“No one can save the world, but we can all do some good while we’re here.”
— Marty Rubin
Considering that the Assured Support Team has reviewed well in excess of 10,000 adviser files, we are 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 where advisers are struggling with the FASEA Standards and, by each focusing on a specific standard, offset war-stories with some practical suggestions.
You may be surprised by their observations but thrilled with their practical suggestions.
You must act with integrity and in the best interests of each of your clients.
Sakichi Toyodo, the father of the Japanese industrial revolution, developed the concept of the 5 whys. By repeating a question 5 times, he believed the nature of the problem, as well as the solution, becomes clear.
We are all familiar with s961B of the Act which sets out the best interest duty required to be exercised by advisers when providing advice to retail clients.
By enshrining integrity in Standard 2, FASEA are articulating your obligation to look more widely at your clients’ interests . This is straight forward in theory, but more problematic in practice. This obligation is particularly challenging when a client specifically requests advice.
ASIC have repeatedly conveyed their expectation that an adviser is not an “order taker” but doesn’t a client have the agency to provide instruction, directions and orders?
- If a potential client wants you to execute an LRBA arrangement after attending an SMSF seminar or establish an SMSF after visiting their accountant, why wouldn’t you do it?
- Why can’t a client, an otherwise fully functioning adult, choose what level of life cover they want? They know how healthy they are and know their kids will be off their hands in 5 years, so can’t they reasonably decide that since they’re unlikely to die in this period, they only need the bare minimum of cover.
- Can’t they leave their super to their adult children from their first marriage as the new married partner is independently financially secure?
- Why can’t they elect to have insurance in super as they want to focus on their mortgage as retirement seems so far away?
- Shouldn’t they be able to stay in their employer fund as they feel loyal even though it has an uncompetitive fee structure?
- Why isn’t it ok for them to set up tax effective structures and trusts to run and protect their family business (and not inform, or include, their partner as a controller)?
- Don’t clients have the right to not share all of their personal information?
- Can’t a client request a change in product because they no longer want to be associated with the brand?
- Shouldn’t a client be able to decide for themselves whether to accept an exclusion to implement a lower insurance premium?
- Why can’t you just deliver what your clients want?
Clients have agency, sure, but, as an advice professional, you have more relevant knowledge, skill, education and experience. Both under the law, and FASEA Standard 2, you have an explicit duty to not compromise your obligation, or abdicate responsibility, because of client preferences.
As ASIC has repeatedly confirmed, the best interest duty requires you to use your expertise to conduct a reasonable investigation into the financial products and strategies that will satisfy their needs and preferences and which may put the client in a better position. This over-riding obligation exists “even where a client approaches an adviser indicating they are interested in a particular strategy or financial product”.
So how do you respond when client preferences conflict with your professional obligations?
Some ethicists might suggest that you should decline to provide services, but I haven’t seen that strategy used very frequently. Some advisers just disclaim their involvement and take a passive “execution only” approach.
Neither strategy is, in my opinion, the conduct required of an advice professional. A competent and capable adviser, acting in accordance with their duties, would explain – in reasonable detail – the consequences and implications of their preferred approach and why their preferences would lead to a sub-optimal or detrimental outcome. The level of detail is critical, because without clear explanation of the risks and likely impacts, clients are unlikely to be able to “fully understand” the strategy or give “free, prior and informed consent” to your advice.
The quality of your advice is critical and I’d emphasise that complying with Standard 2 requires you to focus on the substance of your explanation and not simply its form.
And what if you do all this and the client still wants to proceed? What if, despite the clear, detailed and easily-understood warnings the client wants to ignore your advice and do something different?
This is the point where your risk appetite becomes relevant. You may choose to proceed to implementation, but doing so without the benefit of that (well-documented) frank and honest conversation, risks contravening both Standard 2 and your Best Interest Duty.
It’s important to appreciate that Standard 2 complements s961B. This means that it’s possible to satisfy your statutory duties but not necessarily satisfy your professional or ethical obligations.
“The job of financial advisers is to help their clients by providing professional advice that leaves their clients in a better position, not to merely execute their clients’ wishes, especially when those wishes are going to leave their clients in a worse financial position.”
— Peter Kell, ASIC Media Release 18-266
TIP: Neither a clients preferences, nor their instructions, override your duty to advise or act in their best interests. Often, I’ve found that the contravention of Standard 2 (and s961B) is caused by the adviser’s poor discovery process and their unwillingness to explore, and test, the clients knowledge, request or preferences.
They don’t ask enough “Why” questions.
To help meet Standard 2 (as well as break open the discussion, gain trust and promote a more effective discovery process) try making multiple, reframed passes at key aspects of your clients preferences, wants and instructions. For example, ask the following question, multiple times, in different forms to obtain and clarify the information on which you’ll be forced to rely.
- What brought you in today? ( What is the ultimate problem you are trying to solve)
- What motivates your thinking? (bad experiences/values/cost/real reason for seeking advice)
- How does this help you towards where you see yourself? (aspirations/future state)
- What are your worst fears if your request is not met? (is the thinking informed/rational/informed)
- What do you see as your barriers to being informed about what other options might be available? (financial literacy/trust)
You must be satisfied that the client understands your advice, and the benefits costs and risks of the financial products that you recommend and you must have reasonable grounds to be satisfied.
Let’s skip over the first element of Standard 5 (appropriateness and best interests) to focus on the failures I often see in files I review.
Simply, how can an adviser demonstrate that their client understood the advice to the adviser’s reasonable satisfaction?
FASEA is not prescriptive, so ultimately it is up to each adviser to demonstrate client understanding in a way that suits their style, preferences and business process.
That said, I find that there are several common scenarios where there is insufficient evidence to show how an adviser has proven “understanding”.
- The silent client/active client dynamic
A very common advice situation is where recommendations are provided to a couple, but only one member of the couple actively engages with and liaises with the adviser; they effectively act “on behalf of” and as an intermediary for the more silent client.
This may be a reality of human behaviour, but it presents a particular challenge for professional advisers; to demonstrate adherence with FASEA standard 5, they need to show that both clients understand the advice and its benefits, costs and risks.
Too often there is no evidence of engagement between the adviser and the silent client. even up to the point of product applications after the provision of a Statement of Advice. There may be a signed “authority to proceed” from both clients on file, but no specific reference to how or where that was signed, what steps the adviser took to ensure both clients understood the advice, or how the “assumptions” and preferences built in to the advice (e.g. the goals and objectives) were verified in the first place.
TIP: ensure that your advice process recognises that both clients need to be “present” in the file. If the silent client does not attend any meetings with the adviser or directly correspond with them, it needs to be clear how the adviser is meeting FASEA standard 5.
2. The relative cost of income protection in super
There can be valid reasons to recommend income protection in superannuation.
But, despite the years since ASIC REP 413, many advisers still don’t ensure their file demonstrates the client really understands the issues and implications.
Often a client needs to pay a higher premium (in “net” terms) to hold income protection in superannuation than in their personal name, because their personal marginal tax rate is often higher than the tax rate applicable for superannuation accounts.
This is particularly relevant where they’re already maximising their concessional contributions, and therefore can’t increase them to offset the premium. In this case, the adviser needs to demonstrate the client understands that he or she could hold the cover personally and, in net terms, pay less as a result.
It is common for a file to contain an “SoA presentation filenote” that has some quite generic text stating “I explained the implications of insurance in super, and the client was happy with that as they wanted to minimise the impact on their cashflow”, and for the SoA to contain a generic recommendation in the SoA to make some additional contributions to super to offset the insurance premiums.
However, this approach holds a lot less weight than an email exchange with the client, or a recorded conversation, directly addressing the key issues and relative costs for that particular client.
TIP: Personalise your process, and avoid relying on generic text in SoAs and file notes.
3. Climbing up and down the risk tree
At the heart of investment planning is the decision about how much risk a client needs to take with their investment dollars.
When an adviser recommends that a client significantly increase or decrease the percentage of “growth” and “defensive” assets a client should hold, this is a material change.
Therefore, it is vital to ensure the client understand the risks involved. If the adviser recommends that a 40-year-old client invest their superannuation in a “moderate” portfolio of 50% growth assets and 50% defensive assets, how have they verified the client really understands the opportunity cost over a long time frame?
How do they demonstrate that the client understands and appreciates the potential impact on their retirement balance?
Similarly, if an adviser recommends a 70-year-old retiree holds 95% of their assets in growth assets, has there been documented discussion of the specific implications of this for the client in the event of a long, protracted, downturn in markets?
TIP: Relying on generic text in an SoA, and a completed risk profile, will not provide good protection in the event of a future complaint. There may be valid reasons for the recommendations, but the key is the client needs to understand the risks.
TIP: Ensure your explanation of the risks to the client is specific to their circumstances, and then document this on file.
You must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances.
All advice is scaled advice, but there are arguments that Standard 6 does not allow for scaled advice to be provided. There are also arguments that Standard 6 has a wider application than the law itself.
There has always been a requirement for the adviser to make adequate enquiries into the client’s relevant circumstances, but scaled advice can still be provided. The client is able to make their own decisions, but it is when these decisions are not informed, or the adviser has not executed their relevant duties in providing the advice that problems occur.
To me, this sounds like the adviser must apply professional judgement and scope the advice effectively. Nothing new really.
I think the FASEA Code of Ethics reinforces and clarifies Best Interest Duty rather than trying to trump it, or confuse the issue.
What Standard 6 does is prompt the adviser to put the brakes on during the process and consider what the client objectives are; what the client may be requesting; what has been uncovered; what the impact may be if advice is not received in certain areas; and what the impact may be to other areas of circumstance if advice is provided (including family members).
In its simplest form, my view is that Standard 6 (in conjunction with Standard 2) requires the adviser does not act solely on the client’s request and considers the impact. It also requires that the client’s relevant circumstances are uncovered, and that these areas are actively (appropriately and sufficiently) considered during the advice process.
If the adviser is unauthorised to provide advice in a certain area, or their experience and knowledge does not allow them to competently address the need, it cannot be ignored. Another professional will need to be engaged, or a referral will need to be made.
No longer can areas be scoped out because the client didn’t want advice in that particular area, or they instructed the adviser to exclude relevant areas. Relevant areas need to be considered and the decision needs to be made after understanding the risks and implications.
How can you satisfy Standard 6?
This really comes down to the discovery process, scoping and providing sufficient information to make informed decisions.
- Conduct a thorough discovery mission
- Don’t act on the client’s request alone;
- Consider estate planning and the family situation;
- Document relevant considerations, risks and provide sufficient warnings;
- Document the scoping process in detail;
- Consider existing products adequately;
- Consider the worst-case scenarios and exit strategies;
- Consider the timeline of the strategy and effects over time; and
- Address all consequences of the recommendations.