“History Doesn’t Repeat Itself, but It Often Rhymes”
— Mark Twain
Postcards from the edge
Considering that the Assured Support Team has reviewed well in excess of 9,000 adviser files, we’re well placed to identify recurring issues. Normally, we start with objective data, but in the warm glow of the new financial year we thought we’d shake things up a little by highlighting subjective observations.
In this article, three of our Senior Consultants identify what they consider to be the biggest recurring issue they see in adviser files and offer some ideas about how these common problems can be addressed.
You might be surprised by their nominations.
Maria nominates “record keeping”
Financial advice can be significantly enhanced when financial advisers and accountants combine their expertise.
This is particularly apparent when SMSF, structuring, entity and tax planning advice needs arise.
When the financial planner and the accountant are either the same person, or separate people in the same business, we often see gaps in record keeping that work to the planner’s disadvantage.
It may be a controversial opinion, but a financial adviser has statutory obligations in relation to record keeping that are far greater than those of an accountant. Unfortunately, combined practices often use accounting CRMs which are not necessarily fit for purpose of advice and their design tends to undermine the adviser’s compliance with their obligations.
In practice, relevant information is either omitted from the system or segregated in a way that makes the adviser’s file appear disjointed or materially incomplete. This not just an issue of complying with FASEA Standard 8 and keeping secure, complete and accurate records. It’s not simply a problem caused by accountants’ tendency to delete inactive client records after five years (instead of the Licensee’s requirement of 7 years). It’s more fundamental and goes to the adviser’s ability to demonstrate the appropriateness of their advice and that their advice, and services, were in the client’s best interest duty.
I commonly see client files with SMSF recommendations that omit the trust deed, investment strategy, company extract and financial records. In some cases, the adviser is relying on the fact that the accounting business holds those records without appreciating that it’s the Licensee’s responsibility to retain those records which evidence the suitability and appropriateness of the advice provided by their representatives.
TIP: Duplication of records is less of a problem than incomplete or inaccurate information. Ensure that you treat any referred client, or current accounting client, as a new client for the purpose of providing advice.
TIP: If you’re not the client’s accountant, formally request all relevant information from the client’s accountant. If you are, ensure that the advice file contains all the relevant information that’s in your accounting file.
Keith nominates “Product Replacement”
FASEA Standard 5 summarises and distils the sometimes-oblique phrasing of the Corporations Act with respect to financial product recommendations from an adviser to a client: they must be “in the best interests of the client and appropriate to the client’s individual circumstances”.
This can be relatively straightforward for an advice business that is not built on “ongoing advice” relationships. However, for businesses that are built on providing ongoing advice, advisers arguably need a degree of scale and efficiency to be able to function sustainably. They can’t necessarily provide ongoing superannuation and investment advice to clients whose funds on multiple platforms or products and in multiple investment options without incurring some additional risks to both themselves and the client.
This creates an intrinsic tension. Advisers need to have confidence in their recommendations but also need to manage multiple ongoing advice clients and so may prefer to utilise iterations of one or two trusted investment solutions for the majority of their clients.
This is a pragmatic solution but one that often fails to take into account the personal circumstances of each client.
I recognise the challenge, but the adviser’s inconvenience does not invalidate their obligation to ensure that each recommendation is in their client’s interests, not their own. From the files I’ve reviewed, it appears that many advisers don’t have sufficiently robust processes for documenting, and justifying, how they arrive at their decision to replace existing products. This is a crucial piece of the advice process and one that is frequently neglected, particularly when “onboarding” new clients to the business.
At a minimum, when reviewing files, we want to see that a rigorous and genuine process has been followed to identify the best product options for clients. That means,
- There should be a genuine consideration of whether the existing product could be made “fit for purpose” for the client; this may require selecting a different underlying investment option, or combination of options.
- Comparison research should include the “most suitable option(s)” for the existing product, not just the “existing investment option”.
- Alternative options need to be considered and these should be genuine alternatives. For example, simply including research on file that shows costs for the same SMA or collection of managed funds across two or more alternative platform does not show a sufficient consideration of alternatives.
- There needs to be some analysis of the research. This can be brief and to the point – but it needs to be on file.
- The recommended product needs to be fit for purpose, and be sufficiently linked to the client’s situation, goals and objectives. These links should be explicit; a thorough discovery and fact-finding process can assist in teasing out key goals and objectives. If a client wants ongoing advice there may be legitimate reasons why one investment or superannuation product provides the adviser with greater administrative efficiency than another – but such administrative efficiency is unlikely to be a client goal, so can only ever be a secondary consideration.
- Above all, each file should contain concise and relevant narrative text explaining the reasoning and process behind the product recommendations, and at least part of this narrative text should be personalised. This narrative should be “front and centre” of the file – it is a key part of what ASIC and AFCA will look for when they review a file.
TIP: Start from the presumption that your client’s existing products are appropriate and consider how they satisfy their needs and objectives. Only investigate alternatives if they don’t (or if they are clearly deficient compared to other alternatives, impose additional costs or cause additional problems).
Ben nominates “estate planning”
It’s a challenge to handle well, but because estate planning is directly linked to the client’s circumstances and objectives, their financial adviser is uniquely positioned to provide guidance and advice.
An adviser often has a comprehensive understanding of the client’s personal, financial and family circumstances, as well as their goals, needs and objectives, and so they’re well placed to provide assistance to their client as well as to their external advisers, beneficiaries and estate.
I appreciate that it’s often reduced to a recommendation to “update your will” but I believe that the adviser’s Best Interests Duty (S961B) requires more.
In my view, compliance with s961B requires advises to act in their client’s best interests and provide strategic advice that considers their broader needs (including those of their dependants and beneficiaries). It’s an obligation reinforced, not introduced, by FASEA 2 and 6.
Generally speaking, estate planning is becoming more complex through the use of alternate and diversified investment assets, structures (trusts and companies) and the complication of blended families. It requires specialist knowledge, but any competent adviser should be able to help their client identify their specific needs, the practical effect on intestacy and the differences between estate assets and non-estate assets. The intimate nature of the financial planning relationship allows, if not requires, advisers to consider whether specific assets and beneficiaries’ interests and how, and when, assets and interests are best transferred .
A competent adviser should also identify any potential obstacles to the client’s preferred distribution.
Even helping your client articulate their preferences and identify their beneficiaries is a significant value-add
I know many advisers leave that to their client’s accountants and lawyers, but, in my experience, a generic disclaimer and referral is not an adequate response. More controversially, I think it’s equally important to have these discussions with single clients (who may only be receiving insurance or retirement advice) and clients that have scoped your advice to exclude it. If these clients subsequently die, or become mentally or physically incapacitated, your failure to alert them to the relevant issues becomes particularly problematic.
Even something as simple as a beneficiary nomination can have significant effects later in life, especially in blended families.
TIP: Understand your Licensee’s requirements but make a considered effort to consider the interests of those that depend on, or will rely on, the appropriateness of your client’s financial plan.