Reference no: EM131343759 , Length: word count:6500

ASSIGNMENT

Question 1 -

Case study-Part A

ABC Bank is a large, vertically integrated 'Big Four' bank with a full service offering, including wealth management services, banking at the retail, business, private, corporate and institutional levels, and asset management consulting, among other services. Currently ABC bank operates four different Australian Financial Service Licenses (AFSL), due to the acquisition nature under which it has grown market share. The bank has just acquired a fifth AFSL, Shadow Financial Services (Shadow FS), which has been in the industry for over twenty years.

ABC Bank is interested in growing its financial planning arms, as the bank has come to realise that clients are more likely to keep their banking products with it if they have a strong financial planning relationship with its financial advisers. This comes down to the way the relationships are built, and the duration that most clients feel is required to build that relationship. As a way of growing market share, ABC Bank has invested heavily in both acquiring client books and building their adviser numbers in order to service clients more effectively.

However, ABC Bank has just been through an enforceable undertaking, and has been very conscientious about its brand reputation since a recent 60 Minutes report highlighted some undesirable financial planner behaviour, which has since been stamped out. To counter this negative spotlight, the ABC Bank executive leadership team engaged an external auditor to review the current systems and processes. This led to several changes including a new compliance monitoring software program that raises red flags if any adviser breaches a benchmarked expectation.

Shadow FS's main client market segment is working mums and dads. Shadow FS has been in the insurance landscape for over 50 years and has prided itself on appealing to blue-collar workers and 'Aussie battlers'. This is a segment that ABC Bank wants to expand into, as it is a large portion of the market. However, the audit discovers that a large number of these clients currently have in place double-leveraged investment positions, as financial planners in the past encouraged clients to take out margin loans to fund investment into a model portfolio that included an internally geared fund manager. Sometimes clients also used their homes as security for a line of credit to invest.

As part of the acquisition, ABC Bank offers to review clients' investment and insurance needs, stating this in the letter introducing the change of ownership. Management believes this is a great way to transfer orphan or idle clients into active clients once again. ABC management are also using this opportunity to address the key risks about the double-geared investment situation and get in touch with clients who aren't in an ongoing service program.

Another big change at Shadow FS is the amendment of the Approved Product List (APL). Management state that this change is due to a quality review from the research team, but most of Shadow FS's financial planners know that it is due to the licensee now becoming vertically aligned with ABC Bank's own suite of products. Because of the wide variety of clients that Shadow FS had built up in its book over the years, the APL was expanded to offer new products, such as self-managed superannuation fund platforms, that targeted specific areas of the market. These were sometimes added to the APL as new businesses were bought by Shadow FS. After the ABC Bank research review, the APL is reduced from over 2000 products to just fewer than 500. All of Shadow FS's financial planners are told they must comply with the APL in order to be covered by ABC Bank's professional indemnity (PI) policy. A one-off approval process is in place for products not on the APL, but this recommendation would not be covered by the Bank's PI policy, so the risk of indemnity would fall on the individual financial planner.

Furthermore, ABC Bank management have stated that they will be changing Shadow FS's remuneration structure for its financial planners. ABC Bank's preferred model is based on a number of quantitative and qualitative metrics, either of which could result in an amber or red gate notice and forfeit of the financial planner's opportunity to participate in the bonus scheme. In the past, the financial planners were mainly set sales targets that were based purely on revenue retention, growth and additional cross-selling opportunities. Furthermore, they were able to rely on recurring or trail revenue to meet their targets, which will phase out over the next two years so as to encourage a higher level of contact with existing clients in each financial planner's book. The change has angered most financial planners, who have been with Shadow FS for over 10 years and have become accustomed to high monthly bonuses. At the same time, the move to a vertically aligned product suite has the financial planners questioning the licensee about its motives, the behaviours it wants to reward, the organisational culture the bank is looking to create, and the financial planners' best interests duty obligations.

(a) Identify two (2) examples of conflicting or overlapping obligations that the financial planners in Case study-Part A may be confronted with as part of the client engagement process. Financial planners' obligations are often classified as either a legal, ethical and/or professional obligation. Discuss how these obligations are addressed under the new ABC Bank's licensee standards, or how they may have been addressed under Shadow FS's old licensee standards. There is no need to discuss two examples from each licensee, but rather identify two examples and use either licensee to support your example.

(b) Describe how at least two (2) features of the different business models identified in the case study apply to the delivery of financial advice services. Make reference to how this might impact ethical decisions that a CFP practitioner would make every day.

(c) Identify four (4) key stakeholders in relation to the financial advice provided by financial planners at Shadow FS. What are the potential conflicts of interest, or competing duties, that the planners may face when acting in the client's best interest, and how should each of the stakeholders' expectations be addressed?

(d) Evaluate the growth of professionalism and ethical obligations in the financial planning industry and how this has been beneficial to the Australian public. To support your discussion, research and make reference to at least two (2) key developments (legislation, formal inquiries and/or media scandals) in the history of financial planning in Australia.

Question 2 -

Case study-Part B

Cheri has been a financial planner for more than 10 years, and is a CFP professional. She has just joined Shadow FS and was hired by a recruitment agency representing ABC Bank. Cheri had heard that the financial planners at Shadow FS were on a good remuneration package and had a lot of administration support, freeing them to focus on delivering a high level of service to their clients. This is something that is important to her, as she has always put the client's interest above her own.

She quickly finds out about the changes that ABC Bank is making to the APL and the remuneration structure for financial planners. She negotiated a strong base in her contract, but was not too clear on the metrics she would need to meet in order to be eligible for a bonus, and now has concerns she will not be able to make bonus in her first year. Secondly, she is not yet comfortable with the new range of products she is allowed to recommend, so she has hesitations about their suitability.

Cheri came from an advice practice where she had worked for almost five years. She had liked the fact that she had a wide range of investment and insurance product solutions to choose from (over 2000 across various product providers), which meant she never felt that she could not find a strategic solution that suited the client's needs and situation. This being her first bank-aligned licensee, Cheri is a little concerned about meeting her best interests duties.

Shadow FS now has a very negative corporate culture, and Cheri hears daily about the changes, which have angered the older financial planners. Cheri does not like this type of environment as it puts added pressure on the financial planner to remain positive about the recommendations they make and how the outcome will benefit the client. Cheri is starting to wonder if she is the right fit for Shadow FS. Cheri meets with her first client, Peter, from the existing book she is given. As part of the ongoing service review and to meet her compliance and best practice process, she completes Peter's risk profile again. To her surprise he is a conservative investor. Cheri checks the case file again and finds he is currently invested in an aggressive portfolio of assets, including a margin loan, with a loan-to-value ratio of 50%.

Peter is a plumber with a low level of understanding of investment options and portfolio design. He has relied fully on his financial planner to put him into investments that he 'can make money out of'. In the past he has only ever owned an investment property, which he has done well from as it is currently worth twice as much as the purchase price he paid. Peter explains that he likes property because he can fix it up to make a better return, whereas investing in shares is a bit like gambling-a 'roll of the dice'.

In the review meeting Cheri does not raise this discrepancy with Peter, as she wants to investigate further by checking the file notes in case it was an administration error. Peter says he is happy to leave the funds with Cheri, but lets her know that he has been struggling financially recently due to a run of bad luck on the pokies. When pushed further Peter explains that he often spends Friday night at the pub and plays the pokies. This concerns Cheri, as Peter has already raised the fact that he may need to draw down on the investments, which increases timing risk.

She decides to check with her manager, Michael, about the previous adviser, and try to understand why they put Peter in an investment that does not meet his risk profile. To her surprise she discovers that the previous adviser was Michael, who explains that he wanted to put the client in the current portfolio because it helped the client meet his desired return objectives at the time. He thinks the client should stay in the current portfolio, and no changes should be made in this review, as he does not want this situation to escalate and impact his chances of getting a bonus this year. One client complaint is an automatic disqualifier for a bonus. Michael warns her he would not like this to happen, as he needs the money to meet his mortgage repayments. Michael asks her to keep this confidential.

Cheri is not comfortable with this and decides to call her licensee standards team for clarification on next steps. They inform her that the risk profile is required to be completed and that the client must be invested in line with this profile, unless the client explicitly requests not to be, or has a preference in relation to asset class weightings. They refer her to the relevant licensee standard for her own research.

Cheri is now even more perplexed about the best way forward, as she has just started working at Shadow FS, and wants to keep her manager and licensee happy. More importantly, she wants to fulfill her fiduciary obligation to the client. Furthermore, Cheri is concerned that Peter will lodge a formal complaint if he loses the money he has invested with Shadow FS, and she does not want to be dragged into that. She does not know what to do with Peter's review Statement of Advice (SoA).

(a) Describe Kohlberg's theory of moral development and define the levels that Cheri and her manager, Michael, are on. Justify your answer by discussing examples from Case study-Part B.

(b) Describe how the FPA Code of Professional Practice facilitates client participation in review meetings and the broader financial planning process. Use examples from Case study-Part B to articulate the application of these practices.

(c) Do the law or the Regulatory Guides give Cheri any guidance on how she should address the identified risk profile error?

Apply the FPA Code of Professional Practice and Code of Ethics, and propose next steps for Cheri in meeting her fiduciary obligations. Make reference to the details of Case study-Part B in your answer.

Question 3 -

Case study-Part C

Seven months after ABC Bank acquires Shadow FS, it comes out in the media that Shadow FS has placed a number of clients into double-geared strategic investments, and in some cases, recommended they use their home as security for lending arrangements. To appease the clients who have been affected by these recommendations, ABC Bank announces it will undertake a formal advice review program with a team of newly appointed financial planners from outside the group.

Emily is one of these new planners and is given several files to review in her first week. She is a CFP practitioner and has been a financial planner for over eight years.

One of the first files she reviews is that of Philip, an elderly French man who migrated to Australia back in 1962. He worked all his life as a baker and saved hard for retirement, which he currently enjoys. He has invested $200,000 of his life savings in the recommendations put forward by his previous financial planner, and is worried that he may need to get this back soon as he is looking to pay for a Refundable Accommodation Payment/Deposit. Secondly, Emily discovers that the previous planner may have rolled over all of Philip's superannuation funds into the new superannuation account, in which case he has lost the life insurance policy that he had wanted to maintain to cover his estate planning cost upon his death. The SoA had stated that the account was to be left open for the life insurance only, and a balance of $10,000 was to be maintained. This was supposed to be checked at each review meeting under the ongoing service program. Emily wonders whether the client cancelled the policy at some point, or it reached the expiry date, or whether it may have lapsed after not being paid one year due to a diminished superannuation balance. She adds this to her list of points to address with Philip at their review meeting. Emily is upset that there are few file notes to go on in this case. At the review meeting with Emily, Philip asks about doing his Will and if Emily could help with this. She refers Philip to the estate planning lawyer who is employed by the bank to help clients with their Wills, and notes this on Philip's file.

Emily reviews another file on Jody, a single mother with two children who invested the life insurance benefit from her late husband ($300,000) in a recommendation made by her previous financial planner. When Emily calls Jody she hears about how Jody is currently struggling to make her mortgage repayments, as she has just taken two months off work due to a broken arm. Jody asks if she could take out $50,000 from the investments to help her get through this rough patch. With the markets currently down 15% from where they were when she invested, Emily explains this means she would lose more than 30% of what she invested. Jody does not want to put this money at risk, as it came from her husband's passing, and asks to see the SoA again. Jody is sure the current portfolio is not what she agreed to. Jody asks who she can speak to about making a complaint, as she is not happy. Emily escalates this to the internal dispute resolution team for further assessment based on the client's complaint.

After the first week of reviewing these files, Emily feels she is caught between what she has been told are the rules for reviewing these cases and what she feels would be the right thing to do. After giving it much consideration, Emily decides to put forward a case for both of these clients to be compensated, and to have the initial amount that both of these clients invested returned to them with indexation for the period of investment.

Before Emily puts forward the case for compensation, she asks her manager, Stephen, also a CFP practitioner, for guidance on how to rectify the errors in each of the cases. He tells her that it is important for her to minimise the amount that the bank will need to compensate the clients, and reminds her that her bonus is linked to how many cases he can review with no remedial action. This conflict of interest makes her uncomfortable. Emily was aware that her bonus was linked to the remedial actions taken, but never considered doing the wrong thing by the client. She has always prided herself on putting the client first and will continue to do so even if it means she is ineligible for any bonuses. Emily decides to go ahead with putting a case forward for both Philip and Jody to be compensated, as she has too many concerns about the inconsistencies in and appropriateness of the initial advice, and believes that the error with Philip's life insurance could end up being a future compensation claim.

(a) Define fiduciary duty and explain how it is applied in the financial planning context. Identify two (2) steps a CFP practitioner could have taken in order to satisfy this duty when providing the initial advice to the clients in Case study-Part C.

(b) Evaluate whether there are any legal, ethical or practice obligations that might limit how far Emily can act in the interest of the clients. Provide four (4) examples of these limitations with reference to Case study-Part C.

(c) From the following areas of advice, select and define three (3) types of advice that may be given to the two clients in Case study-Part C:

I. general advice

II. personal advice

III. scoped advice

IV. holistic or comprehensive advice

V. tailored advice

VI. no advice transaction

VII. referral advice

VIII. ongoing advice

IX. factual advice

Explain what aspects of the clients' situations led you to those definitions of advice.

(d) Evaluate the ethical dilemma that Emily is faced with by applying the Grace ethical decision-making model to the following decisions:

i. whether Emily should submit compensation requests for both of these clients

ii. whether Emily should take action against her manager for his comments about how she should handle the situation.

Question 4 -

(a) From your experience, discuss how you would disclose, manage and avoid conflicts of interest. Critically review, identify and assess two areas for improvement. Justify your response.

(b) Assess whether there is a professional obligation for CFP practitioners to publicly expose suspected wrongdoing by a financial planner or a financial planning practice. Identify the appropriate circumstances for whistle blowing. Where possible refer to examples in Case study-Part C in your response.

(c) Discuss the avenues for consumers to report inappropriate financial planner behaviour, and/or make requests for compensation when they feel their expectations have not been met. Define what outcomes a complainant can expect when lodging a complaint through each avenue. Refer to Case study-Part C for examples.

(d) Describe the Federal Government's policy behind introducing the Renewal Notice and Fee Disclosure Statement regulations. Compare the Renewal Notice and Fee Disclosure Statement regulations against the professional framework for client review in the FPA Code of Professional Practice.

Attachment:- Assignment Topics.rar