Client interests and best interest advice
Domain 3 - Client interests and best interest advice - tests whether you can place the client's interest ahead of your own and prove it. Fact patterns usually conceal a compensation conflict.
The two duties
Duty of care: know the client, analyse properly, recommend what a competent professional would. Duty of loyalty: prefer the client's interest to your own and to third parties'. Together they define the best interest standard. Product-level suitability is the floor, not the whole test.
Conflicts: avoid, mitigate, disclose
Order of treatment: avoid the conflict where possible; otherwise mitigate (independent product panel, fee-based structure, second review); then disclose in specific and, where possible, dollar terms and obtain informed consent. Disclosure does not convert advice contrary to the client's interest into acceptable advice.
Recurring conflicts: commissions and trailing fees, revenue sharing, proprietary products, referral fees, principal or agency trading, gifts and hospitality, recommending an affiliate's service, and charging for monitoring not performed.
Applying best interest
- Compare reasonably available alternatives on cost, risk and fit with the client's objectives.
- Match risk to the client's capacity for loss, not the planner's optimism.
- Record why the recommended option beat the alternatives; a contemporaneous note is the evidence.
- Revisit when circumstances, products or costs change.
Worked example
A client with a three-year horizon and no capacity for loss is offered two capital-protected notes. Note A pays the firm 2.5% and the adviser 0.8%; Note B pays 0.6% with no adviser share. Both are issued by the same bank on identical terms.
Reasoning: identical economics mean the only differentiator is cost to the client. Best interest requires recommending B, or documenting a client-specific reason it cannot be used (for example, minimum size). Placing the client in A without disclosure and rationale breaches loyalty; disclosure alone does not cure the cost difference.
Traps
- Treating a signed disclosure as a complete defence.
- Confusing 'suitable' with 'best'.
- Recommending what suits the planner's risk appetite or sales target.
- Ignoring small ongoing fees that compound over long horizons.
- Failing to disclose a conflict involving a family member or related company.