Welcome to Bizarro World: Proving Best Interests
As anyone with teenagers can attest, sometimes, reason is simply not enough.
I suspect that anyone grappling with the implementation and assessment of the "Best Interest Duty" might experience a similar realisation.
Bizarre approaches to Best Interests
s 961B(1) sets out the core best interests duty, a primary obligation that ambitiously requires the provider to "act in the best interests of the client in relation to the advice". It's a primary obligation because it provides the parameters for all future engagements and it's ambitious because it is not a duty limited to the advice but applies to any interaction" in relation to the advice".
s 961B(2), in contrast, provides a statutory framework that is a partial, and not terribly effective, defence against apparent failures to act in a client's best interests. (For those playing at home, the actual quality of the advice, which should be the focus of a licensee's compliance arrangements, is addressed by s 961G). By demonstrating compliance with the processes described as the 'safe harbour steps', an adviser can try to dispute the claim that they contravened s961B(1).
These positions seem to be widely understood and accepted. Unfortunately, an increasing number of Licensees appear to use s961B(2) both to prove the provider's compliance with their best interest duty and to establish the quality of the advice provided.
Welcome to Bizarro World.
The role of safe harbours
Let's be clear.
Compliance with s961B(2) does not prove that the adviser acted in the client's best interests.
Compliance with s961B(2) does not prove the advice is appropriate for the client.
A Provider's advice process may support their assertion that they complied with the law, but they do not prove it nor do they necessarily support these conclusions.
So why are Licensees using s961B(2) as the principal, and in some cases only, means of assessing your compliance with the law?
In most cases, it's simply a matter of convenience and 'consistency'.
This approach also explains why many compliance experts ignore the nuances of s961B(2) in favour of 'commercial' interpretations. This is a lazy and uninspired approach. Particularly when one considers the facilitative and commercial character of the Corporations Act and the significant consequences for misunderstanding its requirements.
Rather than labour the point, let's refresh our understanding of the 'safe harbour' requirements.
s961B(2)(a) Identifying objectives and needs
In order to provide personal advice, an adviser must start with identifying the objectives, financial situation and needs[i] disclosed to the adviser in the client’s instructions.
Your discovery process can be scaled according to your client's needs, objectives and circumstances and your client can instruct you to provide, or not provide, specific services. The client is (notionally) in control, but as the advice professional, it is the adviser's responsibility to actively identify the client's relevant circumstances and test their instructions, particularly their understanding of the consequences and implications. Advisers often confuse goals and objectives and record vague and generic information in their notes and advice documents. This is not in their interests nor in the interests of their clients.
s961B(2)(b)(i) Identify the subject matter
In order to provide personal advice, an adviser must identify the subject matter of the advice sought by the client (whether explicitly or implicitly). Where a client has complex or unclear needs, this may necessitate additional discussions[ii].
A professional adviser is not simply an order taker. An adviser can not, and should not, implement instructions that the adviser knows, or reasonably suspects, will deliver adverse, sub-optimal or trivial outcomes for their client. Likewise, they cannot limit themselves to their client's explicit needs and requests. They must consider their client's implicit needs and test their client's assumptions and preferences.
s 961B(2)(b)(ii) Consider relevant aspects
After identifying the subject matter of the advice sought, an adviser must take into account those aspects of the client’s objectives, financial situation and needs that are relevant to the subject matter of the advice[iii].
The emphasis on "relevancy", and the active duty to consider their client's circumstances and needs, should translate as the methodical application of the adviser's knowledge, experience and common sense to their client's needs. They should avoid the automatic assumption that certain matters are always relevant, or always irrelevant, and turn their mind to their client's specific circumstances.
s 961B(2)(c) Make further enquiries
An adviser cannot solely rely on their client’s instructions but must make further inquiries where it’s reasonably apparent that the information provided to them is incomplete or inaccurate[iv]. If after making enquiries, this situation is not resolved, the adviser must warn the client before providing advice[v], but disclosure does not “reduce or diminish”[vi] the adviser’s best interest obligations.
In our experience, this is one of the most frequently omitted advice steps. An advice professional should think very carefully about whether they have all the information they need to provide the advice or services sought. If there are relevant or material gaps in the information they have, they must investigate. If they investigate but still can't obtain all the information they need (but consider it's in their client's best interest that they proceed) then they must warn their client - in clear and effective language - about the gaps and assumptions in the advice. They must also instruct their clients to consider their own circumstances (and the risks of implementing the advice) before they proceed to implementation.
s 961B(2)(d) Consider your capability
An adviser must, before providing advice, formally consider whether they have the expertise (experience, education and competency) to provide the advice sought. Where the adviser does not have the expertise, they should decline to provide advice[vii].
It is unusual to see any adviser formally considering whether they have the knowledge, skill and capability to provide the advice sought by their client. In our experience, most advisers rely on their authorisation to demonstrate their capability, but the 'safe harbour' process requires the adviser to formally consider this issue before proceeding to provide advice.
s 961B(2)(e) Decide whether a product recommendation is reasonable
An adviser must only recommend a financial product if, after considering the subject matter of the advice sought, it is reasonable to do so[viii].
This is a trap for new players. Before an adviser launches into their replacement product research and disclosure mode, they need to consider (ponder, analyse and record) whether a product recommendations is needed to help their clients' achieve their goals and objectives. If the client's existing arrangements are adequate and appropriate, or if their needs can be met without new financial products, then it may not be reasonable. Practically, in our opinion, this seems to require advisers to analyse their clients' existing products before they even contemplate their replacement.
s 961B(2)(e)(i) Investigate relevant products
Where an adviser thinks it reasonable to recommend a financial product, the adviser must conduct a reasonable investigation into relevant[ix] products. An adviser is expected to exercise their professional judgment in scoping product selection but is not required to investigate every product[x].
An adviser is not required to investigate every product but they do need to actively, and reasonably, investigate to identify products that are relevant to their client's needs and reasonably likely to satisfy their objectives. This obligation is particularly important if the adviser only has access to a limited Approved Product List or an APL dominated by a range of products with conflicted-remuneration.
s 961B(2)(e)(ii) Consider the information you've gathered
Where an adviser thinks it reasonable to recommend a financial product, the adviser must assess the information they gathered from their investigation[xi].
Read. Consider. Think. A professional adviser does this routinely but the Act requires them to do this methodically, consistently and predictably. It also needs to be well documented.
s 961B(2)(f) Consider your client's objectives, situation and needs
The client’s objectives, financial situation and needs must be the adviser’s paramount consideration. When advising their client, an adviser is required to base all judgments on their client’s objectives, financial situation and needs[xii].
The 'safe harbour' incorporates a number of rest stops on the way to a product recommendation. Think of these as mandatory rest breaks designed to reduce the risk of incidents or inappropriate advice. This step requires the adviser to review their proposed recommendation and confirm that the recommendation is based on their objective, considered and impartial assessment of the client's objectives, situation and needs. They should stop and think about whether, on balance, their proposed recommendation delivers what their clients' need.
s 961B(2)(g) Champion your client's interests
An adviser needs to take any additional steps that would reasonably, and objectively, be regarded as being in their client’s best interests. This requirement includes any steps that a person with a reasonable level of expertise in the subject matter would have taken if they had exercised care and objectively assessed their client’s relevant circumstances[xiii].
Accurate self-assessments of your capability aside, this is, in our opinion, the most problematic element of the safe harbour steps. Personally, we think it invalidates all the previous steps and should be eliminated but we understand equivocation well enough to appreciate the beauty of a vague, open and poorly defined 'catch all' provision.
Q. What must an adviser do?
A. Whatever an objective expert would consider reasonable.
Considering that financial planning is famous for its homogeneity and uniformity, this should be easy to anticipate. Plaintiff lawyers, in particular, will have definite views on this requirement. If you're confused just remember to focus on the client's best interests and repeat "It’s the vibe of the thing, your Honour."
While the statutory defences outlined in s961B(2) may suggest whether, or to what extent, an adviser has complied with s961B(1), the adviser’s substantive conduct is, in our view, the key determinant for assessing their compliance with this duty.
The processes followed by an adviser may, at best, suggest their advice was provided in the best interests of their client but it does not prove it.
Let's hope your Licensee's approach doesn't disadvantage you too much in the short term.
Over the longer term, we hope that reason and the vibe will prevail.