Financial services, regulation and ethics

In the last chapter, we examined how the FCA’s rules impact on the day-to-day activities of...

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... only to obtain sales but also to develop a trusting and ongoing relationship with their clients.

Financial advice is when a professional adviser assesses a client’s personal circumstances and then recommends products to meet their needs. These recommendations, although explained verbally, are also given to the client in writing. All communications within the financial advice process, in any form, must serve their purpose in a way that is fair, clear and not misleading.

Advice or general information

There is a clear difference between getting advice on the advantages and disadvantages of purchasing a particular product, and simply obtaining general information that is available to everyone regardless of their circumstanc...

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...depending on the policy being purchased and will include:

What the policy covers

Any exclusions

Any limits or restrictions

Other important features

Investments

A ‘Key Information Document’/ ‘Key Investor Information Document’ that gives details of the product and answers questions regarding:

The aim of the investment

The client’s commitment

How payments are invested

The risks

The tax treatment

Fees, charges and their effect on the potential return

Explain the difference between receiving advice and receiving general information.

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The purpose of a fact find is to establish relevant information to assist the adviser in identifying the client’s needs and objectives, which will then allow them to recommend suitable products addressing these needs.

It is an FCA requirement that a fact find is kept on file by an adviser when they are first giving advice to the client. If further advice is given at a later date, the details held should be checked and, if necessary, appropriately updated and amended. Where the details remain unchanged at a future advice date, this must also be documented.

The style and appearance of a fact find will vary from one firm to another and in relation to the type of advice and products available. However, they will all contain three main sections:

Personal details

Financial details

Planning and objectives

The first two sections deal with factual information, while the final section looks at attitudes and opinions towards the client’s future hopes and plans.

Personal details

This section is further sub-divided into:

Basic information

Family details

Employment details

Basic information

Although this section obtains details of the client’s name and address for contact purposes, it also establishes the country of domicile and residence in relation to taxation. The client’s marital status helps to determine protection needs, and health-related questions will assist in ensuring that the correct illustrations are provided for any life or health assurance needs.

Family details

Establishing the names and ages of any financial dependants will also assist in establishing the amount of cover and policy term required for any protection needs. The details collected by the adviser about family members can also form the basis of a list of referrals for future marketing purposes (subject to data protection considerations).

Employment details

These details establish the level of earnings that would be lost on death or illness and will also identify any existing or previous employer pr...

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... indication as to whether any life policies should be placed in trust and whether a recommendation should be made to seek legal advice in drawing one up.

Financial advisers

Details of any other professionals that the client uses for financial advice, e.g. an accountant or tax adviser, will be collected in this final section. It may be necessary for these individuals to be consulted before any recommendations are made, or to have them present when the advice is presented. Although the involvement of other professionals might be viewed by the adviser as a threat, it is likely that the client will receive a superior service if there is a co-operation between the different parties.

Summary of the fact find

The information gathered during the fact find provides the basis upon which the recommendations are formulated, considering all the client's relevant circumstances. The resulting financial plan should address the client’s needs in an efficient and affordable way.

Adviser’s skills and benefits

In carrying out the fact find the adviser needs to find out a lot of factual information about the client and clarify their understanding of it. As much of the information gathered in the personal and financial details sections is factual (hard facts), there is a tendency to ask only closed questions, which can make it seem like an interrogation for the client. The adviser should always attempt to ask a mix of closed, open and probing questions. Once hard facts have been obtained, dialogue can be expanded with follow up open and probing questions, thereby gathering vital clues as to the client's thought processes and reasons for the choices they have made and the provisions they already have. This can then be used to help influence the client when prioritising needs and presenting recommendations.

Paul is meeting with his client Mr Matthews one year after first providing him with advice. What should he do in respect of the details he holds on the previous fact find?

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Most clients are likely to have five key needs that are closely related to their life stages. In priority order these are:

P rotection : A capital sum to provide for dependants and repay debts in the event of death. This is important in the early stages of life with young families

I ncome protection : A continued income in the event of illness or accident. This is again important in the early stages of life with young families to support

P ensions : A need for capital sums and an ongoing income when employment ceases

S avings : Building up capital from regular amounts of surplus income. This can be an important aspect of many life stages and can be for various amounts time periods

I nvestment : Investing lump sums to increase their value and provide protection from inflation. It is normally only later in life when significant amounts become available for investment

The mnemonic PIPSI can be used to remember it.

Although some clients will be able to state exactly what their needs are in each area, in many cases it will be the adviser’s role to ensure that each aspect is identified, discussed, quantified and prioritised.

Identifying potential demands and needs

Through the completion of the fact find, the client’s potential needs should become apparent. However, the adviser can quantify them by identifying capital and income shortfalls on death and assisting the client to ...

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...iscussing and exploring areas that they have never considered before. This means that they may never have thought about the financial consequences or have any way of judging the amount of cover they would need.

The adviser needs to be able to use their communication skills to assist the customer in visualising potential scenarios and finding out from them whether this is a situation they would like to take steps to avoid. This picture-painting helps the customer to see and feel the problems they would potentially face if they do not act. If they then decide not to address a need, they are doing so with a clear understanding of the possible future issues they may face.

Where investment is involved, the discussions around attitude to risk need to be tailored to the client’s existing knowledge and experience. It is very easy for the adviser to talk in technical terms that are meaningless to the client. The adviser should always attempt to give clear explanations of the level of risk, with descriptive examples of products that illustrate both the advantages and disadvantages of taking different degrees of risk. This ensures that the customer does not focus only on the possible gains available, but balances this with the possible losses. Their decision is then being made as an informed choice.

What is the order of priority for identified needs from the adviser’s viewpoint?

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When preparing recommendations, the adviser must bear in mind that any solutions put in place to address identified needs should be maintained over the required period. If the premiums are not maintained, the costs involved in setting up the policies and the premiums paid up until the time of cessation may be lost.

All the key points regarding the affordability and the suitability of the recommended product(s) must be recorded in writing and confirmed to the client in a suitability report.

Affordability

The details gathered in the income and expenditure sections of the fact find should clearly indicate the surplus income available to address the needs. However, it should still be recorded on the fact find that the client is willing and able to maintain the commitment over the required period.

Where a client’s budget is particularly tight, it may be benefici...

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...ient’s reasoning.

The decisions an adviser makes regarding the suitability of their recommendations are frequently made away from the client after the fact find and before a second appointment. Here, the adviser needs to use their detailed knowledge of the products they have available. They need to be able to analyse the features of each possible product that could address a particular need and match them against the client’s situation, circumstances and requirements. The closer a match there is, the less likely the client is to reject the advice, as they will be able to see that the adviser has taken their wants, needs and preferences into account and that the solution recommended has been tailored to achieve their financial goals.

What should be recorded by the adviser in relation to the affordability of a recommendation?

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Having formulated their recommendations, the adviser must now prepare these for presentation to the client, bearing in mind the individual client’s own level of knowledge and understanding. Although the recommendation can be made in any form, there are fixed rules regarding what it must contain.

Research and due diligence

Research and due diligence must be carried out by the firm to assess the nature of an investment, the risks and benefits of the investment, and the strength/reputation of the provider. This process will take longer for recommendations relating to products not researched before, or those not so familiar to the adviser, and it may not always be appropriate to rely on a provider’s marketing material, especially the provider’s opinion as to the investment’s risk level. Firms must make an adequate comparison of product providers across the market in order that they select the most appropriate one, and must retain sufficient evidence of the research carried out to support their recommendations.

Oral presentation

The oral presentation will explain the advantages and disadvantages of each of the recommendations. The adviser needs to obtain the client’s acceptance and agreement to proceed and therefore needs to consider the lan...

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...tures to the client, highlighting with descriptive examples how it meets their wants and needs. By personalising the benefits for the customer, it not only helps to build the relationship of trust between the adviser and the client, but also shows that the possible issues that could arise from leaving the need unaddressed are being removed if the recommendation is accepted. As the client agrees and buys into each aspect of the product being appropriate for them, they will have fewer reasons for rejecting the advice.

In preparing the written report, the adviser needs to ensure that the language used is appropriate for the client, considering their knowledge and experience. Jargon should be avoided, and personalisation should be used as much as possible. Although the client will remember a week later why they purchased a policy, they might not do so a year on when they are considering cancelling it. If the report reminds them of the reasons why the product was purchased, they will be more likely to keep it in place when they are reminded of the future plans it will fund or the problems it will remove.

State why the adviser needs to consider the style and language they use in their oral and written presentations of their recommendations.

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This revision test (opens in a new window) has 10 questions and ...

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... time 2.5 hours

4 standard multiple choice questions in the R01 exam.