Your duty to prioritise your client’s interests over your own interests
Your duty to provide advice that prioritises your client’s interests over your own interests arises under section 961J of the Corporations Act. ASIC discusses it in paragraphs RG 175.363 to 378.
Your duty to provide advice that prioritises your client’s interests over your own interests is in addition to and separate from your duty to provide advice that is in your client’s best interests and is appropriate to your client.
In summary, in the context of risk insurances where the adviser is rewarded by a commission, this means that your advice must not be primarily motivated by commissions.
Example 20: Remuneration conflicts life insurance commissions
An advice provider is providing a client with a review of their life insurance policy, which currently sets a death benefit of $300,000. The advice provider advises the client that they require additional cover of $100,000.
The advice provider recommends that the client obtain a new policy for $400,000 and then cancel the existing policy, rather than apply for additional cover within the existing policy. The terms of the life insurance policies and the annual premiums are the same.
The advice entitles the advice provider to a commission of 120% of the annual premium of the whole insured amount (i.e. $400,000), rather than just the increased amount (i.e. $100,000). The client follows the advice. As a result, they need to have medical checks, which they would not have needed if their level of cover was increased.
The client was nearing the four year anniversary of their existing policy. If they had continued to hold their existing policy, including if they increased their level of coverage, they would have been entitled to a 5% increase in the level of cover at no extra cost.
In this situation, we consider that s961J has been breached. The advice provider has given priority to maximising the non-client source of remuneration over the interests of the client.
But the client prioritisation rule is more than just a rule against commission motivated advice.
For example, the client prioritisation rule means advisers should not over-service clients by creating excessively complex arrangements likely to generate greater income for the adviser. By way of further example, it also means that advisers should recommend strategies likely to decrease a client’s need for financial products in the future. For example, recommending a client use their excess cash flow to reduce debt even if this means the need for life insurance products will fall and the adviser’s income may fall.