risks in each part of the value chain – product and advice.
There are substantial volumes of complaints made about both providers and adviser companies.
We also know that insurers often see themselves as custodians, ensuring compliant practices by advisers through accreditation and monitoring.
They can be forgiven for taking on this role – it has been, essentially, forced upon them by conduct law. It is logical too: larger, better-resourced companies, with wide market influence are the logical place to go if you want to try and lift standards across the sector.
Yet advisers can also be forgiven for thinking this is a bit rich.
Having worked with insurers for many years, most feel that the insurers themselves have much work to do to get their house in order from a compliance perspective.
They too can be forgiven for this view.
The Financial Markets Authority, starting with the conduct and culture review, and continuing through a range of investigative processes, have identified fair dealing issues which they have sought to have remedied.
They have taken these actions to the courts and obtained penalties against insurers totalling nearly $10 million since March 2021. There are some actions still ongoing.
Returning to the question "which is the riskier business?"
I would not now want to pick an answer.
There is no part of the industry that can claim great superiority over other parts.
I think it is useful to say that there are substantial risks in both providing product and providing advice.
The FMA is being persistent in pursuing improvements in market practice wherever it finds issues of concern.
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Comments from our readers
On 20 October 2023 at 11:09 am JPHale said:
Very well put Russell, it provides a great perspective on some of the points I’ve been poking at and lighting fires under.
There is risk across the spectrum and probably more on the advice side as Steve outlined.
The reality of advice is it is based on a fundamental of the provider acting in good faith and delivering on what they have promised.
An insurance contract is a promise to turn up and put whole the insured when the event happens.
This means conduct issues with a provider 10-20-30 years later is a real problem. Not because you can't review and move, but because the client can't move in response to these policy contractions due to underlying risk issues that have developed.
This is where the recent issues with Southern Cross, AIA, and to a lesser degree Fidelity Life and Asteron Life, become significant advice risks.
I'm talking about historical products where providers changed things long after the policy was taken that disadvantages the client.
Asteron Life specifically tackled this when they released the current single life policy structure, and I've been told that Fidelity Life are working on addressing the forced underwriting of one life with policy splits on old policies (Tower and legacy)
These things can be accommodated, the problem when they do is the gap from those previously disadvantaged. As people will have lost benefits or reduced coverage as a result.
The advice risks we face giving advice today on new cover is far less than advising on existing older cover; cover before the life insurance tax changes, and another group that is before passbacks started.
This is going to be an area that nib is going to have to consider when they come to market with a full suite of adviser products. How to future proof what on the face of it looks simple today.
Partners and Chubb also have their challenges, as policy administration and change also come with historic wording hangovers as people add and move cover around. Meaning increases in policies could result in more expansive products than the cover on sale at the time because of the existing benefit wordings.
With a few exceptions, our providers do a pretty good job overall, and that's something we should also celebrate.
On 20 October 2023 at 11:17 am Backstage said:
Russ, have I missed something? Is there any doubt? Advice surrounding product is I feel more of a risk. Product without advice is product. If it states what it is and is fit for that purpose and makes no other claims then I would imagine the "buyer beware" comes into play. Wrap that product in advice then it is "seller beware". I could have missed the point? On 20 October 2023 at 2:44 pm Murray Weatherston said:
J have you had a Damascus moment?
Your last sentence "With a few exceptions, our providers do a pretty good job overall, and that's something we should also celebrate." seems completely at odds with your defence of CoFI
On 24 October 2023 at 11:41 am JPHale said:
@Murray, don't miss a beat do you?
On the whole, they could be a hell of a lot worse, when compared to what goes on overseas. But that doesn't mean there isn't room for improvement.
The challenge is your experience isn't insurance and insurers, you haven't seen the challenges they create out of sight, especially with people who don't have means, unlike your average wealth client.
The reality of the typical wealth adviser is they aren't playing in the space with people needing basic means covered. You don't see the ground-level need the majority of the population have.
We need CoFI for all the reasons I have said, at the same time the engagement and approach by most providers on solving problems is pretty good.
The problem is not all of them are and the bigger they are the more they do what the hell they want despite the need to put clients first.
CoFI is needed for the few exceptions because they are the ones causing the most harm. The harm that is engineered not to be visible and falls into the gaps and cracks in the systems that they have created.
These are the people left holding the bag after paying for a product for decades only to find it doesn't deliver on what was promised.
They are seen as isolated cases, not enough seen at the same time by the same people, to be seen as systemic, resulting in the big players getting away with it.
It's the classic divide and conquer, where those impacted are unable to organise to represent themselves as a larger group.
They do, however, make a bit of noise in social groups and the consistent theme is they don't know where to go for assistance. Knowing that the resulting processes are stacked against them.
The SX non-surgical issue being one, the benefit has been removed, and those wanting to claim that could have in the past can't.
They can't take an effective complaint because the benefit was removed under the terms of the contract, and the complaints process is just going to side with the insurer because they were allowed to do that.
The usual comment that comes back from those who don't understand what goes on here is trite, suggesting they could have moved or gone somewhere else. Most have pre-existing conditions or were in group schemes, and couldn't move to better places.
A hell of a lot of people rely on providers, especially insurers, to do the right thing. When providers don't, clients have very little leverage to fight back. Most are in a place where they don't have the energy to either because they are just dealing with day-to-day survival.
On 25 October 2023 at 4:49 pm Amused said:
Really sad to see the industry degenerate now into worrying about the subject of “risk” when giving advice to a client.
As an adviser if you know that you are putting your client’s interests first, then you have nothing to fear when giving advice.
On 26 October 2023 at 10:01 am Aggressively_passive said:
@Amused
that may be true.
But it's also not. You can PTICF all the way there and back, but if you dont have the documentation, record keeping and in place, if you haven't polished the paint on your filing cabinets correctly then you still have a lot to fear.
Just take a quiet look at the last couple of FADC cases. Even if your clients are not complaining - even endorsing your work they will hang you on dox.
On 26 October 2023 at 12:42 pm Steve Wright said:
Amused. If ‘putting your client first’ means: you act with integrity; treat your clients fairly; your knowledge is sufficient and you advise them with competence, due care, diligence, and skill; you make suitable, fit-for-purpose recommendations; all the time avoiding any false, misleading or unsubstantiated representations; you ensure they understand your advice and; you create suitable evidence of all of this, then I agree with you, you have nothing to fear when giving advice.
The good news is that this is possible for those with good intentions and who actively engage in their professional development.
Backstage. Totally agree with you.
On 26 October 2023 at 5:05 pm Murray Weatherston said:
People
At the end of the day when you face the regulator, it won't matter whether you think you have done everything right. If your "judges" think differently, you will be right in the pooh.
Your processes and manuals and audits both internal and external will simply be pleas in mitigation.
And to go off this particular topic, has anybody heard what is happening to the alleged miscreant (investment) advisers who wrongfully declared some investors to be wholesale investors when the regulators thought they weren't? FADC has no upcoming cases but the problem must have come to light ages ago...I'm too lazy to look up exactly when.
On 27 October 2023 at 11:17 am Steve Wright said:
Murray you say, "...if your judges think differently, you will be...". These ‘judges’ must surely still be able to point to some unacceptable act or omission before you can be found ‘guilty’ of something? Either a breach of the law or the Code, or to negligence or breach of contract (not satisfying the Scope of Service etc). I accept the new law and Code may be untested, but any allegation of a breach will still need to pass a ‘reasonableness’ test.
Advisers can actively take steps to reduce this risk, by, for example: improving their knowledge of every important aspect required in giving suitable advice; by making sure they stick to honouring the Scope of Service; by properly explaining the advice and ensuring the client has enough information to make an informed decision (and documenting this) etc. Some might say this is simply ‘a… covering’, but I see it as professionalism. Doing the best for your client with skill and diligence and providing clients with documented advice they can pick up and understand 10 years later.
My concern is for all the FAPs and Advisers who may not recognise where they could do more to reduce the risk of an adverse ruling. They are unlikely to take steps to reduce their risk. Ironic for risk advisers!
On 30 October 2023 at 9:04 am Amused said:
It is truly a sorry state of affairs for our industry if the opinion of the regulator now supersedes that of a happy client. Especially when the client also refers their family and friends to the adviser based on the advice that they received.
If this is what FSLAA now means for the financial services industry, then I think it is time the new incoming Government was bought up to speed fast. This was not the stated goal of regulation. Based on the handful of complaints being made annually against financial advisers (most of these relate to clawback of commission) the industry is clearly putting the financial interests of consumers first.
Time to go and sit down with David Seymour then for a chat about the empire building that Wellington bureaucrats are apparently up to once again. I'm sure he'll have an opinion on this...
On 30 October 2023 at 1:52 pm Aggressively_passive said:
@steve
LOL (at least I would if it was funny. It isn't).
It used to be that "wrongdoing" involved actual harm to actual clients.
Now that is not the case.
The thing we are "judged" against is different now. And that is the point here.
On 30 October 2023 at 2:16 pm Murray Weatherston said:
@Steve
You are correct that the regulating body will have to give reasons why they came to the different conclusion they did.
My initial comment was simply to point out that even if you think you have done evrything right, it is possible that a regulator might come to a different view - you are not the final arbiter in advice given by you.
On 31 October 2023 at 12:38 pm Backstage said:
What was the question :) ? On 31 October 2023 at 9:17 pm Skeptical said:
@Amused - The old regulation positive feedback loop.
Regulator intervenes, some outcomes are worse for clients. Seeing those unfavourable outcomes, regulators intervene again. Oh no, now something bad happened to a client, better get involved again with a flash new piece of legislation that will surely fix the problem this time, so on and so forth. To the point where the actual point of the intervention in the first place was lost.
It's just a pity that our providers have by and large haven't stood up to the regulator about incredible burden placed the adviser workload. Not to be snide, with another cheap shot, but we have industry advocates sitting there with praise for that latest piece of regulation coming. As if it is absolutely needed this time, this is the one that'll fix the problems.
Surely the smart thing to do, would be clearly identify the problems, then only introduce legislation to fix those problem. Not making up endless problems as we go.
On 1 November 2023 at 10:55 am Amused said:
@ Skeptical - Well said.
On 2 November 2023 at 8:51 pm Chatterbox said:
Having work on several providers when they decided to act as advisor to policyholders, it was pretty soon that they closed down that option and always referred complaints and enquiries to registered advisors whom were contracted. Hence the Providers know what side their bread is buttered on. The problems came when the policyholder was complaining about the advisor. Then the Provider had to "switch" the policyholder to an alternative preferred advisor. Worse still when the policyholder wrote or asked the advisor to act and the advisor refused to act. Normally because the advisor was digging themselves a hole. Interestingly the Provider always protected the advisor. So much for consumer protection ! Let alone Product protection. More issues to come on product disclosures as FMA digs deeper over the coming firming up of regulations. Good Returns everyone. Some might consider eventually whether to raise litigation against Providers who have indirectly used them as cannon fooder. On 12 November 2023 at 4:25 pm Steve Wright said:
‘White labelled’ products? Is this actually the riskiest business?
In my previous comments to Russell’s query, I contemplated pure product providers versus pure advisers. But what about advisers who have their own product?
Pure insurance providers have no duty (besides a commercial one possibly) to offer ‘competitive’ products, they just can’t be misleading. (By competitive I don’t mean cheap, I mean products (policies) with benefits broadly able to be objectively justified as ‘in the policyholders’ interests’ relative to other provider product options.)
Independent (not tied) advisers, however, do have a general duty to recommend competitive products that they can justify as being in the policyholder’s interests.
So, what of seemingly independent advisers with their own ‘white label’ product? I suspect they do not have the freedom that pure product providers have to offer substandard, non-competitive product.
Anyone got thoughts on this?
On 13 November 2023 at 8:13 am Backstage said:
@ Steve Wright, yes, I have an opinion. You may have over cooked it! How many advisers have white label products? A product is just that, a product. Advice, well that is something else and advice coupled with a product is wrapped in way more legislation than a product standing alone... I really can not see how this question became so confusing. I have clearly missed something. Sign In to add your comment
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The reason I say this is that the legal obligations of product providers to policy holders introduced by ‘independent’ FAPs, is relatively settled (ignoring COFI). By contrast the legal obligations of FAPs to their clients (their ‘advice risk/compliance’) are new and less settled. A great example is Code Standard 4. How much detail are advisers expected to include when ensuring their client understands their advice?
I believe that we in ‘adviser world’ have an enormous amount of work to do on understanding and limiting ‘advice risk’. FAPs should have the typical ‘process’ type compliance (which remains pretty much the same regardless of client) sorted by now, but my concern is that advice risk (which is not addressed by process and which requires client specific consideration) is anything but sorted for a great many advisers.
Identifying ‘advice risk’ in all its forms and wherever it may come from, is important, as is taking steps to minimise this risk, because the consequences of getting it wrong could be costly, even career or business ending.