“Is someone getting the best, the best, the best, the best of you?”
— Foo Fighters, “Best of you”
More than most people, we understand the challenge of providing advice in a highly regulated, and frequently changing, environment.
You work hard to make First Grade, train obsessively to maintain your spot and then, on game day, the posts move, the lines have been redrawn and the referees keep awarding penalties for rule changes of you weren’t even aware.
Compliance can often look backward to tell you where you went wrong (and why) but they’re often unwilling to coach you through the changes or train you to get better.
That’s not us.
We see more and, more importantly, want to help you get better.
We’ve reviewed over 16,629 advice files and uncovered a few gems along the way.
Our data shows that most of the advice we’ve reviewed satisfies advisers’ core obligations (best interests, appropriateness, client priority and warnings) and the vast majority of advisers are meeting their duties and obligations. Most impressively, there’s an increasing number of advisers that are demonstrably, routinely and consistently, exceeding their professional obligations and duties.
This takes consistent effort and know-how, commitment and perseverance.
So, what are they doing?
Addressing growth and income
The Statement of Advice (SoA) clearly and specifically addressed the client’s need for capital growth or regular income.
In order for advice to be suitable and appropriate, it needs to be based on the adviser’s knowledge of the client’s relevant circumstances. Practical and appropriate advice should consider and address the need for regular income. When this is not done, the appropriateness of the recommendations often comes into question.
In fact, if the need for capital growth and income is not addressed, or if the clients’ current and anticipated positions are not compared, this fundamental failure compromises the reasonableness of the client’s “free, informed and prior consent”.
However, when this is done well it does more than satisfy legal obligations; it provides specific reassurance about the clients’ future position and whether, or when, their specific objectives and needs may be met. Of course, it’s not presented as a guarantee and these advisers also spend time clearly explaining their reasonable assumptions and the relevant contingencies.
For example, consider the advice provided to a remarried widower who had attempted (unsuccessfully) to manage their own portfolio to generate the high income his new, blended, family needed. He’d never engaged an adviser before but recognised the challenge of balancing their income needs with his desire to leave a legacy. It’s often difficult to reconcile competing objectives, or re-prioritise needs, but this particular adviser succeeded by examining the portfolio assets in terms of quality, suitability and appropriateness and properly considering duplication.
They considered each individual security for its growth and income characteristics, highlighted specific investments and identified their susceptibility to market movement to explore their role in providing distributions and dividends. The adviser introduced international investments (not just for default exposure) that were individually targeted for income and recommended funds with commercial property exposure yo complement the client’s current property investments.
The recommendations provided to the client contained clear but detailed projections which included potential pitfalls of the recommendations and explained these. The investment philosophy utilised by the adviser, which was well-positioned in the SOA, was designed to consider, and limit, fund manager risk and the impact of market volatility.
Admittedly, the advice itself was quite focused on investments, but the way in which the adviser had integrated the recommended portfolio with the client’s relevant circumstances was masterfully done. Whether it was the result of strategic planning or artful para-planning, the “clear, concise and effective” advice was not only explained very well but likely to exceed all of the client’s identified needs and objectives.
The Financial Services Guide has been provided, and thoroughly discussed with the client.
Aside from being another document that gets attached to every email (just in case), a Financial Services Guide is designed to assist a retail client in deciding whether or not they will obtain advice from a particular adviser.
The law requires that this document is provided before any advice is provided (or as soon as practicable) and it is an offence not to do so. It also has to be correct and not misleading or deceptive.
There are a number of ways that the provision of an FSG can be evidenced, but what about those times when an adviser not only provides it (and records the relevant details), but also discusses it and does this well?
The outcome is that the client is usually well-informed before the advice process even starts.
Recently, we observed a situation in which a single mother had recently started caring for another family member’s children. Objectives were associated with helping all of these children financially at some point in the future, to set them up and hopefully be on the way to purchasing their own homes. This client also wanted to receive advice regarding superannuation and insurance.
The way in which the adviser explained the advice process in conjunction with the Financial Services Guide (including limitations, relationships, authorisation and fees) armed the client with the knowledge required to make an informed decision regarding their priorities.
It was clearly a tough situation and sometimes this causes clients to sacrifice understanding and prudence for immediate action. Sometimes this urgency becomes contagious, and the advice suffers as a result of the compromised advice process.
Not in this case.
The adviser’s consideration for the client and her family’s needs was clear in the file. In fact, the adviser’s working papers and file notes presented a clear picture of the measured and methodical way these issues were addressed. There was no sales pressure applied and, instead, the adviser focused on explaining, and educating the client about, the advice process and how it could work for the client. The notes not only proved the client’s consent and understanding but left us feeling like we were there in the meeting with them.
The adviser approached financial advice from a broader perspective than the immediate problem and integrated the Financial Services Guide and client’s circumstances into the initial meeting to educate the client around their options and potential outcomes. This armed the client with the information they needed to understand, and prioritise, their own needs and prioritise before making any commitments. They could have left, at that point, with more confidence and understanding than they possessed before the ‘obligation-free’ meeting.
They didn’t leave, but instead engaged the adviser. The actual advice which ended up narrower in scope (the adviser did a fantastic job of this as well) as it was evident during discussions and assessment that the client, although lacking in confidence, had quite a good grasp of their financial circumstances.
It was obvious to us that the reason for the quality of the advice and the client’s satisfaction was the initial engagement discussions and the adviser’s decision to lead with the FSG and use it to frame the client’s advice needs.
The risk of loss
The Statement of Advice clearly and specifically assessed the client’s tolerance of the risk of capital loss.
Sometimes clients want more income than they can reasonably generate, or expect outcomes that do not align with their desired investment risk appetite and tolerance to volatility.
In a perfect world, all clients are able to generate sufficient passive income to last their lifetime. Unfortunately, we don’t live in a perfect world and, practically, this is not achievable for everyone. Good advisers understand that if there is a shortfall in retirement income, or mismatch between the client’s expectations and investment performance, then it needs to be effectively addressed. The best advisers understand that this can be done a number of ways but often results in a trade-off of priorities. It may require investing more (and spending less), choosing a higher level of growth assets, spending less in retirement, reconsidering retirement time frames, or considering part-time work during retirement.
Any differences, or potential strategies should be highlighted and explained to the client, along with consequences and options but any decision comes with risk and a key aspect of investment recommendations is understanding clients appetite for, and tolerance of, volatility. For example, if a client needs to take additional risk with their investments, they need to be able to handle it, and also understand that there is a risk that objectives still may not be achievable. How this is handled is a key factor in determining whether the advice is in the client’s best interest.
Recently we reviewed a file for a couple preparing for retirement with modest assets (and little experience in investing). They’d sought advice on how to obtain an income level which was neither achievable nor sustainable. The critical issue was that they both wanted to maintain their pre-retirement income in retirement, but lacked the capacity (resources and tolerance) to be able to do so. After discussion and education, the adviser recommended a heavier weighting towards growth assets. This would be executed immediately, but as time went on, this would shift towards income producing assets, with adjustments planned during reviews.
The adviser handled the situation particularly well. The initial discussions with the clients regarding their objectives, and likelihood of achieving these, was thorough and no stone was left unturned. There was also extensive education around investment risk and volatility and the consideration of potential (and reasonable) changes to the risk profile in order to achieve goals. The investigation of alternate scenarios and worst-case events was also evidenced in these considerations. The written advice for the clients outlined the relationship between the objectives and the likelihood of these being achieved but explained why the additional risk and volatility was necessary (and how it would be mitigated).
It was, on balance, an exceptional alternative to the usual reliance on the clients’ risk rating and templated text.
In our post-audit discussions with advisers we often find that these conversations and strategies are taking place, but not necessarily being documented as well as they could be, or at all.
Great documentation supports great advice; for help with how to do even better with this, please get in touch with us at firstname.lastname@example.org