You are a senior financial adviser, employed for the past six years by Brown Green Financial Services Pty Ltd (BGFS) who holds an Australian financial services (AFS) licence. Martin Brown (age 48) commenced his financial planning career 20 years ago and seven years ago established the BGFS partnership with Carly Green (age 38). BGFS also employs Bianca Smith (age 21), who is undertaking her professional year.
Martin Brown’s clients are mostly age 55 to 75 years and are small to medium-sized business owners and self-funded retirees. Martin prefers to look after his existing clients and any new referrals are given to either Carly or yourself, depending on the type of advice they are seeking.
Carly Green has 12 years experience as a financial adviser and her clients are age 35 to 55 years. Carly’s clients are established professionals and include the children of some of Martin’s wealthiest clients. Many of Carly’s clients have self-managed superannuation funds.
Bianca Smith was originally employed as the firm’s paraplanner. Bianca has completed a FASEA-approved Bachelor of Financial Planning degree, passed the FASEA exam and is currently in quarter three of her professional year as a Provisional Financial Adviser. Carly is Bianca’s supervisor for the professional year.
You have 10 years experience as a financial adviser and are fully qualified. You have experience with a wide range of strategies and clients. Half of the clients you service came with you to BGFS. When Martin or Carly is away or on leave, you also look after and provide advice to their clients.
Scenario 1 (Brown Green Financial Services Pty Ltd)
Bianca is about to meet with a new client couple, Justin Fraser (age 22) and Bethany Stewart (age 23). Justin is the son of Martin’s longstanding clients (and personal friends), John and Donna Fraser. Justin works as an apprentice electrician and Bethany is a midwife working full-time at the Royal Hospital. John and Donna have insisted that Justin seek financial advice now as Justin and Bethany have recently placed a substantial deposit on a new home. The deposit was paid from Justin’s distribution from his late grandfather’s estate. Justin’s parents want to ensure Justin has a financial plan in place, especially now that he has financial commitments (mortgage) and he is receiving regular (significant) distributions from his late grandfather’s estate.
Bianca has completed many client meetings, but this is her first meeting (indirectly supervised) in the capacity of Provisional Financial Adviser. She doesn’t have very much information about Justin and Bethany and is aware that she is required to provide advice that will be in the client’s best interests. While Carly is away on leave, Bianca asks for your support and guidance on how to approach this interview.
You ask Bianca about her planned approach for the interview and she replies:
Justin’s parents (John and Donna) have been Martin’s clients for a long time and the family seem quite wealthy. I assume John and Donna are both knowledgeable and comfortable with the general concepts of financial planning, risk and investing. I’m also assuming Justin’s parents will be guiding him on what to invest in, so I shouldn’t have to go into a lot of detail (as I usually would) about financial plans and the relevant processes.
I intend to follow a similar approach to what Carly has taught me. For our wealthier families, they often tell us what they want to do with their money and we respect that, because we consider them to be successful people. Carly explained to me those clients wouldn’t be wealthy if they didn’t already know what they were doing with their personal finances and investments. Carly often says that these are the easiest clients to deal with, because they know what they want, and we therefore don’t need to spend as much time to understand their goals and objectives etc.
I’ve already emailed our FSG to Justin and Bethany, so I’ll get them to acknowledge first up in our meeting that they’ve received and read it. I’m assuming that I don’t need to discuss insurance with Justin and Bethany as they are very young and healthy (like myself) and Justin has received quite a significant inheritance from his grandfather. I think initially they will just want some investment advice, particularly around the significant inheritance distributions, so they can really start to grow their wealth.
(a) Define one (1) barrier to ethical decision making, and explain how it may be influencing Bianca while she is planning for the meeting with Justin and Bethany.
(b) Explain if the BGFS advisers’ conduct complies with Standard 5 and Standard 12 of the FASEA Code of Ethics in their dealings with Justin and his family.
(c) Discuss Bianca’s compliance with the value of Honesty in the FASEA Code of Ethics if she proceeds with the interview as planned. (5 marks)
Scenario 2 (Brown Green Financial Services Pty Ltd)
Carly’s clients from Brown Green Financial Services Pty Ltd (BGFS), Daniel and Kelly, call to arrange an appointment. While Carly is on leave, she has asked you to assist with her clients. You will be meeting Daniel and Kelly for the first time and Carly has told you they are valued clients because they often recommend BGFS to their family and friends.
Daniel and Kelly operate a successful manufacturing business, into which they’ve poured all their funds and time over the past 20 years. Their assets include the manufacturing business (valued at $1 million), family home ($2 million) and investment portfolio ($2 million). They also have an industry superannuation fund (balance $200,000) established when Kelly was working as a teacher. Daniel recently inherited $1 million and is keen to invest it to build their wealth for retirement, and they would like to have funds available to help their adult children if they need them.
In the meeting you begin the fact-finding process and question the clients extensively to understand their current situation, goals and objectives. They seem to run a successful business, although while chatting with them, you notice they have very little knowledge or experience with investing, and their financial literacy seems to be immature for people with their level of wealth. During the meeting they appear disinterested and preoccupied as they chat between themselves about a client complaint that has arisen in their office.
Part-way through the meeting, Daniel takes a phone call and states that they will need to leave immediately to take care of an urgent business issue. They say they will call into the office tomorrow to sign any paperwork required to invest the money. They tell you to ‘just invest the money in the way you think is best for us’. Daniel and Kelly explain to you that this is what Carly does for them all the time, as they are not interested in how the process works, saying ‘we are good at manufacturing and we pay you good money to be good at managing our money’.
(a) Briefly identify and describe a potential ethical issue that may arise from Daniel’s and Kelly’s minimal knowledge or experience with investing and overall disinterest in their financial plan.
(b) Discuss what you must do to demonstrate your obligations to the relevant standard(s) under the FASEA Code of Ethics, to implement advice that is in Daniel’s and Kelly’s best interests.
(c) Based on your meeting with Daniel and Kelly, identify and describe an appropriate ethical framework to deal with this client interaction/situation.
Scenario 3 (Brown Green Financial Services Pty Ltd)
Just before Carly returns from leave, you meet with her clients Jose (age 47) and Rosa (age 44) Santos. Carly met with Jose and Rosa approximately 18 months ago, after they had come across from another financial adviser (with a different AFS licence). According to the file notes, Jose had contacted Carly as they were unhappy with the service they were getting from the previous adviser. Jose wanted Carly to review their previous financial plan and look after them in the future.
The previous file note shows that Carly provided them with advice to switch their superannuation and insurance to products on the Brown Green Financial Services Pty Ltd (BGFS) approved products list. The product replacement research showed the recommended superannuation products to be significantly cheaper than Jose’s and Rosa’s previous products and could be easily commuted to a retirement income stream (when required in the future). It also showed that the insurance benefits and premiums in the replacement products were broadly comparable with their previous products.
While it appears the products were comparable, from your experience one of the replacement products has longer waiting periods and shorter benefit periods. You also notice in the file that the insurance provider has provided cover with a significant loading, which resulted in the premium being higher than the previous policy. The records show that Jose accepted and signed the insurance documents, but there is no file note of Carly discussing the different terms and definitions with either Jose or Rosa.
Before proceeding with the statement of advice, you wait until Carly returns from leave and ask her about the previous advice. Carly explains as follows:
Jose and Rosa contacted me out of the blue last year asking for an appointment. They said they were really unhappy with the turnover of advisers at the previous financial planning business. They were paying ongoing advice fees but didn’t feel they were getting any value for those ongoing fees (approximately $3,000 p.a.). I explained to them that I would be happy to meet with them and would waive my initial advice fee. I told them I charge fees rather than commissions, so the cost of my advice may be much higher than their previous adviser. Jose still wanted to go ahead, as he was adamant they wanted me to be their adviser and felt that even if my fees were higher, he would be okay with this.
In regard to their super and insurances, Jose had always been in excellent health and very fit, so I was surprised when his insurance offer came back with a significant loading and I did speak to Jose about this. Jose said he was comfortable that the super contributions would more than adequately cover the premiums and we proceeded with the rollover and established the insurance. Rosa wasn’t too involved with the process as Jose is the one who seems to make the decisions and take control of the family finances. Rosa didn’t actually say too much during the initial appointment.
I realise there isn’t much paperwork or many file notes in their file. I’ll have to check with our paraplanner as he mentioned we may have temporarily lost some records when our computer server went down.
(a) Explain what Carly should have done to demonstrate compliance with the FASEA Code of Ethics value of Diligence.
(b) Identify and discuss how the obligations under Standard 7 and Standard 9 of the FASEA Code of Ethics apply to the issues raised in this scenario.
Criteria-based Marking Guide for Question 3(a)–(b)
Scenario 4 (Brown Green Financial Services Pty Ltd)
Martin Brown recently took leave and when he returns, Bianca spends some time with him discussing her recent meeting with Martin’s clients Zack and Eva Martinez, as she isn’t sure whether she has provided appropriate advice, given she is still new to her role. She also uses this opportunity to find out if and where Martin had recorded the clients’ information from his previous interactions with them. Martin explains that most of the interactions had been informal and generally conducted on the golf course, mainly because they had known each other for many years. Bianca learns that Martin has been a reliable source of referrals for Zack’s accounting business and the golf games were Zack’s way of saying thank you to Martin for the clients.
As part of Bianca’s professional year program, you have been coaching her recently and have been discussing her professional responsibilities under the FASEA Code of Ethics. You are preparing for your next coaching session when you will confirm Bianca’s understanding of Competence and her obligations under this value, according to the FASEA Code of Ethics, particularly as Bianca is concerned whether she had the appropriate knowledge and skills to deal with Martin’s clients.
(a) Explain whether Martin is likely to have met or breached the conflicts of interest obligations under the following Acts and codes in his dealings with Zack and Eva Martinez.
- Corporations Act 2001 (Cth)
- FPA Code of Professional Practice orAFA Code of Conduct —Principles of Practice
- FASEA Code of Ethics. (15 marks)
(b) Explain Bianca’s obligations regarding the value of Competence with reference to clients Zack and Eva Martinez.