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Since the Financial Advisers Act (FAA) came into force there has been some angst over exemptions for other professions – such as lawyers and accountants. Are financial advisers right to be concerned that lawyers and accountants can hand out financial advice? Are there any restrictions on them?
Thursday, October 19th 2017, 6:37AM 
7 Comments
by Pathfinder Asset Management
Financial advice requires specialised skills. This means to give other professions an open-ended exemption from the FAA could jeopardise the quality of financial advice and undermine consumer confidence when seeking advice. This commentary considers the exemption for lawyers and accountants and what restrictions apply (or should apply).
Is it financial advice?
The FAA sets the ground rules for when someone is giving financial advice. There are several carve-outs where a person is not giving financial advice (section 10(3)) which include:
- Providing information (such as the cost or terms of a financial product)
- A recommendation about a class of financial products
- Making a recommendation about the procedure for acquiring or disposing of a financial product.
Here no one (including a lawyer) is giving financial advice if they make statements like “shares generally give better long term returns than bonds” or “you can buy or sell shares by phoning a broker but I think it’s easier to do this online.” There is no financial advice here under the FAA (for lawyers or for anyone else).
When can lawyers give financial advice?
Section 13 of the FAA provides that financial advice is not given if that advice is incidental to a business (and that business is to principally a financial service). There is no clear dividing line for what ‘incidental” means. A lawyer whose practice principally provides legal (not financial) advice could rely on this exemption.
Section 14 provides an exemption to specific professions. This includes teachers, lecturers, journalists, registered valuers, real estate agents, accountants and lawyers. In the case of lawyers and accountants the exemption applies if they are “providing a relevant service in the ordinary course of business of that kind”.
What is special about lawyers and accountants that allows them onto the exemption list? On the face of it their training and day to day workload are very unlikely to give them skills matching financial adviser qualifications, experience and training.
This has been described by many as an outrage – yet the exemption granted is unlikely to be very wide. It would be a brave accountant or lawyer that freely dishes out financial advice to clients believing they are exempt. The exemption may be very narrow indeed.
What does the FMA say?
It is a struggle to find explicit guidance on this on the FMA website. Under the heading “Types of advice” they do give some useful pointers to consumers which appear to treat the lawyer exemption as very limited:
“Sometimes lawyers and accountants offer financial advice alongside the other services they provide. They’re allowed to do this, as long as they don’t just give you financial advice….. generally speaking, if someone is providing a recommendation or opinion on buying or selling a financial product, or providing financial planning services, they have to be an authorised or legally registered financial adviser.”
It is still pretty murky where the boundaries start and stop. An ADLS article¹ from 2013 referred to examples provided by the FMA of when a lawyer (or accountant) is within the FAA exemption. Here’s a couple:
- A lawyer who is administering a deceased estate notifies the beneficiaries of their cash inheritance. The lawyer suggests they place the inheritance in a bank term deposit until they have decided how to use or invest it, and also suggests if they are going to invest it to get the help of an authorised financial adviser.
- A lawyer who is setting up a company for a client advises the client to include an option to buy out her business partner’s shares in the event that he wishes to sell, and to agree the method for calculating the price of the shares.
The FMA also provided examples of when a lawyer (or accountant) is acting outside the exemption:
- A lawyer who has administered a deceased estate informs the beneficiaries of their cash inheritance and advises them to use the money to pay down their mortgage, or invest in a specific KiwiSaver Scheme.
- An accountant (or a lawyer) who has acted in the voluntary solvent liquidation of a company advises the shareholders to use the released equity to invest in shares in a specific company, which is about to list on the NZX.
The picture from the FMA’s examples is of a very narrow FAA exemption for lawyers and accountants.
What do lawyers think?
The New Zealand Law Society also published a Practice Briefing titled “Financial Advisers Legislation – implications for lawyers.” They give a series of 7 scenarios and consider if a lawyer would be acting inside or outside the exemption. The scenarios provide a few useful observations:
- It’s ok for a lawyer to tell someone to put funds from a property sale on call with a bank while the lawyer finalises how the funds should be distributed to family interests. The advice (put the cash on deposit with Westpac) is a “stop gap” measure taken by the lawyer.
- It’s not ok for a lawyer to provide advice on a full range of financial products where the legal practice generates the majority of its fee income from providing such advice. (Personally I would have thought the last part about “majority of fee income” isn’t needed – lawyers should not be providing advice on a full range of financial products unless they are an AFA).
- It is ok for a lawyer who is a trustee of a trust to make decisions about how to invest the trust’s money. That is fine because they are acting in the capacity of a trustee (not because they have any special exemption as a lawyer).
An article published by a member of the NZ Law Society’s Commercial and Business Law Committee² expressed a wider view. This argued that Parliament excluded lawyers from the scope of the FAA regime because lawyers’ professional conduct rules provide sufficient regulation already. The reasoning here is that lawyers can only provide financial advice when they are competent to do so – they need to comply with their duty of care to clients. On this reasoning they can provide more than the “stop gap” deposit advice if they feel they’re competent to do so.
Anyone else have a view?
The sorted.org.nz website gives common sense advice to consumers around their finances. Under the heading “Legal Advice” it suggests consumers should talk to a lawyer, accountant or community law service for tax matters, setting up a family trust or for legal advice. Under the heading “Investing advice” it suggests consumers speak to financial advisers and sharebrokers for advice around shares, bonds, “sometimes property” and for finding the right mix of investments. They don’t suggest consumers should go to their lawyer or accountant for financial advice.
Barry Read from IDS Limited provides a couple of useful examples of when lawyers get involved in financial advice and on the face of it they are acting beyond the FAA’s “incidental” exemption:
- An AFA prepares a full plan for a client who in turn provides it to their lawyer for comment. Their lawyer says “don’t do this” to the overall plan or parts of it. Saying “don’t do this” is financial advice.
- A lawyer sees a client’s financial accounts and queries some insurance costs by saying “you’re paying a lot for insurance, do you really need it? You should just do without it.” Again, this is financial advice.
These examples go beyond a lawyer acting in a way that is “incidental” to the business of being a lawyer.
Final thoughts
To finish up it is worth noting that the NZ Law Society Practice Briefing seems to accept that most forms of financial advice will be outside a lawyer’s skill set:
“Lawyers should consider whether to secure an AFA status…The fact lawyers may be able to rely upon an exemption does not necessarily mean that they should. It may be the case that the client is actually better served by referral to a professional adviser who is competent to deliver the services required.”
In the Law Society’s 2016 submission³ to MBIE on the FAA Options Paper they state that a financial adviser should not provide financial advice services “unless the financial adviser is competent to provide that service.” They also argue that lawyers being regulated under the Lawyers and Conveyancers Act 2006 must have competence for services they provide.
The FAA exemption for lawyers should be interpreted narrowly. It should only apply where (a) the financial advice is clearly incidental to the business of being a lawyer, for example “stop gap” deposit advice and (b) the lawyer can demonstrate they have the competence to give that financial advice. Moving beyond the simple “stop gap” examples and into more detailed financial advice, an AFA designation should be the only way to demonstrate appropriate competence.
John Berry is co-founder of Pathfinder Asset Management Limited, an independent director of Punakaiki Fund Limited and a member of the Code Working Group.
Notes:
¹ Frank Chan: “When is a Lawyer a Financial Adviser? A timely reminder of the need for caution” http://www.adls.org.nz/for-the-profession/news-and-opinion/2013/11/29/when-is-a-lawyer-a-financial-adviser-a-timely-reminder-of-the-need-for-caution/
² Rebecca Sellers and Luke Leybourne: “Putting clients’ interests first: Financial Advice” https://www.lawsociety.org.nz/practice-resources/commentary/legislation-and-regulations/putting-clients-interests-first-financial-advice
³ http://www.mbie.govt.nz/info-services/business/business-law/financial-advisers/review-of-financial-advisers-act-2008/options-paper/options-paper-submissions/NZ-Law-Society-Parts12.pdf
Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors.www.pfam.co.nz
Tags: Code Working Group financial advisers Pathfinder Asset Management
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Comments from our readers
On 19 October 2017 at 8:33 am w k said:
your answer to "should financial advisers give legal or tax advice" should give you some idea if lawyers should give financial advice.
On 19 October 2017 at 8:53 am Brent Sheather said:
Good article. I have seen lots of instances where lawyers and accountants give financial advice and whilst most of it is good some of it is very stupid. For example – about five years ago one accountant persuaded his fellow trustees of a family trust not to buy international shares because of “tax problems”. Similarly a lawyer argued about 10 years ago that a family trust should own no long dated bonds “because interest rates were going up”. Yes all those things could be a matter of opinion but neither individual had the appropriate frame of reference in that neither knew what best practice looked like. What was worse when that was explained to them neither cared. In effect they were saying my law/accounting degree and experience gives me more knowledge of investment matters than the combined knowledge and experience of the market. Good luck with that idea.
On 19 October 2017 at 9:04 am Brent Sheather said:
A further thought. In the section “What do lawyers think” I can see it is ok for a lawyer to tell someone to put their money in the bank as an interim measure. But is it ok for the lawyer to tell someone to invest in a mortgage trust when the law firm actually owns the mortgage trust? If the answer to that is no, and obviously it should be no, then maybe the FMA need to do some research…… It is the old problem with vertically integrated businesses – advice masquerading as independent when it aint.
On 20 October 2017 at 10:58 am dcwhyte said:
Good article, John - and agree with Brett. There is nothing in an LLB or CA qualification that prepares a lawyer or an account to advise on investment or life insurance any more than an architect or a dentist is prepared by their professional qualification. Smart lawyers and accountants will find alliances with professionally qualified financial advisers and do the right thing by their clients.
On 20 October 2017 at 2:10 pm Licensed Adviser said:
It would be appropriate for Lawyers and accountants active in this space to follow similar CPD to Financial Advisers. Logging 30 hours specific investment training would go some way to showing competence.
On 20 October 2017 at 2:11 pm Licensed Adviser said:
It would be appropriate for Lawyers and accountants active in this space to follow similar CPD to Financial Advisers. Logging 30 hours specific investment training would go some way to showing competence.
On 24 October 2017 at 8:52 pm SonnieBailey said:
I'm a former lawyer and current AFA. I'd reframe this a little to see where financial advisers and lawyers complement each other. Sometimes, lawyers can provide incidental advice that results in better client outcomes.
There were definitely times where, as a lawyer, I would provide incidental advice. For example, where I would be preparing wills for young couples with young children. After going through their asset situation, I would ask about their life insurance arrangements. Many times they didn't have sufficient life insurance in place, or any at all. I would explain that, no matter how well I draft the will, their testamentary intentions meant very little if their estates aren't able to finance them. I would say they really need to consider life insurance (and while they're at it, other forms of personal insurance - this was often in the context of preparing enduring powers of attorney, as well, so it was relevant). Wherever possible I would refer them on to risk advisers, explaining the benefits of seeking an adviser compared to, say, going to an insurer directly or using LifeDirect. I wouldn't provide specific product advice or advice about level of cover, but I would strongly encourage them to consider insurance.
I think this was absolutely appropriate and lawyers should be encouraged to provide advice in these limited situations where it will result in better client outcomes.
Another example that comes to mind is where clients are discussing shareholder/buy-sell agreements. Often insurance is central to this. There is certainly a point where you can overstep the mark, but if you're too rigid you'll prevent important conversations from taking place.
I can also think of scenarios where the example "An AFA prepares a full plan for a client who in turn provides it to their lawyer for comment. Their lawyer says 'don’t do this' to the overall plan or parts of it" needs to be fleshed out. For example, a lawyer may be aware that the client has made a specific gift of certain financial assets for someone in their will, and a recommendation to sell the shares would compromise this. Or the recommendation relates to trust assets, and the lawyer is aware that the recommendations are not in line with the terms of trust. Perhaps "don't do this" lacks nuance but communicating these issues with a client are relevant.
I don't think any of my comments are inconsistent with the article but thought I'd add to the conversation.
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FAQs
Can a solicitor give financial advice? ›
If you received financial advice from a solicitor or accountant, who is authorised by the FCA to give financial advice, you may need to take your complaint to the professional body which regulates them. If you're not sure where to complain, you can contact the FCA consumer helpline on 0800 111 6768.
What are the benefits of financial advice? ›Advisers can provide expert guidance when you have important and potentially difficult financial decisions to make, such as approaching retirement. An adviser can put a plan together to help meet your short, medium and long-term goals.
Is it worth getting a financial advisor UK? ›There are scores of savers out there who could benefit from allowing an adviser to review their finances. The benefits include making sure you are maximising tax allowances and tax wrappers, such as ISAs and self-invested personal pensions (SIPPs), as well as having a viable plan in place for retirement.
Do I need a financial advisor for my pension? ›You can set up a personal pension scheme without advice. However, there are very good reasons for talking to an independent financial adviser about it, including: Helping you to understand and manage risk. Helping you to find and choose a diverse range of investments.
How much should I pay in investment fees? ›The general rule for financial advisor fees is about 1%. More specifically, according to a 2019 study by RIA in a Box, the average financial advisor firm fee is equal to 1.17% of assets under management (AUM), compared to a 0.95% average in 2018.
What constitutes financial advice? ›A recommendation or a statement of opinion constitutes financial product advice if it is intended to influence a person in making a decision about a particular financial product. Financial product advice generally involves an evaluation, assessment or comparison of, some or all of the features of a financial product.
What are the disadvantages of independent financial advisor? ›The drawbacks include high stress, the hard work needed to build a client base, and the ongoing need to meet regulatory requirements. This is a lucrative career, but it's one with a high burnout rate.
How do financial advisors make money? ›There are three ways financial advisors get paid: Fee-only advisors charge an annual, hourly or flat fee. Commission-based advisors are paid through the investments they sell. Fee-based advisors earn a combination of a fee and commissions.
What are the benefits of hiring a financial advisor? ›A financial advisor helps tackle some of the tough issues relating to wealth management and personal money matters. They can assist with creating a personalized retirement savings plan with a timeline, build a plan to meet financial goals such as saving for big life happenings, or answer questions about life insurance.
How much should you pay for pension advice? ›Broadly, advisers often charge between 1 and 2 per cent of the asset in question (e.g. a pension pot), with the lower percentages being charged for larger assets (percentage charges on smaller assets may be higher). Every adviser is different but all should be happy to discuss their fees up front.
What is the best way to choose a financial advisor? ›
- Know what financial services you need.
- Learn which financial advisors have your back.
- Learn about financial advisor options.
- Consider how much you can afford to pay an advisor.
- Vet the financial advisor's background.
- Frequently asked questions.
People approaching retirement with a defined contribution pension pot can get help from Pension Wise: online - visit the Government's Pension Wise website. by telephone - call 030 0330 1001.
Are Financial Advisors good value? ›The real value of working with a financial advisor is in avoiding expensive mistakes. It's less about picking the best investment and more about making smart decisions with all aspects of your money.
How much should a financial advisor charge UK? ›If there's a particular option you prefer, ask the adviser as they might be happy to negotiate. These include: An hourly rate — this will vary from £75 an hour to £350, although the UK average rate is about £150 an hour. A set fee for a piece of work — this might be several hundred or several thousand pounds.
When should you talk to a financial advisor? ›- You feel “lost” in planning for your financial future and need a roadmap.
- You just don't want to deal. ...
- You like managing your money, but realize your financial plan would benefit from an impartial and unemotional third-party opinion.
While these elements are essential in getting the business up and running, one needs to have their head on their shoulders to calculate a fair percentage. With most startups, the general rule is to offer approximately 20-25% of your business earnings to an investor.
What is the average fee for an investment advisor? ›Advisors who charge flat fees can cost between $2,000 and $7,500 a year, while the cost of advisors who charge a percentage of a client's account balance — typically 0.25% to 1% per year — will vary based on the size of that balance.
Are wealth managers worth it? ›Wealth management is actually crucial for not just protecting but growing the assets you've accumulated, so you can meet current financial goals and maybe even build a nest egg worth passing down to future generations.
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Can you give general financial advice without a license? ›If you want to run a financial services business, you generally need to be authorised under an AFS licence. An AFS licence authorises you and your representatives to provide financial services to clients.
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- General advice. If you just want the facts or guidance on super, investments, insurance or estate planning, then general advice may be for you. ...
- Single issue advice. ...
- Comprehensive advice.
The only thing that should be put in a resignation letter is the date, your name, signature and one sentence: “I resign my position effective immediately.” After resigning at 3 p.m. on a Friday, an advisor should immediately go to the hiring firm to complete paperwork, then immediately start contacting clients.
What are the pros and cons of hiring a financial advisor? ›- When to choose a fee-only financial advisor (and when not to). ...
- Pro: They can offer unbiased advice. ...
- Con: There can still be room for error. ...
- Pro: Costs can be more predictable. ...
- Con: They could be more costly for some investors. ...
- Pro: They can help create a comprehensive financial plan.
In fact, given that the average experienced lead advisor has 96 clients, the average advisor only spends 2.9 hours per year actually “investment managing” the client's portfolio.
Why do financial advisors get paid so much? ›Commissions. In this type of fee arrangement, a financial advisor makes their money from commissions. Advisors earn these fees when they recommend and sell specific financial products, such as mutual funds or annuities, to a client. These are often payable in addition to the above client fees.
Can financial advisors make you rich? ›So can a financial adviser make you rich? The answer is yes. But it would take a very long time unless you already have a reasonable amount of money. Definitely one of the key benefits to working with a financial advisor is long term slow wealth creation and wealth protection.
Do financial advisors invest your money? ›Financial advisors also help invest your money, either by recommending specific investments or providing complete investment management. In some cases, you can choose which services you want or need based on the type of advisor you select.
How often should I meet with my financial advisor? ›Experts recommend that you meet at least once a year with a financial advisor to discuss your investment plan and review your risk tolerance and cash flow objectives.
What should I ask my financial advisor every year? ›- 5 key questions to ask at annual review time. Is your investment strategy on track? ...
- Is my investment strategy on track? You probably have several savings goals and accounts. ...
- Am I saving tax-efficiently? ...
- Am I protecting my income? ...
- Am I preserving my assets? ...
- How does my financial plan affect my family?
It also helps to improve the emotional wellbeing of customers by making them feel better about their money – and themselves. Clients who worked with a financial planner said that they were more in control of their money, felt more secure and stable, more confident, and better prepared to cope with life's shocks.
What is the importance of independent financial advice? ›
The benefits of using an Independent Financial Adviser (IFA) are many fold, including: Helping you plan for the future and set life goals (i.e. at what age do I want to retire?) Help you reducing tax and make sure you are aware and using all of your tax-free pension and saving allowances.
What are the pros and cons of having a financial advisor? ›- Pro: time. Hiring an advisor can save you a significant amount of time spent on research and studying different investment strategies. ...
- Pro: strategy. ...
- Pro: peace of mind.
- Con: peace of mind. ...
- Con: conflict of interest. ...
- Con: costs and fees.
The Independent Adviser will provide independent advice and is able to consider and recommend all types of retail investment products that could meet your needs and objectives. Independent advisers will also consider products from all firms across the market, and have to give unbiased and unrestricted advice.
What are three benefits to financial planning? ›- #1 – Financial planning helps you set and achieve your financial goals. ...
- #2 – Having a financial plan is a source of motivation and commitment. ...
- #3 – It provides a guide for action planning and decision making.
Money management refers to the processes of budgeting, saving, investing, spending, or otherwise overseeing the capital usage of an individual or group. The term can also refer more narrowly to investment management and portfolio management.
How has financial planning benefited to you and your family? ›A financial plan can help you secure your family's finances and become independent of these constraints. With a good financial plan, you can save enough money to cover your monthly expenses. The financial plan can help you manage your money when your business has extra sales.
How do advisers charge? ›A monthly fee — this might be a flat fee or a percentage of the money you want to invest. An ongoing fee — an adviser can only charge you an ongoing fee in return for providing an ongoing service, unless you're paying off an initial charge over time through a regular payment product.
How do I quit a financial advisor? ›The only thing that should be put in a resignation letter is the date, your name, signature and one sentence: “I resign my position effective immediately.” After resigning at 3 p.m. on a Friday, an advisor should immediately go to the hiring firm to complete paperwork, then immediately start contacting clients.
Do financial advisors make commission? ›In the financial world, advisors and planners are compensated in one of two basic ways: by earning flat fees or by earning commissions. A fee-only financial advisor is paid a set rate for the services they provide rather than getting paid by commission on the products they sell or trade.
How many clients does the average financial advisor have? ›In fact, given that the average experienced lead advisor has 96 clients, the average advisor only spends 2.9 hours per year actually “investment managing” the client's portfolio.
What are some of the possible drawbacks associated with seeking advice from a financial planning expert? ›
Bad Advice
Financial planning professionals offer no guarantees. Their advice can be, and sometimes is, wrong. Sometimes economic circumstances change--dramatically--making previous assumptions and advice wrong and resulting in significant investment losses. Many people do very well with their own financial planning.