“Don’t worry. As long as you hit that wire with the connecting hook at precisely 88 miles per hour, the instant the lightning strikes the tower… everything will be fine.”
— Dr Emmett Lathrop Brown, Department of Treasury, “Regulating financial services”
Catalysts and consequences
The Safe Harbour steps. The Best Interest Duty. The Client Priority Rule. Design and Distribution Obligations.
These, and numerous other pieces of legislation, are designed to ensure that advisers provide the right advice to clients at the right times.
Why then do we still see mistakes in strategic and financial product advice?
In our experience, these mistakes can be attributed to what we call a “Catalyst” event; one mis-step made early on in the advice process creates a cascading series of problems, that could have been prevented if the right questions had been asked at the right times.
Great advice isn’t just about making money for clients but about addressing their needs and objectives. It’s about the end-to-end process that the adviser has taken to understand the client, thoroughly research relevant options and use that information to make recommendations that will put their client in a better position overall.
We’ve selected two case studies below from real client file reviews to demonstrate what went wrong, at what stage in the advice process the Catalyst event took place and how these mistakes can be prevented in future.
Advice documents and fees
- The adviser wanted to vary the terms of an ongoing service agreement at a different time to the presentation of the clients annual review.
- Believing that an SoA was required to support a change to a fee arrangement, the adviser produced an additional SoA at the time of varying the service agreement which resulted in over-servicing the client, under-charging for their services and feeling confused about the entire process;
- The client was confused and didn’t understand whether their annual review had occurred or not.
What was the “Catalyst”?
- The adviser needed to understand that the ongoing fee arrangement could be amended or varied without, or separate to, the provision of financial product advice. While ASIC expect that the substantive part of fulfilling a fee arrangement with a client will be the provision of advice, it doesn’t matter when that occurs in the anniversary year, so long as it is done;
- As long as the adviser has provided the services promised within the contracted term, including an advice review, the terms of a fee arrangement can be varied by agreement with the client at any time.
How to prevent this in the future
- Ensure that your fee agreement is well-drafted so that both the adviser and the client understand that it is a separate legal contract;
- De-couple the idea that changes to a fee arrangement have to happen at the same time as an advice document being provided, this is not necessary;
- Ensure that any changes to a fee arrangement represent fair value so that both the adviser and client understand that there is more to the fulfilment of the agreement than the provision of an SoA.
Inadequate research & inappropriate advice
- The adviser became aware that the client had received Total & Permanent Disability (TPD) proceeds from their retail Life Insurer. Because the reason for the TPD event was an accidental injury, the adviser mistakenly assumed that this qualified as a personal injury and therefore treated it as a structured settlement in their advice;
- Since structured settlements do not count toward non-concessional contributions (NCC) caps, the adviser recommended that the TPD proceeds be contributed to a new SMSF set up to facilitate the purchase of real property. Incidentally, under the presumption that the TPD proceeds qualified as a structured settlement, the adviser felt pressured under the mistaken belief that the client only had 90 days to decide if they were to take the TPD proceeds as a lump sum or pension;
- However, the TPD proceeds were paid from a retail Life Insurance company as a standard claim outside superannuation and were not, in fact, a structured settlement. Unfortunately, the settlement did count toward the client’s NCC caps;
- The client may not have proceeded with the SMSF setup had they known that the full TPD proceeds could not be contributed immediately and the adviser’s error placed the client in a position where they would be unable to fulfil their intended objective to purchase property within the new SMSF without going to the extra expense of creating a bare trust and the additional expenses of interest, loan set-up fees, brokerage and other associated costs that may be required to borrow funds. The client’s partner joined the fund at the last minute without really knowing why she was now party to an SMSF.
What was the “Catalyst”?
- This was a case of not doing appropriate and accurate research;
- A phone call to the Claims Manager who processed the TPD claim could have confirmed that the TPD proceeds did not qualify as a structured settlement;
How to prevent this in the future
- Always go to the primary source for information about a clients’ insurance and investments rather than using secondary or tertiary information that has been assumed and/or interpreted incorrectly;
- Take time to assess what’s required. In this particular instance, the adviser missed the opportunity to maximise NCCs in the financial year that the advice was provided, bring forward NCCs for the following financial years and potentially having his wife also maximise her NCC contributions to ensure that the full TPD proceeds were available to fulfill their investment objectives.
Back to the future
“The future isn’t written. It can be changed…you know that.
Anyone can make their future whatever they want it to be.”
— The BDM’s Guide to Dealing with ASIC (2019 ed) or Doc Brown in “Back to the Future Part III
It’s alarming to realise how often small, preventable, mis-steps and mistakes early in the advice process aggregate and compound.
Sometimes it results in clear client detriment. In other cases, it leads to extensive remediation and rectification. In others, to regulatory outcomes with personal and brand consequences. In most cases, un-managed mis-steps and mistakes result in a world of hurt.
Advisers don’t, and indeed can’t, operate in a risk-free environment. Flight, fight or freeze might be understandable, biological responses to looming legal consequences, but none of these actions are necessary for advisers that take reasonable steps to properly consider their strategies and the assumptions on which they are based.
The good news is that most compliance issues (and the mis-steps and mistakes that create them) are preventable.
Measure twice. Cut once.
It’s never too late to make improvements and acknowledge mistakes; in fact, those advisers that more consistently produce exceptional advice started by identifying (and addressing) the mis-steps, mistakes and unreasonable assumptions in their advice processes and in their businesses.
Instead of burying critical compliance findings, they saw their mistakes as the perfect opportunity to go back to basics, re-evaluate their systems, refine their processes and improve their advice.
You can too.
If you need help along the way, don’t be afraid to reach out to us.