Most people would probably agree with the concept that a client (or customer) should understand what service they will receive before they agree to pay for that service. This is the basic premise addressed by FASEA Standard 4 of the Code of Ethics.
You may act for a client only with the client’s free, prior and informed consent.
However, the concept of “informed consent” requires further investigation and unbundling as it involves the client to both understand and agree to the service being offered. In the world of financial planning, this is neither simple nor straightforward. For the client to understand what is being offered, financial advisers are also required to explain what is not being offered as well as the possible implications of what is not being offered.
The difficulty arises due to the complexity of financial advice and how it impacts clients in different ways depending on their unique circumstances. Advice in one area often influences advice in other areas and so the onus is on the adviser to explain this to a client in a way they can understand.
A simple example of this might be with regards to explaining the impact of not providing life insurance advice to parents with young children and a large mortgage relying on a sole income, compared to the same parents with older children, a smaller mortgage and both parents working, or even the same couple but with no mortgage and adult children. For each circumstance, the explanation of the impact of not having insurance is different ranging from dire to limited consequences.
For a financial planner to explain the magnitude of the impact of the advice not being provided therefore requires a thorough understanding of the client’s circumstances, taking as much time in the discovery process as is necessary to satisfy best interests duties.
Herein lies the paradox. The provision of limited advice often leads to lower fees (as fewer services are provided) but requires the additional burden of providing evidence of the explanation of the impact of advice that is not being provided (more work).
Many dealer groups and planners try to solve this problem by simply choosing to only provide comprehensive advice. However, each segment of advice provided requires another tier of explanation. For example, if an adviser is providing retirement advice, then they may need to consider contribution strategies, transition to retirement (TTR) strategies, death benefit nominations, analysis of non-super debt and assets and perhaps self-managed superannuation fund (SMSF) options. If advice is being provided in these areas, this needs to be conveyed to the client. If not, then the reason and possible impact need to be explained.
In most other professions, for example, lawyers, accountants and doctors, there is a similar expectation regarding informed consent and that a client’s best interests will be considered in any advice provided. However, the difference in these mature professions is that they do not need to provide detailed evidence that they have addressed each possible matter and assessed any consequences. It is simply implied that these have been duly considered in the provision of advice.
Unfortunately, the financial planning industry is yet to earn this level of trust. It appears that for too long, too many practitioners believed advice could be limited to just the areas providing the highest revenue for the least amount of work, ignoring the consequences to the client of this limited advice.
The transition to a trusted profession has begun with new minimum education and experience levels and the introduction of a Code of Ethics. However, until the financial planning industry is accepted as a profession, financial planners will need to acknowledge that there are no shortcuts in the provision of advice and the heavy burden of compliance evidence is necessary.
To conduct a commercially viable practice in this environment requires a new approach, the days of conducting a first meeting with a paper-based fact-find gathering information is no longer sustainable. Online fact finds provide clients with an easy and secure way to provide personal and financial data as well as information regarding goals, values and risk profiles before the first meeting.
Having captured this data prior to the meeting, advisers can then flow the information through a series of online tools to conduct an interactive meeting delving deeper into the client’s needs, visually demonstrating the value of their advice so the clients can make informed decisions and have an inbuilt audit trail along the way.
Scoping the advice becomes straightforward and then it’s a simple matter to generate a detailed letter of engagement and ongoing service agreement that satisfies an adviser’s compliance obligations and, just as importantly, enables the client to provide free, prior, and informed consent.
Hans Egger, managing director, AstuteWheel
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