“That’s been one of my mantras — focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
— Steve Jobs, BusinessWeek, May 25 1998
Although all financial advice is, in reality, defined-scope advice the idea of defined-scope advice still generates debate and controversy. Too frequently dismissed as either transactional recommendations or as adviser conveniences, defined-scope advice is often presented as being inconsistent with the Best Interest Duty and the Financial Adviser Standards and Ethics Authority (FASEA) Standards.
This isn’t true and it’s dangerous to assume that poor execution invalidates the principle and significant consumer benefit scoping provides.
If you’re a financial adviser grappling with these issues, this article should help clarify the intricacies of defined-scope advice and examine its compatibility with these broader ethical and professional obligations.
Defining the Scope of Advice
Let’s start at the very beginning.
A reference to advice as “defined or limited scope” advice isn’t a reflection of the quality or appropriateness of the recommendations; it’s simply an indication that the advice is specific financial guidance that focuses on particular elements of a client’s financial situation.
It may be an appropriate approach in some circumstances, but entirely inappropriate in others.
For instance, an adviser might concentrate solely on how to optimise a client’s superannuation without delving into other financial matters.
This targeted approach can provide better client engagement and more cost-effective solutions, but to be effective, it demands clear communication between the adviser and client regarding the limitations and scope of the advice.
‘Scoping’ is the process of refining your clients’ preferences, needs, resources, capabilities and timeframes to clearly identify their needs and objectives to identify whether, and how, you can serve them. It’s the application of structure, process and reason to identify needs and clarify what may be vague or undefined objectives. It’s the steps you take to arrive at the right destination.
In INFO267, ASIC explained that defined-scope advice could also be referred to as scaled, single-issue, narrow-scope, modular, piece-by-piece or episodic advice and offered intra-fund advice as an example of defined-scope advice.
The Challenge of Perception
It’s a common misconception that defined-scope advice is incompatible with the Best Interest Duty and FASEA Standards. We’ve heard it frequently. In addition to ASIC’s warnings about modular advice, advisers argue that a narrow focus could potentially overlook other critical financial aspects, thereby failing to act in the client’s best interest.
It can, and sometimes does, but we’d suggest that this perception blames the technique for some advisers’ poor execution and dubious intent.
Aligning Defined-Scope with BID
The Best Interest Duty, as legislated in the Corporations Act 2001, requires advisers to act in the best interests of their clients. This obligation does not invalidate defined scope-advice nor is defined-scope advice inherently in conflict with this core obligation.
The key lies in intent, transparency and informed consent about the scope of advice. The Best Interest Duty (and Client Priority Rule) require financial product recommendations to made in the client’s best interests and primarily for their benefit. Logically, there may be circumstances where defined-scope advice (and only defined-scope advice) is what is required to be provided to satisfy these obligations. The scope of all advice is driven by the client’s relevant personal circumstances – their context, preferences and situation – and tailored to their specific needs. Clients, not advisers, should determine the scope of the advice they receive but advisers must articulate what the advice will cover and what it will not, to enable clients to make informed decisions.
Compatibility with FASEA Standards
FASEA’s Code of Ethics, and, in particular, Standard 2, requires advisers to act with integrity and in the best interest of their clients. This standard can be harmonised with defined-scope advice through the following measures:
- Clear Definition of Scope: Ensure that your client fully understands the limitations of the advice.
- Ongoing Monitoring: Regularly reassess your client’s situation to ensure that the advice remains appropriate.
- Transparency: Disclose any limitations or conflicts of interest upfront.
Case Studies: Scoping in Practice
To gain a deeper understanding of defined-scope advice, let’s delve into a couple of case studies that offer insights into the practical application of this form of advice.
Case Study 1: Overlooking Health Factors
In this matter, Flynn was engaged by a client who wanted to focus solely on maximising their superannuation contributions. The adviser agreed to this defined scope and proceeded to provide advice on how to optimise contributions for tax benefits and long-term growth. However, Flynn failed to consider a crucial aspect: the client had recently been diagnosed with a chronic health condition that would likely require significant medical expenses in the near future. This oversight became evident when the client had to withdraw a large sum from their superannuation to cover medical bills, negating the benefits of the adviser’s previous recommendations.
Lesson: This scenario illustrates the importance of a comprehensive understanding of the client’s life circumstances, even when providing defined-scope advice. Advisers should be vigilant in gathering all relevant information, including potential future expenses related to health or other life events, to ensure that their advice serves the client’s best interest.
Case Study 2: Success Through Transparency
In this case, Belinda, an adviser, was approached by a client who was primarily concerned about their retirement savings. The client had a limited budget for advisory services and wanted to focus solely on optimising their superannuation contributions. Belinda recognised the limitations of this defined-scope advice but also saw it as an opportunity to provide targeted, valuable guidance.
Before proceeding, Belinda clearly outlined the scope of the advice, specifying that it would focus exclusively on superannuation contributions and not cover other financial aspects like investments, insurance, or estate planning. She also disclosed all current and potential conflicts and provided a detailed fee structure. To ensure that the client fully understood the limitations and implications, she asked the client to provide informed consent in writing. This document outlined what the advice would and would not cover, thereby setting clear expectations and avoiding future misunderstandings.
Over time, Belinda set up regular check-ins to reassess the client’s financial situation and ensure that the advice remained appropriate. During one of these check-ins, it was discovered that the client had received a significant inheritance. Given this change in circumstances, Belinda suggested expanding the scope of advice to include investment strategies, to which the client agreed. This approach not only aligned well with FASEA’s Standard 2 but also demonstrated how defined-scope advice can adapt to changing client needs while maintaining ethical standards.
Lesson: Transparency and client consent are integral to aligning defined-scope advice with FASEA Standards. Regular check-ins, flexibility and adaptability are key to ensuring that the advice remains in the client’s best interest.
If you are an adviser that provides defined scope advice, we recommend that you include in your Statement of Advice (SOA) a clear and explicit statement to ensure your clients fully understand the limitations and implications of defined-scope advice.
Your decision to limit the scope of our advice has some important consequences for you to consider. Most importantly, by asking us to limit our advice as detailed above, we’re not considering other products or strategies.
For example, as a consequence of your choices, our recommendation does not address [insert relevant categories].
While we’re conscious of your preferences, we have a professional duty to act in your best interests and may need to expand the scope of our advice if we identify relevant matters that you need to consider. In any event, your decision to limit the scope of our advice means that you have to personally consider any recommendations we make for appropriateness in light of your own knowledge of your needs and circumstances.
You should not implement recommendations that you do not understand or without appreciating their likely consequences and implications.
- Defined-scope advice can be aligned with both the Best Interest Duty and FASEA Standards, particularly Standard 2.
- Transparency, ongoing monitoring, and clear communication are essential.
- Advisers should be prepared to expand the scope if it is in the client’s best interest.
- For actionable steps, consider setting up regular client check-ins to reassess the scope of advice.
Recent ASIC Media Releases
The Australian Securities and Investments Commission (ASIC) recently released a statement on scaled or modular advice, emphasising the need for transparency and client consent. This aligns with the principles discussed in this article and underscores the regulatory focus on these aspects of financial advice.