The Corporations Act, and the general law, require advisers to ensure their advice is in their client’s best interests, appropriate to the client’s circumstances, and prioritizes the client’s interests over the adviser’s interests.
This means each client’s unique circumstances must be considered when constructing financial plans. Their age, existing wealth, expected future wealth from inheritances, income, training, education, prior investment experience, personal financial commitments, debt risk tolerance and, most importantly, their personal philosophy including their religious beliefs and community values.
Financial planning advice is not in the client’s best interests, appropriate to the client’s circumstances and does not prioritize the client’s interests over the adviser’s interests if it does not reflect the client’s personal philosophies, including their religious beliefs and community values.
There can be conflict between the secular and the philosophical. Advisers must ensure their advice is secularly competent, and at the same time appropriate to the client. Conflicts need to be identified, discussed and resolved in the statement of advice. This is to ensure the advice is competent and of value to the client, but, to be frank, also to defend against a later complaint.
Islamic clients may present a technically interesting case. There is a lot that cannot be done. But there is a lot that can be done too, you just have to think about it a bit differently.
The personal philosophies will vary from client to client, and usually reflect their ethnic and geographic backgrounds, as well as the complex differences that occur within Islam. But usually at least four common characteristics can be identified. To varying degrees Islamic doctors do not like:
- debt, and interest
- superannuation and other investments that breach ethical principles, particularly socially detrimental activities such as gambling, tobacco, alcohol, and weapons, but also banks and similar financial institutions that profit from debt, and even highly geared listed companies
- life insurance and income protection insurance and
- western style traditional wills and estate planning.
In the case of debt, and interest, this is a difficult area given Australia’s addiction to home ownership and home loan mortgages. Home ownership is harder than it is for non-Islamic clients. Some just rent. Others buy lower cost homes using cash savings, typically in outer metropolitan or regional areas (which is not a bad idea because doctors’ incomes are usually higher in those areas).
As a practical matter, this means many suburbs in Melbourne and Sydney are out of reach. It’s just too hard to come up with the $2,000,000 cash needed to buy an average home in, say, Caringbah or Collingwood without using a home loan.
There are Islamic alternatives to the traditional home loan mortgage. One alternative involves the capital provider sharing in the capital gain expected to accrue to the capital recipient. Another involves a “lease to own” transaction where the property is leased for an agreed annual rent and at the end of the (very long) lease the owner transfers the property to the lessee.
I find myself worrying about my client’s long term financial fortunes if they do not have an ascending footprint on the Australian home ownership ladder. It’s not hard to see home-ownership based inter-generational social divisions. What will their children do? It’s an issue, at least from a non-Islamic point of view.
These worries should be confirmed in the statement of advice. Set out your concerns, and how there may be conflict between standard secular advice and the client’s world view. Explain the consequences, and record that the client understands and accepts those consequences.
Superannuation and other forms of investing are problematic. Some Islamic clients just avoid the issue. They do not pay super contributions despite the overwhelming tax incentives because of concerns about what comes next. That is, how will the super fund invest their benefits? Investments in alcohol, weapons, interest earning deposits, gambling and so on are not acceptable.
The question should be how do you make sure the super fund invests in line with the Islamic member’s religious beliefs and personal philosophies? Remember, interest income is frowned on. For example, the classic “conservative” investment option emphasizes fixed interest securities, which are inconsistent with Islamic beliefs. It’s quite a restriction, because some funds will have as much 90% of benefits invested in fixed interest and similar securities.
Some good options include:
- a self-managed super fund investing into appropriate (and debt free) investments, for example, a block of land expected to increase in value over time
- the “ethical” investment option available at many large retail funds and industry funds (we prefer industry funds because of their not for profit status) or
- Crescent Super, a large retail super fund specializing in Islamic investments for Islamic members (and non-Islamic members interested in ethical investments).
Life insurance is problematic, again at least to a western minded adviser, and I am truly worried for many of my uninsured Islamic clients. Their view is, generally, one should not engage in commercial transactions concerning things one does not own such as one’s life, or health, and these matters are best left in God’s hands. My statements of advice play it safe by recording my concerns, and standard secular recommendations, and then stating that I understand my client has a religious and philosophical concern about risk insurances and therefore will not act on my advice. And they understand and accept the risk this creates for them.
Wills and estate planning is complex. Islamic law contemplates wills and sets out who will inherit based on blood relationships and gender. Islamic succession law has a male bias, and favors sons, brothers and husbands, but also protects daughters, sisters and wives. Often two thirds of an estate is distributed under strict set rules, and the remaining one third is distributed more flexibly, in line with the will-maker’s individual preferences.
Financial planning works better when there genuine understanding and empathy between adviser and client. This can mean the best advice is a referral to someone better positioned to help. The non-Islamic adviser should carefully consider if they can competently advise an Islamic client. Sometimes the best advice can be a referral to a person who is better at a particular sub-specialty, in this case a person who is an Islamic financial planner.
There is an inherent professionalism in saying “I know someone who can help you more than I can”.
That is advice truly in your client’s best interests.