The PI risks of goals-based advice

Financial advisers making the switch to goals-based advice must ensure they are adequately covered with professional indemnity insurance.

That was the warning heeded by delegates at the inaugural Association of Goals Based Advice conference in Sydney yesterday, with MKM Partners' Oscar Martinis saying the various mechanisms to implement goals-based advice can have differing, perhaps unforeseen impacts on PI cover.

An adviser using managed discretionary accounts, individually managed accounts, separately managed accounts or their own managed investment schemes can potentially open up a can of worms as the distinction between whether you're a financial adviser or an investment manager becomes blurred, Martinis said.

"In some cases, depending on the MDA operator that you're partnering with, you end up signing a Wholesale Investment Management Agreement and you're no longer a financial planner. You now have PI risk that your financial planning policy won't cover," he said.

Martinis warned advisers not to get caught out, saying that while not all PI insurers will extend a policy to cover investment management activities, it's still quite easy to obtain suitable cover.

"Some may extend your policy, but it's not the end of the world if they won't. You can purchase a standalone investment manager's insurance policy to pick up that PI component," he said.

The good news for advisers is that these policies are often significantly more affordable than a financial planning policy. This is because you're no longer fronting the client and not providing advice, instead standing behind the business' product disclosure statement and offer document, he explained.

Martinis also offered some advice to advisers claiming that obtaining PI insurance is difficult, saying this simply isn't true.

"All that PI insurers want to know is whether the people in a practice have the skills to implement goals-based strategies going forward; how good the business' governance regime is; and how good a practice's processes for implementing goals based strategies are," he said.

When it comes to providing approved product lists, Martinis said less is more.

"Don't give your PI insurer the Zenith recommended list as your APL because you cannot possibly know 1200 products. Yes, that might be your investable universe, but what are the 30 or 40 core managed funds that you use? To be able to articulate that and why you've chosen them is important," he said.

Providing the insurer with insight around buy and sell triggers can also prove influential, he said.

"If you're going down the direct equities path, you've got to include these. You generally buy based on this recommendation or that recommendation, but what's your sell process? Does it involve a solid communication piece for when the market falls and you need to hold your clients hand through it?" Martinis asked.

"At the end of the day, it's about mitigating those shocks and surprises for the client."

Read more: managed accountsAGBAAssociation of Goals Based Advicefinancial adviceinvestment management agreementMKM PartnersOscar MartinisZenith
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