Appropriate, and better, risk advice.
Appropriateness doesn't require an adviser to provide perfect or ideal advice. Nor does it require the adviser to provide the highest level of care.
'Appropriate advice' just needs to be fit for purpose and based on the risk professional's consideration of their client's relevant personal circumstances.
Whether an adviser has correctly or adequately identified the client’s relevant circumstances will depend on the specific situation including the nature and scope of the advice provided, the complexity of the advice and the client’s needs, financial literacy and experience.
This might suggest that identifying relevant personal circumstances is an inherently subjective assessment, but the financial advice industry has, through a combination of practice, education and external influences, developed common discovery processes.
Relevant personal circumstances are determined by the adviser’s application of reason and professional judgment to the client’s situation.
Although ASIC's Regulatory Guide 175 suggests some relevant circumstances for advice on products with an investment component, they make few, if any, suggestions for other types of financial product advice.
In my opinion, appropriate advice on superannuation and insurance should consider and address matters including:
- the need for, and sustainability of, the recommended insurance levels;
- the general assumptions on which the recommendations are based including
- the value of level premiums;
- the likelihood of the client maintaining cover with the insurer over a longer-term;
- the methodology used to calculate sums insured;
- the disadvantages of unitised cover; and
- the likelihood that client’s insurance needs generally decline over time;
- the precise impact of the recommended insurance on the client’s superannuation balance and the growth of their superannuation;
- whether the client’s needs and objectives could have been achieved within their current fund;
- the medium and long term consequences of the recommended actions (including the client’s capacity to recover);
- the real consequences and implications of the recommended strategy;
- the root causes of the client’s specific issues (and the strategies and means by which the root causes can be addressed or mitigated);
- the client’s desire to minimise fees and costs;
- whether the adviser’s process and advice model benefitted the client (or whether they compromised the client’s interests);
- whether the advice (if followed) will produce the expected benefits; and
- tax position, social security entitlements, family commitments, employment security and expected retirement age.
Replacing insurance products involves additional complications in the wake of Commonwealth Financial Planning Limited v Couper  NSWCA 444. Notwithstanding standard disclaimers in SoA templates, appropriate advice (and advice provided in the client’s best interests) requires an adviser to “sufficiently impress” upon their clients the real risks they assume in replacing one policy with another including, but not limited to, the risk that section 29(3) of the Insurance Contracts Review Act 1984 (Cth) entitles an insurer to avoid a life insurance policy for non-fraudulent non-disclosure within three years of commencement.
This risk should be prominently addressed wherever replacement product advice is provided and particularly where the advice is based on limited information about the client or their relevant personal circumstances.
It is not enough to include it in the SoA as boiler-plate; the risk should be clearly discussed with the client and that discussion noted. Except in the case of automatic acceptance, the price an adviser quotes for a new policy (and on which the replacement product assessment relies) is a “best case” price, the variability risk should be clearly addressed to demonstrate the appropriateness of the advice.
Formal contemplation of the risk is required by, and consistent with, the adviser’s best interest duties. ASIC emphasised this risk in their REP 413 “Review of retail life insurance advice” where they opined that
“Quality life insurance advice should be robust and rigorous in duly considering the adverse implications of a product switch. The potential effect of s29(3) of the Insurance Contracts Act should be considered by the adviser when the client has a current policy in force that cannot be avoided by their existing insurer based on this provision.”
There are two additional points an adviser should consider and address.
First, is the problem of basing a recommendation on the first year’s premium given the long-term commitment for the insurance recommended. Particularly when recommending level premiums, an adviser should look beyond the first year’s premium before making any statement about costs, consequences and the appropriateness of the product replacement recommendation.
Second, be careful of misrepresenting the cost and real benefit of level premiums. In general, level premiums neither stay at the same rate nor decline over time. They increase but at a far less dramatic rate than stepped premiums. If a level premium policy is maintained over a significant period, the cumulative cost of level premiums is often less than the cumulative cost of stepped premiums. However, it often takes many years for the cost of the stepped premiums to overtake the level premiums. As ASIC identified, few consumers maintain policies for the length of time necessary to realise that benefit.
ASIC noted that average durations are not significantly different for level premium policies. ASIC wrote at 413.84 that despite
"insurers .. assuming that level premium policies will have significantly longer durations, at 109 months (9.1 years) .. the data for level premium policies shows the same trend [as stepped premium policies] with insurers incrementally revising the policy durations down across the survey period.
A great many risk advisers provide reasonable advice but many also struggle to appreciate that "reasonable" advice is not enough. Appropriate advice, and acting in a client's best interests, requires a higher standard of care than ASIC generally attribute to the sector. On should not assume that it is impossible, or even difficult, to meet these standards - it simply requires a more effective discovery process and a more open, and complete, consideration of the relevant issues.
 ASIC Report 413 “Review of retail life insurance advice” dated October 2014 at 214