We are often faced with ethical dilemmas in the advice business, juggling the competing goals of clients, regulators, licencees and ourselves. When these issues arise, it's important to explore the different conflicts and options available to resolve the conflicts as best as possible. Often there is no "right" or "best" answer but instead there are numerous pathways that lead to alternative outcomes.

Below is a case study which explores a scenario which recently arose for a colleague which I helped workshop to help resolve some of the conflicts and navigate through the ethical maze. This is intended as an exploration of the issues to give insight in to the thought processes involved and challenges faced rather than a prescription of action/s.

Scenario

  • The client had received insurance only advice involving a policy owned through their existing family trust using own occupation TPD cover.
  • The client accepted the advice and went through an extensive underwriting process resulting in amended terms being issued.
  • The client accepted the amended terms in writing to the adviser just 3 days prior to expiry of the terms.
  • The client had a superannuation balance of less than $50,000 but was contributing the maximum concessional amount each year ($25,000) to boost their balance.
  • After returning the accepted terms to the adviser but before they had been submitted to the insurer, the client contacted the adviser to instruct that they want the policy to be implemented through superannuation. This was based on some information received by their accountant that superannuation owned policies are tax deductible.
  • The accountant had been involved in establishing a self-managed superannuation fund for the client recently and while the fund was formally established, the balance rollovers had not yet been requested.

Ethical Considerations

  • Has the client received "advice" from their accountant? While tax impacts are important, do they override the client's other objectives established through the financial planning process?
  • Super ownership was considered in the original recommendation but discounted based on the contributions already being made to super and therefore it was deemed unlikely that there would be any additional tax benefit obtained by structuring the policy inside super when compared to outside super.
  • By changing the structure of the policy, given the deadline on the amended terms, any interim cover in place will lapse and potentially leave the client uninsured.
  • By holding the cover inside super, the client would be required to compromise on the original "own" occupation TPD definition or utilise a superlinking arrangement which would require supplementary financial advice since neither the accountant nor client have the technical understanding to direct this change.
  • Is changing the recommendation good quality advice? Does changing the recommendation continue to provide advice in the client's best interest? Perhaps not if there have been no material changes to the client circumstances or objectives.
  • In this situation, who is providing the advice? Does the adviser have a duty of care to their client to ensure they don't follow "advice" from third parties not licensed to provide advice?
  • A significant amount of work has been done in terms of advice and implementation so far with the fee paid by means of commission from the insurance policy. If the policy were not to proceed, that revenue would not be received despite the work having been completed.
  • The self-managed fund currently has no balance and if the insurance premium is not paid in a timely manner then cover could lapse, again placing the client at risk of uninsurance.

Responses

Decline to update advice and walk away

While this option would maintain the adviser's professional integrity in terms of not implementing advice they have concerns with, it could leave the client without any insurance cover. It would also mean forfeiting revenue and potentially damage the reputation of both adviser and insurer.

Implement the policy as directed by the client

This option would ensure the client is protected and has cover in place they are satisfied with. However it would mean the adviser potentially compromising on their professional integrity since they would need to update their statement of advice noting that some aspects of the final strategy are in conflict with their professional judgement.

It could also call in to question the applicability and suitability of the original recommendations made by the adviser. This is due to the fact that the statement of advice must be updated to ensure the client is appropriately advised about the change to the policy structure and the implications of that recommendation. So new recommendations would be made that are in direct conflict with the recommendations originally issued.

This course of action could also cause the policy implementation to be delayed while a new statement of advice is prepared.

Implement cover as-is to ensure client is protected

This option would protect the client by having appropriate insurance cover in place while any advice recommendations are updated, policy structures are discussed further and a suitable course of action is agreed upon. Essentially it buys time to look at another alternative shown above. It does however also require that the adviser commit more time and energy to the process which is otherwise complete.

Furthermore, this option relies on the client's willingness to sign the amended policy terms and trusting that the structure of the policy can be changed after the fact. Also, in some cases, another insurance provider may be more suitable under the alternative structure and require underwriting from scratch all the while the client is potentially unhappy with the cover they hold as an interim measure.

Depending on the timing of all this, changes to the legislation concerning insurance commissions could erode the adviser's revenue and therefore the profitability of doing business, particularly under this scenario where a policy would be implemented and then cancelled shortly after when the amended statement of advice is ready.

Proceed with the policy as recommended initially

This option may only be viable after discussing with the accountant directly and convincing them of the merits of the original recommendation. Care would have to be taken so that neither party loses face from the client's perspective to maintain the strength of each relationship over the long term.

Although there could then be some concerns raised around the suitability of a self-managed super fund for the client's accumulation balance. If working in conjunction with the accountant on the client's risk advice then it could also be appropriate for consideration and recommendations to be made regarding the client's super too. This could then quickly extend more broadly than the adviser's authorisation and/or expertise or create further conflict between the accountant and adviser.

Conclusion

As you can see, there are no ideal outcomes or solutions here, with every avenue leading to a different ethical challenge. The most appropriate course of action will aim to maximise utility and will ultimately come down to factors broader than this case has considered. However, I hope that considering the scenario, the ethical concerns and potential solutions has helped illuminate a means of thinking about ethical dilemmas that may prove beneficial in your practice.

Categories: Musings