Why there are often several suitable recommendations

Why there are often several suitable recommendations

"As it is said, ‘there are more ways than one to skin a cat,’ so are there more ways than one of digging for money”
- Seba Smith, American humorist & writer, 1854

To the relief of cat-lovers (and YouTube) the ancient art of cat-skinning has been lost, along with its diverse methodologies. But the fear for financial advisers is that they, too, might be losing their 'art' — and their flexibility to explore alternative ways to 'dig for money'.

Increasingly, advisers are feeling boxed-in by regulations. Rules about how to go about giving financial advice are, generally, getting more prescriptive with limited practical insights.

The core question is: Should a client expect to get exactly the same financial advice, or plan,  from two or three different advisers?  Before you can answer this question you have to first deal with a range of tricky questions that sit beneath it.

The first set go to the very heart of the role of a financial adviser:

  • Can there be two, or more, correct answers to a financial planning question?
  • Does the adviser still have a professional judgement capacity to be exercised?
  • If there are many correct answers, how would an adviser justify the choice of one alternative over another?


The second set of questions go to the basis of the business-model of giving financial advice:

  • If financial advice becomes a 'tick-a-box' process, that always leads to the same outcome, then what value is the advice-giver delivering?
  • If advisers deliver a 'cookie-cutter', commoditised approach, for how long can they charge a premium fee?


Thankfully, regulation has not yet become a total straight-jacket that ties advisers' hands. Advisers are still permitted, and required, to apply their professional judgement as they work through the alternatives that face every client.

Regulations are prescriptive around what information about clients and financial products must be gathered and 'taken into account'. But the regulations generally don't say much about what 'taking into account' means or looks like. For example, most regulation speaks of knowing the clients' risk tolerance and their goals — but how those two pieces of information are to be evaluated, weighted and used is not explained.

This 'taking into account' stage is where the door opens to advisers' professional judgement. Because, in most situations, there will be alternatives and choices that must be considered — and there is seldom just one 'correct' answer to a financial planning question.

It's well known that different people often reach different conclusions from the same set of facts, because they evaluate those facts differently. Each person may place different weights on the same fact, or interpret a particular fact in a different way.  And, of course, we rely on this diversity of opinion to produce the buyers and sellers needed to keep financial markets operating!

Similarly, it is entirely proper, and even to be expected, that a client could present their facts to different financial advisers and receive different recommendations from each of them. Each adviser will bring their own approach to gathering information, weighting its importance and using it in their own rules-based system to made decisions and recommendations — and each adviser can be fully complaint, despite these differences.  

The common theme in global regulation is that in order to give suitable financial advice or make a recommendation of a suitable financial product an adviser must:

  • Know the client
  • Know the product
  • Have a reasoned basis for mapping the clients to the product.


However, the level of detail required for each stage varies enormously across jurisdictions.

The United States, for example has very 'thin' regulation on what information must be gathered as part of knowing your client (KYC). By contrast, the United Kingdom has the world's most detailed KYC rules — yet even the UK does not include some of the KYC factors currently under consideration for Canadian rules.

So even though everyone across different countries is doing the same thing — knowing the client — they are all doing it differently! It means an adviser in the UK must arrive at a somewhat different recommendation compared to a US adviser, because each is actually considering a different set of data.

But even within a single jurisdiction different people will take different approaches to KYC. Some will only meet the precise 'letter of the law' and go no further, while others will add extra steps to gather extra data that enables them to use professional judgement to make more informed recommendations.

In the United Kingdom financial advisers work under the world's most detailed and strict regulation and rules, where 'suitability' is a core concept. But even these rules still allow advisers to exercise their professional judgement. They are able, compliantly, to explore alternative solutions that might exist for their clients.

The concept of 'suitability' in financial advice is often misunderstood — it does not mean 'best', which would suggest there is only one correct answer. Rather, suitability means that there is a sound, factual and reasoned basis for making the recommendation or product sale.

An example helps us to better understand the concept.

It is cold out today and I don't want to catch a chill. So, I ask two friends' advice on what to wear. One suggests that I should just put a thick coat over my everyday clothes — the other advises me to put on thermal underwear. They are two very different answers to the same question, but both are quite suitable. If I follow either recommendation I will be warm. The selection of one or other option will be determined by other factors such as availability and cost.

Similarly, advisers will exercise professional judgement in constructing advice that will, inevitably, lead to a different pathway toward the goals than a plan constructed by another adviser. 

The critical test is that someone-one else must be able to review the advice and, even if they disagree with the conclusion, how it was reached.

The logic and process should provide clear evidence of how all of the dots around the advice connect to suitability for the client. This is good-practice for advice-givers who must keep comprehensive records. Not only is record keeping good business practice, it will also be crucial if the advice is ever subject to a consumer complaint or regulatory review.

Done well, professional judgement can help build the differentiation and competitive-advantage that advice businesses need to avoid the trap of becoming a commodity, where everyone's offer is the same and price is the only consideration.

We have seen how fund-manager margins are being crushed by index-fund managers, who work for just a few handfuls of basis points instead of the few hundred points their grandfathers knew and enjoyed!

Telecommunications is a great example of the price pressures and customer churn that attach to commodities. All telco connections are pretty much the same, whoever sells it to you, so people regularly change providers based solely on price. The key to avoiding the commodity price-trap is to be differentiated.

Telcos differentiate by making tweaks around the edges of their offer, like different rates and free add-ons, that make it almost impossible to make an 'apples-for-apples' comparison with a competitor.

For advice-businesses the differentiation comes from the way they work with, and extend, the regulation that governs them to produce client service and outcomes that are not 'cookie-cutter' or 'one-size-fits-all' — and which allow for premium fees to be charged.

Posted: 29/04/2019 2:20:06 PM by PlanPlus Global