A customer had once asked about an insurance plan covering his whole life that pays up to three times the sum assured (before the age of 65) with the premium payable for 20 years only.
But his financial consultant recommended a term policy that could be claimed three times within the policy term. As a newly launched plan, the customer would benefit from the promotional incentive offered by the insurer, and the term policy had a cheaper regular premium rate.
However, the financial consultant also did not inform the customer about the insurer offering a higher incentive for consultants that sold this plan during the promotional period.
The financial consultant’s advice may be deemed acceptable by some as after all, he did recommend a plan with a lower premium rate, and the customer also enjoyed a promotional gift.
However, the above scenario also illustrates the possibility of negligence in recommending a suitable plan should both the consultant and customer not have discussed and compared the detailed differences between the term plan, whole life insurance, number of benefits insured, term period, total premium payable etc.
If a consultant recommends the best possible plan with the cheapest premium rate in the market, does it mean that he has fulfilled his fiduciary duty? If the plan is not suitable to meet the customer’s needs or it is not the type of plan that the customer wants, the consultant has failed to fulfil the fiduciary duty.
Fiduciary Duty is the highest duty of one party to act in the best interest of the other party. In the case of insurance practitioners, it is the highest duty of practitioners to act in the best interest of the customers.
Exercising fiduciary duty in the financial advisory process
How then can a consultant ensure that he has exercised his fiduciary duty towards the customer?
Here are a few suggestions that a consultant should take note during the advisory process.
1. Relationship with the customer - At least 2 persons are involved in a financial advisory process. And these people desire a connection with each other – one that enables them to trust each other and work together for the long term.
By establishing and maintaining this relationship, both customer and consultant can communicate and interact more frequently.
Customer will be more open in expressing his detailed needs and desire for the plan. Also his resources and affordability for the plan. The consultant also feels more confident to ask the customer for more information to ascertain the customer’s needs and concerns.
This is surely helpful for the consultant to understand the circumstances and source for a suitable plan that matches the customer’s objectives.
2. Objective of meeting - Consultant should be fully aware of the purpose of meeting the customer – to assist them to establish a financial plan for their future.
To begin with the end in mind, identification of customer’s needs is fundamental. Unless the needs are clearly defined, there is no guaranteed that any recommended plans, no matter how good it is, can be suitable for the customer.
3. Recommendation of appropriate plan – With the well-defined needs in place, selection of a suitable plan for the customer seems easy.
However, it is important to note that the recommended plan has to be one that is beneficial and able to meet the customer’s needs. A plan in need is a plan indeed.
Customer will always be satisfied as long as he is assured that his needs are being taken care of by the plan. This is the peace of mind they wish to enjoy over a long term period when buying an insurance plan
4. Accurate explanation of plan benefits –Iimpressive presentation is essential and beneficial during a selling process. Accuracy in explanation of benefit is even more essential.
The consultant has to make a conscious effort to avoid creative terms or phrases that may potentially twist or misrepresent the facts in the plan. Such misleading facts may cause the customer to make the wrong decision. This may result in unimaginable financial burdens.
For example, if an endowment plan that provides an annual cash benefit payout equivalent to 5% of sum assured, it should be clearly explained that this payout is part of the benefits included in the plan. And not to present it as ‘5% annual interest’ payable in addition to the plan benefits
5. Disclosure of terms & conditions – There is no free lunch in this world. Whilst the customer is satisfied with the list of benefits in the insurance plan, it is equally important for him to know the price to be paid for the plan. Especially the price other than the premium, such as the limitations, exclusions, risks, and costs.
Some of these terms and conditions may result in reduction or absence of benefits that customer expects in the moment of claim or maturity. For example, loss of use of limbs benefit in an accident plan is limited to accidental injury only. Customer should be made known that the loss of use of limbs by amputation due to illness such as severe diabetic condition will not render the benefit claimable.
6. Disclosure of facts by the customer –Duty of disclosure is the responsibility of both insurer (via consultant) and customer. The consultant has the duty to inform the customer that they need to disclose with utmost faith the material facts such as medical records for the proposal of insurance cover.
Failure to do so may result in claim not payable or even insurer having to void the entire policy. This can be catastrophic to the customer’s financial circumstance when the money from the policy is most needed
7. Patience with the customer – During the sales advisory process, it is normal for the customer to ask many questions. Even some repeated questions. It is a sign that they have not fully understood the plan and they desire to understand more.
A wise consultant can emphasise on limitations and appreciate the customer's desire to understand better. Patience to give customer more time would allow them to have better insights into the plan. And enable the customer to make a sound decision on the plan selected.
8. Ensure the customer understands and accepts the plan – When all discussions have completed and customer has decided to go ahead with the proposed the plan, it is good to summarise the benefits and the terms & conditions again.
There is no perfect insurance plan with only benefits and no limitations. Besides ensuring the customers understand the benefits suit them, it is essential for them to be accept the terms & conditions.
Documentation of their confirmation is beneficial for their future reference. It provides a good reminder should they forget the needs or when the needs have changed.
Building a business that lasts
The suggestions above are just some examples for consultants to exercise our fiduciary duty. It is impossible to cover the entire scope of fiduciary duties within this article.
Nevertheless, consultants can be confident in fulfilling their fiduciary duties whenever they have the best interest of customers in mind; and to ensure that the interest is taken care of during the process of financial planning.
It is a mission-focused mindset instead of a motive that is commission-based. One that believes “do unto others as you would have them do unto you”. With a heart of compassion for customers and the willingness to go the extra mile, fiduciary duty is always a passion instead of a duty.
A little effort to sincerely care for customers can bring about positive outcomes. It builds and establishes mutual trust between customers and consultants. This positive relationship will motivate the customers to spread their experiences to their circle of influence by word-of-mouth. They will also speak favorably of the insurer’s brand and most of all, speak proudly of financial practitioners.
It is definitely a price worth paying in exchange of building a business that lasts.
This is an IFPAS X Asia Advisers Network collaboration.
The article “How can a Financial Practitioner Exercise Fiduciary Duty?” originally appeared in Tuesday Times, an online publication by IFPAS.
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