When dealing with an institution that provides you with advice, there are certain documents and information that needs to be disclosed to clients prior to the establishment of a relationship between a client and the institution.
One of these documents is a Disclosure Document, which conveys a wealth of information, not only regarding the individual you are dealing with at the institution, but also ownership structures and services the individual is regulated to advise on.
Below are 5 of the key points to note:
1) Services Provided
It is always important to understand what services the representative is regulated to provide to clients. These services are usually disclosed as categories on the Financial Services Conduct Authority (FSCA) license.
For instance, for a representative to advise on share portfolios, they need to hold a category 1.8 license, Securities and Instruments: Shares. If a representative does not hold a certain category, then they are not regulated to provide advice in these areas.
These category disclosures will also indicate if a representative is still under supervision for certain categories, as experience is required to provide advice on most products.
2) Qualification and Experience
As a minimum, the representative you are dealing with should hold the Certified Financial Planner® designation, especially if you are engaging in an ongoing financial planning relationship.
The Disclosure Document will also indicate what other qualifications or designations the representative holds and what experience they have in place. If you are engaging with someone to assist with your life savings, it is important that they have the relevant qualifications and experience in place.
3) Independent Advisor or Tied Agent
Is the representative free to provide you with solutions from any company in the market, or are they restricted to dealing with only one institution? This is exceptionally relevant when dealing with a representative who is employed by a life insurer or a FSP which is a juristic representative of a life insurer.
A juristic rep is a company which is a representative on another FSP, thus they utilise the FSCA license of that FSP. For instance, you could have ABC Financial Wellness PTY, which is actually a juristic representative of an insurer – such as Discovery Life. All correspondence and paperwork may state ABC Financial Wellness, however the representative would be restricted to only providing advice on Discovery Life solutions – this would be disclosed in the Disclosure Documents.
4) Sources of Compensation
Does the representative earn fees from clients directly, earn commission, or remunerated from another external source? Understanding how a representative earns their fees will help you understand the type of advice you will receive. If the only source of income is commission, then the representative needs to sell you a product in order to earn an income – irrelevant of your requirements.
If fees are earned from a 3rd party and not directly from a client (e.g. rebates from funds, or non-financial compensations), then there is a high probability that all your funds or services, will flow to that 3rd party service provider. This goes hand in hand with conflicts of interest.
5) Conflicts of Interest
FSP’s need to disclose all relationships which may be considered a conflict, which basically means, do others gain from the financial advice provided.
An example of a conflict is when the FSP owns the entity which also manages the clients’ funds, in which case the FSP may earn an additional fee from placing funds with that investment manager or are forced to do so.
Finally, other points to receive clarity on through the Disclosure Documents are:
- how to lodge a complaint,
- how much Professional Indemnity does the FSP hold?
- how they deal with your personal information,
- transparent ownership structures,
- client engagement process and any outsourced agreements.