A finer grain approach to advice
Financial planners need to ensure they are considering client cash flow and budgeting advice.
A cornerstone of the Future of Financial Advice (FOFA) reforms is the “best interests duty”. In April, we saw the first reports of advisers being banned on charges of not acting in accordance with these FOFA reforms.
What does the “best interests duty” require of an adviser?
In part, it requires:
- Identifying the objectives, financial situation and needs of the client that were identified through instructions;
- Identifying the objectives, financial situation and needs of the client that would reasonably be considered relevant to the advice sought on that subject matter;
- If it is reasonably apparent that information relating to the client’s relevant circumstances is incomplete or inaccurate, making reasonable inquiries to obtain complete and accurate information;
- Basing all judgments on the client’s relevant circumstances; and
- Taking steps, at time of advice, that is reasonably regarded as "in the best interests of the client", given the client’s relevant circumstances.
With the duty to prioritise the client’s interests in the event of a conflict, the Australian Securities and Investments Commission (ASIC) has further clarified in RG 175:
- The recommendation of the product of a related party must be supported by extra benefits for the client; and
- If your APL contains only products of a related party, you must not recommend one over a competitor’s product unless a reasonable adviser would be satisfied it was in the client’s interests to recommend that product over a rival product with similar features and costs.
A financial adviser's overall approach to these new duties should be informed by ASIC’s view that a reasonable adviser should believe that the client is likely to be in a better position if the client follows the advice.
The importance of client cashflows
There are a number of points within the “Safe Harbour” guidelines that strike me as remarkable, and in particular the strong emphasis on understanding client's financial position.
From experience, while the client fact find process is often done well in relation to the client net position – assets and liabilities – the same may not be true for understanding a client’s cashflow and budget.
Often, this information is the client estimates of their budget. At worst the budget section of the fact find may not be completed at all. The overriding assumption here is that a client with surplus and good income is in control of their day-to-day financial management. Either way, we argue the adviser’s ability to truly understand the client’s ability to pursue any strategy involving ongoing financial contribution is quite possibly compromised starting from this basis.
Outside of the fact find data, the following point is extremely interesting. An adviser should take “any other steps that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.
Given the fiduciary basis of the adviser/client relationship, this would seem a very wide ranging requirement for an adviser to fill. In many cases this would see an adviser needing to provide recommendations and advice around many areas of a client’s financial situation that have not traditionally been advised on by planners (debt management, budgeting and cashflow).
The future of financial planning advice
At a minimum there is a need for:
- More detailed fact finds;
- Supporting documentation for why the advice provided to a client is in the “best interests” of the client; and
- Evidence that products and services provided improve the client outcomes (especially when replacing existing products).
At a deeper level, there is a need to provide continued support for how your advice has improved (and continues to improve) your client’s financial life.
Taking a finer grain approach to financial advice, where the adviser gets in deep with the client, is where the real future of planning advice lies.
With regular coaching and management of a client’s financial strategy via cash flow management, it is possible for an adviser to truly demonstrate they know their client. In addition, they will find it easy to both demonstrate benefits of the strategies recommended and to take timely corrective advice action if a client hits life event hurdles. We would argue that it not only meets this regulatory requirement but Australians as a whole would benefit significantly with more assistance in this area of their lives.
Mortgage brokers should also be watching the current ASIC review of their industry with interest as I would suggest that many of the FOFA reforms will transfer easily into their world.
How do financial planners make the leap?
There are many cashflow management tools that allow clients and their adviser to collaborate on a client’s day-to-day financial situation and to facilitate visibility and a hands-on coaching service.
With services and tools readily available it is now possible for financial planners to enhance their compliance regime and minimise the likelihood of FOFA reform breaches by implementing cash flow management services.
But, more importantly, they can maximise client financial outcomes, which is after all the intention of FOFA reforms.
Stephen Mitchell is the business development manager at Bill Butler
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