A four-step process for statements of advice designed to help create a culture of compliance in the client’s best interests
EIGHTEEN MONTHS ago, in answer to the question, ‘What are you looking for in a licensee?’ which we put to all advisers considering a move to Synchron from another licensee, we invariably received a similar answer: ‘I want to pay minimum licensee services fees and enjoy maximum share of revenue’.
Today, we are getting a quite different answer: ‘I want an independently-owned licensee with a compliance régime that will protect me – a licensee that will be here tomorrow, not sold out to an institution’.
This change in adviser concerns is very interesting and highlights the responsibility that licensees have – especially in this period of dramatic regulatory change. Our responsibility first and foremost is to the client, through the advisers we represent.
Synchron worked out years ago that the best way to protect our licence and our advisers is to protect the client. One of the best ways to do that is to have an informed client. The way to have an informed client is to provide simple advice documents they actually read.
STATEMENTS OF ADVICE
In a recent email to members of the Association of Independently Owned Financial Planners (AIOFP), the Australian Securities and Investments Commission (ASIC) said it would like to see much shorter SoAs. It suggested three pages since often, that is all a consumer will read.
An SoA needs to clearly, concisely and effectively lay out:
- pertinent points about the advice, putting the client in a position to make an informed decision; and
- a reasonable basis for the advice
Statements in excess of 10 pages are often designed by licensee compliance departments in conjunction with lawyers to not only meet regulatory requirements but to protect the licensee.
That’s ironic, because ultimately long SoAs only confuse clients which –theoretically at least – makes licensees more vulnerable to legal action. It’s time the industry recognised that having a fully informed client in reality rather than a fully informed client on paper is the best protection licensees and advisers can get.
CLEAR, CONCISE AND EFFECTIVE
Under Regulatory Guide 175 (RG175), ASIC requires SoAs to be clear and effective, so the client can make an informed decision.
We believe that one day a financial adviser may be challenged in court to answer how the client could possibly have been able to make an informed decision when provided with a multiple page document that he/she is very unlikely to have read, let alone understood.
A Synchron SoA, for a simple case of life insurance advice, can sometimes be as short as four pages. Adherence to the Synchron four-step process ensures the advice matches the client’s needs.
However, the basis for advice must still be fully documented. It should include investigation of the client’s circumstances and investigations made in relation to strategy, the financial products considered and those recommended.
BEST INTERESTS DUTY
RG175 was revised under FOFA to include the new Best Interests Duty. All licensees, authorised representatives and advice providers are now required to comply with it and related obligations.
According to ASIC, this requirement imposes a higher standard of advice than the previous legislation because the enquiries an advice provider needs to make are more extensive.
PRIORITISE THE CLIENT’S INTERESTS
An advice provider must not act to further their (or related parties’) interests over those of the client.
THE SYNCHRON FOUR-STEP SOA
To help our advisers develop a culture of compliance, Synchron has introduced a four-step SoA process.
STEP 1 - WHY DID WE SEE THE CLIENT OR WHY DID THEY COME TO SEE US? (PRIMARY GOALS AND OBJECTIVES)
Clients usually visit a financial adviser with a goal or reason in mind. This first step is to identify the client’s primary goals and objectives. Advisers are encouraged to use the fact-find document to identify the client’s relevant personal circumstances. If investment advice is provided, advisers will need to determine the client’s risk profile.
STEP 2 - WHAT ARE WE GOING TO DO ABOUT IT? (OUR RECOMMENDATIONS)
This step details recommendations to the client. The recommendations will need to address the primary goals and objectives as advised by the client in the previous step. The recommendations will need to have a reasonable basis for advice and the information recorded on the fact-find document should form the basis of the recommendations in conjunction with the client’s goals.
STEP 3 - HOW ARE WE GOING TO DO IT? (RECOMMENDED PRODUCTS)
Next, advisers will need to determine what product(s) or service(s) are appropriate to meet the client’s needs and objectives.
STEP 4 - DOES IT SATISFY WHY THE CLIENT CAME TO SEE US IN THE FIRST PLACE? (RESULTS OF OUR RECOMMENDATIONS)
The recommendations provided need to be easily related back to the client’s primary objectives and goals – in other words, why the client came to see the adviser in the first place.
POST-APPOINTMENT LETTERS AND BASIS FOR ADVICE
Synchron advisers must provide any client who receives insurance advice with a post-appointment letter. The letter is sent to the client when an application for insurance is lodged. It is accompanied by the client’s answers to the health evidence questions and asks the client to review their answers to confirm their accuracy.
The letter also documents the client’s ongoing duty of disclosure to notify the insurer if their circumstances change before the policy is issued. This document is a compulsory requirement for all Synchron advisers because it creates a paper trail which can be used in the event of a complaint involving a dispute about disclosure of relevant facts.
Authorised representatives need to show evidence of a reasonable basis for advice. This is a legislative requirement. Therefore, advisers must show they have:
- made reasonable enquiries and recorded adequate information about the client to understand the client’s objectives, financial situation and particular needs;
- obtained and carried out adequate research into financial products that may be considered suitable;
- prepared recommendations that take into account factors which may reasonably be expected to match the client’s objectives and needs; and
- included with the recommendations an explanation of why they are expected to suit the client’s objectives and needs.
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