FADC: Advisor Code breach

The Financial Advisers Disciplinary Committee (FADC) has fired a warning shot about record keeping over the heads of advisers on the eve of the new financial advice regime.

The adviser caught in the crossfire was monitored in 2020 regarding her business practices in 2017 and 2018. In a hearing in December, she was found to have breached standards 12 and 15 of the outgoing code of conduct. The committee was composed of Judge Bruce Robertson, Tracey Berry and Sarah- Jane Weir.

In question was whether, by having knowledge of a handful of circumstances of each of four clients in question, the adviser had been in the business of providing “personalised advice”, and if so, whether her records were adequate.

For the FMA, Simon Chapman introduced excerpts and analysis of the adviser’s notes in relation to the four clients. Much of the hearing was spent discussing the definition of “personalised service”, “client”, and types of advice – including “class advice”, “limited advice and “no advice”.

With an office in a North Island city, the adviser is also an insurance agent, tax agent, certified financial planner and chartered life underwriter as well as running a residential property service. Her 35 years in the wider industry may have motivated the opening statement in the decision; “This is a case about breaches of the Code. It is not about the integrity of the [adviser] and there is no suggestion that she has improperly benefited at the expense of her clients, or that any client has been disadvantaged. But, the provisions of the Code are fundamental and adherence to them is always required.”

The adviser was represented by Wellington barrister Lisa Hansen.

The decision summarised Hansen’s defence; “As the oral hearing progressed, and we were able to get beyond the avalanche of words, it became apparent that the [adviser] was of the view that she was not providing financial advice by a personalised service unless and until she had received and documented the entire circumstances of a client, including their existing financial position and its makeup and she had an appreciation of their goals and aspirations.”

Chapman read from Section 15 of the Act that the definition of personalised service is if the adviser takes into account the personal financial situation or goals of the client, but the adviser reiterated that her threshold for personalised service related to completion of a financial questionnaire and signing up for financial advice.

The fact that she was aware of occasional circumstances or ambitions of casual clients did not, in her view, amount to personalised service.

A couple holidaying in the US were beamed into the hearing to discuss whether they had received personalised service from the adviser, whom they had known for 15 years. After a series of emails in 2017 regarding KiwiSaver, life insurance, and a potential family property, there were a number of meetings which failed to result in the couple filling out the necessary financial questionnaire in order to receive personalised service.

The FMA’s Chapman pointed out that the adviser had noted a long-held insurance policy should be retained, and that this represented personalised service. All the adviser's notes pointed to this circumstance: “They needed little or no advice, (the client’s name) has it all in her hands.”

While the adviser acknowledged some of the circumstances of the blended family and their “wider and older” health status, she did not believe that this advice to keep a “gold standard” insurance policy was personalised service.

In this case, the defence provided satisfied the committee, who found that the note accurately recorded the situation.

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Chapman introduced the case of a couple who were long-standing clients of the adviser’s residential property service, and had opted to leave the home loan account on their family home active, although it had been paid off and had retained an insurance product.

Appearing by video link, the client explained the decision to leave the mortgage open was their own, and it happened to have been confirmed and noted by the adviser. The adviser said she hoped the clients would complete a financial questionnaire, after which she would have been able to provide them with a full financial plan. This did not happen.

Judge Robertson questioned the relevance of the example, asking: “What’s the financial service in advising to leave a mortgage document open, what is financial at all about that activity?” The committee, in its decision, confirmed that there was nothing financial about the “class” advice to leave the account open.

Chapman had raised the example in order to argue that the adviser was giving personalised service outside of the definition in the Act. “When you say you had discussions with them that are very abstract that’s not the case is it?”

He also referred to notes made by the adviser including, “Buy the other unit if/ when she dies,” regarding a neighbouring property to one of the client’s rental properties.

The committee was unimpressed with the records kept and decided that personalised advice had been given: “Overall the quality of records supplied for the clients are convoluted and incomplete. It would seem that the [adviser] has relied on the longstanding nature and inherent information understood on the clients, rather than retention of adequate records to evidence this.”

This client was a retirement aged woman, signed up for advice in 1993. Here, Chapman asked questions around the records kept by the adviser in relation to changes to the client’s NZ Funds investment risk profile. The adviser explained that tweaking the portfolio to account for changing circumstances, including a planned wedding and a large increase in spending, did not warrant a new financial questionnaire.

“Can I just clarify the squiggly lines [in the notes]?” asked the adviser. “That’s my demonstrating volatility to the client, that’s explaining the risk.”

The fact that it took four approaches with mock-ups of newly balanced portfolios to get the client’s agreement that a conservative risk approach was necessary, simply illustrated the client being slow to make decisions, she said.

This defence of “pink sheets” with notes, drawings and risk analyses did not satisfy the disciplinary committee however, especially the squiggly lines which were “insufficient to meet the [adviser’s] Code obligations”.

An older gentleman who enjoyed risk and liked to maximise gains, had been visiting the adviser since 1988. She was reluctant to call him a client under her definition of the term, as he had never completed a financial questionnaire, and simply visited her downtown office for casual advice.

“I have been talking to this gentleman for a number of years about his need for personalised service, but people want high returns,” she said.

However, she provided what she termed “limited advice”, and documented it this way, when assisting him with choosing replacement investments after a forced sale of a shareholding. Had she been able to provide personalised service to the client, the adviser believed that she could help him with the wise placement of about $700,000. As it was, he only wanted advice on the investment of $150,000, into three opportunities he learned about through public disclosure statements he picked up at the adviser’s office.

In her 2020 interview with the FMA, the adviser agreed that discussions around this client’s Rio Tinto shares were “personalised”, because she happened to know a singular circumstance relating to the man’s life. She regretted the admission, she told the hearing, as well as the inability to withdraw it.

In this case file, the committee again disagreed with the defence, saying she did not do enough to record her interactions with, and advice to the man.

_Adviser

“The [adviser] did provide the client with what she called a ‘limited advice record’. The [adviser’s] evidence was that it was difficult for her clients to understand the terminology ‘class service’ and she preferred this term. However from the evidence presented at cross examination, it appears clear to us that actually the [adviser] intended to provide the client limited personalised service. It was also apparent from evidence that the [adviser] believed she was close to providing him a ‘complete’ financial plan, and we find that her recommendations assumed the client’s future goals. We find that the [adviser] provided personalised service.”

The committee’s conclusion was that the adviser maintained an idiosyncratic approach to legal definitions and record keeping. She was found to have breached Sections 12 and 15 of the Code, which required understanding of the Financial Advisers Act 2008. A