The obligation to provide an SOA came into force more than 15 years ago. Since then, there has been a continuous debate about the extent to which conflicts of interest that arise from institutional ownership or alignment of financial advisers should be disclosed in SOAs.
Conflicts of interest are important because they lead to bad outcomes for clients. The present system allows institutionally-owned or aligned advisers to act as a distribution channel for product issuers. In my experience the conflicts of interest that underlie this arrangement lead to clients being improperly switched from one product to another or being advised to purchase too much of a product including being advised to borrow to make the investment.
Product switching imposes unwarranted transaction costs upon clients, but its adverse effects can be particularly severe where clients lose the benefits of their existing insurance coverage as a result of switching from one product to another. Similarly, buying too much of a product, particularly where borrowing is involved, can lead clients to have disastrous outcomes.
In this context, the current framework that applies to the management of conflicts of interest that derive from the institutional ownership or alignment of advisers is deficient in at least four respects.
First, disclosure of conflicts of interest does not solve the underlying problem about whether an adviser should be providing advice. An adviser that has a conflict of interest is either able to provide appropriate advice in the context of that conflict or they are not. This is a decision that an adviser should personally have to make each time that advice is provided. Instead, advisers are allowed to disclose actual conflicts of interest in an SOA and leave it up to the client as to whether the advice should be implemented. In this way, responsibility for resolving issues about conflicts of interest is improperly transferred from the adviser to the client.
Second, the disclosure of conflicts of interest is a sham process on multiple levels. Actual conflicts of interest are disclosed in an SOA in the full knowledge that it is most unlikely that a client will read the disclosure and if they do that they will understand the effect of what is being disclosed to them. Clients see advisers because they want financial advice. Clients view the SOA as being a document that sets out financial advice. Clients don’t realise that in some contexts an SOA’s primary purpose is to disclose actual conflicts of interest that the client must consider and then form their own view as to whether they will implement the advice in the light of those conflicts.
Third, the obligation to provide an SOA derived from the view that conflicts of interest resulted in poor financial advice being provided to clients and that the way to resolve this issue was for conflicts of interest to be disclosed to clients by way of an SOA. The SOA operates as a way of avoiding the real issue, which is that business models that create an actual conflict of interest between an adviser and their client should be prohibited. An extraordinary irony of the current system is that I can see doctor about literally matters of life or death and I do not have to receive written advice, but if I consult a financial planner about even the most mundane of topics I have to pay for an SOA to be provided to me. The result being that I have to pay for a document that I don’t want or need so that I can be informed about the conflicts of interest that underlie my adviser’s business model.
A second level of irony is that the costs associated with preparing SOAs is a major reason why people do not obtain financial advice, with the result being that many people who would benefit from receiving financial advice do not obtain that advice. A third level of irony is that the costs associated with the production of SOAs create a commercial advantage for advisers who can subsidise these costs from fees generated from the sale of financial products. It is a perverse outcome of the current system that independent advisers are placed at a financial disadvantage because they have to comply with regulatory obligations that relate to a different business model that has inherent conflicts of interest.
Fourth, the purpose of the SOA has become distorted. The SOA is meant to benefit clients by disclosing to them matters that it is assumed that they need to know about before implementing advice. Instead, it has become a means whereby advisers at the clients cost can set out disclosures and disclaimers that are designed to make it more difficult for clients to recover compensation from their adviser for the consequences of bad advice.
The combined effect of these factors being that clients pay for an SOA that they are unlikely to read or understand, the purpose of which is to disclose the existence of conflicts of interest that should have been avoided. In addition, clients pay for an SOA that can be used as weapon against them should they get into a dispute with their adviser.
The solution to these problems lies with the abolition of the SOA.
An adviser should be free to document their advice in whatever way that they and their client think is appropriate in the circumstances and in a manner that the client is willing to pay to have done. With respect to conflicts of interests, the solution lies in the abolition of the use of disclosures as a mean of managing actual conflicts of interest. Each adviser should be under an obligation to form their own view, given the conflicts of interest that are inherent in their business model, as to whether they can provide advice to a client and comply with their regulatory obligations.
If the adviser gets that decision wrong, the adviser and their licensee will bear the consequences in terms of litigation and regulatory risk. Advisers and their licensees should not, on the basis that the conflict of interest has been disclosed in a SOA or some other document, be able to operate under a business structure that creates an actual conflict of interest between an adviser and their client.
David Huggins is principal of Huggins Legal and is a lawyer specialising in financial services litigation.
Not sure how much credence an article from a financial services lawyer has though it was an interesting read. I have seen more evidence that a SOA is ammunition against an adviser. Any mistake, missing table can be used against a planner. To his point re conflicts, I believe FP do make the decision that they can manage the conflict and proceed accordingly. This does not change the fact they need to still disclose it (which is in the FSG already). This also doesn’t mean I believe there isn’t a real conflict. I think David’s real inference is that a FP licensed by a product cannot manage the conflict so should not give advice. I wont argue. I think CBA should only sell CBA insurance, WBC same etc etc. Brokers should just be brokers (no link to a product) – same as mortgages. Why do we pretend a CBA want to sell anyone else?
Great idea, then instead of the industry covering its back with a long and confusing SOA it may give time to giving the client information they need in a clear and simple form where the advisers behave as professionals, not product pushers.
Only one comment above is on the ball. Verticle Integration of product issue with advice must go. The product issuers can be given a suitable period to divest of advice businesses, alternatively they divest of product issuance and specialise in advice.
Exactly. ANZ has seen the writing on the wall and divested early. It would be no surprise if CBA did something similar quite soon as part of their program to eradicate any source of potential bad PR. However legislation will probably be needed to force wealth specific product companies like AMP and IOOF to divest their advice channels.
I just like his title. Maybe rather than getting rid of SoA’s we just get rid of lawyers specializing in financial services litigation. …just trying to be funny, no doubt those lawyers are a necessary evil just like SoA’s… .You know it’s a slow day at the office post GFC, for litigation lawyers specializing in suing financial planners., when they have to resort to social media and press releases to get business. I reckon this guy should diversify and specialize in helping planners sue ASIC and the media. Maybe we could do a quick whip around/ crowd funding and get him to take on ASIC over the term independent. I reckon things will pick up for him now that accountants have a licence.
SOA’s don’t get read by anyone let alone the clients. If they do they don’t understand them 90% of the time so why have them. I point the finger at an inadequate FPA and the whole pathetic industry trying to make advising harder than it needs to be. Just like this whole education circus going on. What a joke this industry has become. An absolute JOKE. It’s embarrasing to admit being in this industry.
you are not wrong, I concur. in my view, the solution is two-fold:
1. bring the mandatory degree requirement forward – preferably a postgraduate one (in financial planning or CFA level 3 pass) – including that for existing advisers to Jan 2019 OR;
2. make the FASEA licensing exam extremely difficult and modeled on the 3 levels of the CFA exam
the CFA exam is over 3 levels, it is grueling, pass rates are often less than 35% of each level. each exam is 6 hours in length and consists of multiple choice and short answers. total testing time is 18 hours, a reasonable level considering we are handling people’s life savings.
documenting advice is fine, we can do that via email with the subject heading SOA or RoA, or ROAA, and with the inclusion of links for e.g. to pds, fsg, etc that is already on our websites
once we make the supply into the industry extremely rigorous we won’t have any issues.
the main issue with financial planning is “everyone is welcome” (TM) (used by authority from Samsung)
Couldn’t agree with this comment more. The exam better be classroom based and difficult… If its online I know plenty of advisers that will just get their paraplanner to do it..
What a breath of fresh air about SOA’s and their purpose/function,and from someone not at the coal face.of financial planning.The regulators are quite distant and divorced from the practicing financial planner and this creates the impediments we now have
Perhaps the author should send his admirable treatise to the new Chairman of ASIC. As it stands at the moment, ASIC likes an SOA, as it serves as a lump of wood with which to belt advisers and licencees, as evidenced by ASICs abominable sample SOA of May 2017. The mere existence of SOAs favour the institution-owned AFSLs who have the resources to computerize the compilations of SOAs and who can afford expensive lawyers on tap
This article does a great job in outlining the problems, and sets things up nicely for a clear and logical solution. Then goes off the rails! No David, the solution is not to abolish the SoA, the solution is to ban product companies from involvement in advice. Surely that is the only conclusion to be drawn from your otherwise excellent analysis. It is the underlying cause of all the problems.
The concept of documenting advice is actually a good one. It is a key differentiator between financial planners and accountants, and has a lot of benefits for clients. SoAs should continue to exist, but they really only need to be a few pages focused purely on documenting the recommendations.
Agree, SoA’s have gone off the rails in their size. Somehow they need to be massively simplified while still providing the important information and protecting the client.
Agreed, and here’s the other good part about ditching SOAs:
Planners and Paraplanners will have more time to write a document that people actually can comprehend. They will have more time to work on proper solutions. It will cost less and more people will get advice. Poor advice may actually reduce as more potential clients with real advice needs knock on the door, rather than advisers feeling the need to churn existing products.
Put the other rubbish in the FSG if you feel you need to disclose conflicts. Keep internal working papers etc….but seriously….writing a 30 to 50 page SOA for someone to get some income protection, or to convert to an account based pension at retirement? Make no mistake, if we have to continue with SOAs and ROAs we will be phased out as technology improves and direct channels move in for the kill.
Gerry said: “Make no mistake, if we have to continue with SOAs and ROAs we will be phased out as technology improves and direct channels move in for the kill”.
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Gerry, that part of your comment is something I’ve been trumpeting from page like these for a few years now, since it became very clear to me after a series of incidents I experienced. The life companies simply cannot wait for advisers to be gone and will create every impedance to us being in the industry and having an efficient time of it. You are correct – tech will indeed phase us out (no client best interest there) and the robo-advice direct channels of the life companies will move straight in. Easy, happy life companies then have no more pesky commissions to pay. Just wait until people see they can’t claim on these dangerous stripped-down products. It will be enough to put a good number of companies, if not most of them, out of business – not before they desperately ‘try’ to get advisers back to save them – but it will be too late. Most of the good advisers will have had the sense to leave to an industry that rewards top consultants properly or they’ll have retired. Only idiocy, ego, greed and short term-ism graces the leadership of our once great industry now. That goes for the regulators and the life company top end of town. Unfortunately, I truly am very sorry to say, the SoA will NEVER be dropped and even sadder, it will never be improved the way commentators here want it to be. To do so would make life easier for clients AND advisers and the powers that be simply do not want that. Please don’t shoot the messenger on this.