“Welcome to McDonalds”: Five Take-outs for advisers
McDonald v AMP Financial Planning Pty Ltd
NSG v ASIC aside, financial planners often struggle to find cases that clearly address their legal obligations and duties. Thankfully, McDonald v AMP Financial Planning Pty Limited  QSC 195 addresses both the practice and process of financial planning and, as a consequence, highlights expectations that advisers need to adequately consider in their own businesses.
It’s best to read the judgement yourself, but it’s enough to know that AMP sought to exercise their right under the Authorised Representative to terminate the adviser’s authorisation. AMP asserted, identified, and relied on material contraventions of the law and the contract to justify their decision. The adviser objected, and relied on previous compliance reports and her demonstrated willingness to comply with AMP’s direction to oppose the termination.
Over the course of the judgment, Douglas J considered the nature of ongoing service, the definition of financial product advice and the differences between Statements of Advice and Records of Advice.
It’s more interesting than it sounds.
I’d recommend you read the judgment but, in any event, learn from it and consider the following recommendations.
Ignore the score
Too often, advisers focus on the ‘result’ of their review rather than on the substantive issues identified. Institutionally-aligned advisers, conditioned by balanced scorecards and management expectations, are particularly vulnerable to this approach.
While your compliance rating/score may have some internal consequences, it more often than not simply distracts advisers and licensees from addressing, remediating and preventing the failures identified in the report.
In fact, McDonald v AMP Financial Planning Pty Ltd confirms some of our long held views about "compliance" and audit grades and emphasises a critical point that, regardless of how your Licensee describes or rates a compliance issue, any material breach is significant.
"Such a failure to make an appropriate ROA constitutes a breach of a material obligation under the AR Agreement. The argument that it was identified simply as of “medium” importance in a document called the defendant’s “Issues and Consequences Table – Financial Services” does not seem to me to override the consequences of it being a breach of a material obligation."
Read your Authorised Representative Agreement carefully.
Understand what your Licensee considers a “material obligation” and how they’ll be identified.
Identify what specific laws or regulations they consider to be material.
Obtain clarification from your Licensee about what specific breaches can remediated and what can’t.
Read your Licensee’s “Monitoring and Supervision Policy”.
Confirm whether it’s risk or conduct based methodology.
Ensure that any compliance issues are appropriately identified and properly indicate their significance and consequence.
Insist the Licensee provides warranties regarding the conduct and competence of the reviewers and the scope of their review.
Understand whether the Reviewers adequately record the documents they review.
Understand when you’re providing personal advice.
Ensure that you appreciate when, and under what circumstances, regulated documents need to be provided.
2. Remediate quickly
The relationship between the Licensee and the Authorised Representative is not one of equals. The AR Agreement does not create a partnership or a joint venture but instead establishes that the adviser is the agent of, and acts for and on behalf of, the Licensee.
Appropriately enough, the Licensee is the Principal and has structure the authorisation, and the complementary arrangements, to insulate the Licensee. Given their liability, and the breadth of their exposure, and understanding their unwillingness to risk public censure, ensure that you remediate any compliance issues immediately. Where you require clarification or additional support to do so, formally notify your Licensee of your needs and request clarification and assistance.
Understand your obligations.
Take identified issues seriously.
Remediate quickly, fairly and effectively.
3. Focus on purpose
I’ve long maintained a position (contrary to that of some institutional licensees (like yours BTW)) that an adviser’s best interest duty is not simply a matter of process (with quality addressed by s961G) but explicitly requires the adviser to approach with the right intent AND to address the likely outcomes.
… the “best interests duty is a legislative requirement to ensure the processes and motivations of financial advisers are focused on what is best for their clients.”[iv] While the retrospective testing of outcomes is not always helpful, I believe that the consideration of likely outcomes is, and must be, a key component of the best interest duty.
Review your Discovery process. Your information about your client, their needs and their relevant personal circumstances will be critical to any assessment of your advice or advice processes.
Remember that each client is different. Pursue automation, templating and streamlined processes but ensure that each client record, and each file-note, reflects their individual circumstances.
Slow down. Even if the product or strategic recommendation is obvious to you, take the time to consider the options available to them. Test your reasoning by asking how your recommendation could be wrong.
Move beyond compliance. Your Licensee will expect you to comply with the applicable laws, consider whether your standards should be higher.
4. Address expectations
The Fee-for-No-Service fiasco has entangled more businesses than simply the institutional groups that featured so prominently in its exposure. Obviously, there’s more focus than ever on ongoing services. beyond ensuring that you are demonstrably providing ongoing services commensurate with their cost, you need to consider the substance of those services.
While it is possible that an ongoing service review might involve no financial product advice, Douglas J thinks it unlikely. It defies reason, one could infer from his clients, that multiple clients would attend reviews and be given no recommendation at all. Remember, that a recommendation to hold or maintain a portfolio, is advice.
Ensure you have a practical understanding of “financial product advice”. Identify what regulated documents are required and under what circumstances.
Define the nature and scope of the ongoing service you provide. If you don’t necessarily provide financial product advice or perform a review as part of the ongoing service, then document this.
Consider whether the ongoing services you provide, are in your clients’ best interests. If a reasonable person might consider that the cost of the service outweighs its benefit and value, you should reconsider your approach.
5. Keep contemporaneous notes
Document. Document. Document.
I appreciate that, over the course of your career, you’ve been indoctrinated about the importance of disclosure. Disclosure is important, but in the absence of a documentary records even the most fulsome and complete disclosure is irrelevant.
Develop file-note templates to streamline your process.
Implement software to mitigate your process failures.