“Limited advice is also known as scaled, single-issue, narrow-scope, modular, piece-by-piece or episodic advice. Intra-fund advice is an example of limited advice.”
— ASIC INFO 267
Reframing the opportunity
“Scaled advice is personal advice that is limited in scope, either by being in response to a limited range of issues or by addressing a specific area of the investor’s needs.”
— Matthew Daley, Michelle Shraibman “Are you FOFA ready? Scaled advice and its interaction with the new best interests duty”
All personal advice is scaled advice.
While the offer of ‘wholistic’ was a convenient way of differentiating ‘real financial advice’ from intra-fund and risk advice, the reality (long acknowledged by ASIC) is that all advice is scaled.
Even advice that is “comprehensive in scope” is limited; although less limited than single issue or modular advice.
In INFO 267, ASIC tackled the thorny issue of limited advice which was defined as “personal advice that does not cover all possible topics relevant to the client.”
Whether you describe it as scaled, modular or single-issue advice, it’s becoming clear that economics and preferences are driving advisers to reframe their advice processes to reduce costs and better manage the compliance burden. It is, in our view, a belated epiphany but we appreciate tradition, conservatism and technology discouraged advisers from enjoying the opportunities provided by limited-advice models.
Our consistent view has been that embracing limited advice leads to better outcomes; it increases client understanding and secures their informed engagement by providing distinct, but connected, recommendations. Properly implemented, it also reduces regulatory risk, increases efficiency and leads to more sustainable profitability.
(We also believe limited-advice more consistent with an advice profession – few lawyers try to solve every one of your problems with a single opinion – but we understand this is not a popular view (with anyone except para-planners and auditors)).
In the wake of REP 595, and the commencement of FASEA, we expected advisers to embrace Limited or Scaled Advice. While many did, others cited ambiguity and regulatory risks as compelling reasons to maintain wholistic models.
INFO 267 is ASIC’s well-intentioned attempt to address these perceptions. While ASIC’s position cannot be absolute, it provides advisers (and licensees) with the reassurance that:
- the scope of all advice can be limited;
- limited advice can consider either single topics or multiple topics;
- the nature of the advice sought (or required) will d influence your discovery process (and the level of your enquiries).
The burden of best interests
“Particular topics were excluded from the scope of the advice, to the potential benefit or convenience of the adviser, and to the significant detriment of the client.”
— RG 244.49
Please remember that regardless of whether the personal advice you provide is wholistic, scaled, single-issue, modular or intra-fund, you must satisfy your “best interest duty (and related obligations)”. For those playing at home, this shorthand refers to your obligation to act in your client’s best interests, provide appropriate advice, warn them if you’re relying on incomplete or inaccurate information and to prioritise their interests over any other parties’.
Be careful. Although ASIC confirm that the extent of your enquiries is contextual (and varies depending on the nature of the advice sought, the client’s capability and the reasonably foreseeable consequences of the advice), it’s critical to realise that you’re acting inconsistent with your obligations if the advice is scaled to suit your preferences or model instead of the client’s relevant personal circumstances.
Before we address ASIC’s tips, it’s worthwhile acknowledging that ASIC hedges its position on the ‘safe harbour’. While some commentators have suggested that advisers must satisfy the safe harbour in order to satisfy their best interest duty, ASIC’s position (and the law) is more nuanced and reflects its discretionary nature; “if you wish to rely on the safe harbour (emphasis added), you must show that you have satisfied all of the elements of the safe harbour”. Similarly, ASIC write “To satisfy the safe harbour for complying with the best interests duty, you must identify the subject matter of the advice sought by the client” instead of “to satisfy the best interests duty , you must identify the subject matter of the advice sought by the client”. It’s a subtle, but critical, differentiation that signals a shift from mandated formalism to professional duties.
The financial product advice you provide must be appropriate, but the extent of your consideration and investigation – your reasonable enquiries – is “scaleable”. Simply expressed, there’s no ‘one size fits all’ approach and the way in which you satisfy your obligations. Instead, when you provide limited advice, you need to methodically and deliberately consider:
- Likely Impact. The greater the potential negative impact of your advice, the greater your obligation to broaden the scope of your enquiries and your recommendations. Although this might seem subjective and imprecise, it’s simply demanding due care and a contextual and objective assessment of appropriateness based on your knowledge, skill and experience;
- Complexity. You need to undertake less research, analysis and investigation where your advice is, according to reasonable standards, relatively simple;
- Comprehension. The scope of your inquiries depends on the client’s ability to comprehend your advice and their own needs. This is at the heart of your professional duties and your FASEA obligations (“free, informed and prior consent” and “financial literacy”). Clients’ capacities, like their relevant circumstances, can vary considerably and, as an advice professional, you have an ethical duty to explicitly consider:
- their financial literacy, knowledge and comprehension;
- whether they can articulate (or consistently express) their preferences, needs and objectives;
- whether their objectives clash with their appetite for, and tolerance of, risk;
- whether they are functioning under an impediment or disadvantage;
- whether they have unrealistic financial expectations or preconceptions.
“We don’t think the guidance stops you giving scaled advice”
— ASIC Commissioner Danielle Press, IFA 5 August 2020
It’s well established that advisers are not order-takers and these regulatory expectations similarly apply to limited advice.
In practice, this translates into five related obligations:
- Exercise your professional judgment when identifying the subject matter and scope of the advice. Ask clarifying questions to test the client’s position and understanding. This may be common practice for most professional advisers, but they are also obligated to decline to provide advice where limiting the advice would not be in their client’s best interests.
- Only limit the scope and subject matter your advice in response to the client’s relevant personal circumstances and best interests. It should be obvious, but an adviser can not, and should not, limit their enquiries or the scope of their advice (or exclude relevant matters) simply to suit their own preferences or advice model.
- You cannot ignore relevant issues or other needs. Scoping or limiting advice (or providing modular or single-issue advice) does not allow you to ignore, or exclude, relevant considerations. It’s appropriate to identify an issue for future advice, or refer the client to another adviser, but you cannot ignore their need for advice on a topic outside the scope of the limited advice you’re providing.
- Explain, clearly and effectively, the consequences and implications of limiting the advice. Advisers often rely on boilerplate disclosures to address this requirement, but in a post-disclosure regulatory environment, your client’s informed consent and reasonable understanding (Standard 5) must be built on a clear explanation of what’s included, what’s included and what these choices mean for the client.
- Embrace processes and systems to demonstrate compliance with your professional and legal duties. If you have effective measures, processes and procedures in place, you’ll be better able to demonstrate the information on which you relied and better able to prove the appropriateness of your conduct.
Managing duties and risks
“ASIC recognises that many consumers prefer to seek limited and specific advice rather than comprehensive advice.”
— ASIC Commissioner Danielle Press (in Professional Planner 02/12/21)
So how, in practice, can you provide limited advice that is consistent with the Law and FASEA requirements.
At the risk of over-simplification, you should start by clearly outlining:
“Your decision to limit the scope of our advice has some important consequences for you to consider. For example, as a consequence of your instruction, our recommendation does not address [insert relevant categories].
Please understand that while we’re conscious of your preferences, we have a professional duty to act in your best interests and we will expand the scope of our advice if we identify relevant matters that you need to consider.
In any event, if you limit the scope of our advice, you have to personally consider any recommendations we make in light of your own knowledge of your needs and circumstances. Please don’t implement recommendations that you do not understand or without appreciating their likely consequences and implications. ”
— LOE inclusion
- The subject matter of the advice sought by the client, and
- The advice you are providing; and
- The advice you are neither considering nor addressing; and
- The real consequences and implications of this approach; and
- Whether your professional duties require additional steps.
In our view, although these matters will be addressed in the Statement of Advice, these matters should be addressed prior to engagement and certainly before you produce any advice document. Your Letter of Engagement (or FSG) could include text similar to this:
- You do not need to list every possible topic of advice that is not being provided to the client.
- As an advice professional, you must explain any exclusions and the topics outside the scope of the advice sought.
- Ensure that you identify, and explain, relevant considerations that are outside the scope and subject matter of the advice sought.