Financial advice and fiduciary duty - putting the emphasis back on quality

Tim Browne examines the importance of statutory fiduciary duty for financial advisers.

In November 2009, the Parliamentary Joint Committee on Corporations and Financial Services handed down the Inquiry Into Financial Products and Services in Australia, also known as the Ripoll Review.

Of the 11 recommendations, the first concerning a statutory fiduciary duty for financial advisers was arguably the most significant.

So what is a fiduciary duty? The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust.

A fiduciary duty is underpinned by a fiduciary relationship, which can be defined as a person in whom another has full trust and confidence that the person is acting in the other’s interests rather than their own.

A fiduciary duty is therefore an obligation that a person must carry out as part of acting in another’s interests.

While new legislation will depend on the new Parliament, the Federal Government’s response to the Ripoll Review was to propose a statutory fiduciary duty on Australian Financial Services Licensees and their authorised representatives to require them to act in the best interests of their clients, and in no circumstances can advisers place their own interests ahead of their clients' interests.

In addition, advisers must take reasonable steps to discharge the duty, and if an adviser cannot recommend a product from the Approved Product List, they may need to search for an alternative product or recommend that the client see another adviser.

So what are some of the considerations an adviser should take into account in discharging this duty when selecting a suitable product to recommend to a client?

It goes without saying that advisers should know the features of the products they recommend to clients.

Typically, an insurance policy’s true value is at claim time.

The contract between the insurance company and the client, in general terms, is for the insurance company to pay a benefit under the policy terms, provided the client has made a full disclosure at policy application and pays their premiums.

The adviser should appreciate that placing the client in the best position for a successful claim, should the need arise, would be in the client’s best interests.

During the application and underwriting process a knowledgeable adviser can ensure that their client provides all relevant information to the insurance company, meaning less chance of delay in payments at claim time.

In addition to considering the appropriateness of the product and the affordability of the premium, advisers need to consider whether the premiums will be affordable for their client in the future, potentially causing the client to lapse the policy at the time they are most likely to claim.

The adviser must also be confident in the insurance company and understand its claims process.

A product from an insurer with non-competitive underwriting or claims processes could jeopardise cover or expose clients to lengthy and unnecessary delays when waiting for payments.

What about insurers?

From an insurance company’s perspective, the more robust the process at underwriting time, the easier the process at claim time.

The rationale is that if the client has provided full disclosure during the underwriting process, the insurance company is able to appropriately assess the risks and set the appropriate premium.

Knowing the risks upfront also means fewer investigations and a speedier payment at claim time.

The adequate assessment of risk at application time, coupled with prudent claims processes, results in benefits for advisers, clients and insurance companies.

Clients service sustainable premiums and receive comfort that all legitimate claims will be processed in their time of need.

Advisers have confidence in the insurance companies, avoiding the need to rewrite clients at a later date who may be uninsurable due to deteriorating health.

Insurance companies benefit from lower claims management costs coupled with predictable and manageable risks, resulting in sustainable profitable growth.

The recommendations of the Ripoll Review, and the Federal Government’s response, have placed a renewed focus on the quality of advice provided to clients.

It is essential for advisers and their clients to look not merely at premium or product features but at the likelihood a client will be able to successfully obtain insurance proceeds at claims time.

Tim Browne is a general manager of retail advice at CommInsure.