We could go as far back as 2012 but, as an introduction, we’d like to highlight that the team at Assured Support have reviewed over 7,413 adviser files between 2015 and 2019 (with over 3,274 adviser files reviewed since 2018).
We’re offering this information not to boast about our activity, but because this data provides us with expansive view of the advice landscape and a solid understanding of advice trends, adviser habits and common outcomes. In fact, our ability to correlate, benchmark and report also gives unparalleled insight into the emerging advice profession and equips us to see where (and why) some advisers and others prosper.
Advisers frequently ask us how they’re performing relative to their peers and what they can do to get a better ‘result’. We understand that advisers care about their ‘compliance rating’, but, honestly, good advisers care less about the results of their review than about the substance of our observations of their advice and conduct. Regardless of their motivations, most advisers want to get better. Few, however, make the considered and consistent efforts to achieve the quality to which they aspire.
The reality for most advisers is that significant improvement requires little more than commitment. We are frequently asked for coaching advice but it’s not always accepted or implemented.
Whether because of time, confidence or competence, many advisers find that it’s difficult to overcome habit. We’d encourage you to resist the comfortable (or at least familiar) status quo and make the simple but profound changes to your processes. It won’t always be easy, but it will be worth it.
Let’s start with five common errors and consider the simple ways good advisers avoid them.
1. The scope of the advice requested was not adequately defined, contextualised or explained
The law allows for a restriction in the scope of advice (scaled advice) but also that an adviser acting in the client’s best interests will consider all relevant circumstances and offer a range of advice to suit the client’s needs. The adviser needs to be appreciative of their obligations here and ensure that they do not dictate or redefine needs to suit their own circumstances. Documenting the process is paramount. Ensuring that your file clearly demonstrates that the client ‘scoped’ the advice is critical and that you actively addressed the appropriateness and impact of their decision. It’s also vitally important that your file clearly demonstrates that consequences and implications of this decision were clearly discussed.
It is probably not surprising to learn that the most common advice failure is that the scope of the advice provided is inadequately defined, contextualised or explained. For example, the adviser has uncovered needs and identified the client’s relevant circumstances but failed to outline or clearly explain their reasoning (or their recommendations) either in the file or in advice document. Clearly, the significance of this will depends on the adviser’s discovery process, whether the errors and short-cuts are materially relevant and the potential detriment to the client.
How to fix it?
- First and foremost, the information within the file should always align with that which is in the advice document;
- Consistent with the FASEA Code implement measures to confirm informed consent and understanding;
- Provide additional explanation within the advice document to outline why certain areas are excluded from the advice; and
- Provide the client with a Terms of Engagement prior to the advice to confirm the nature of the advice relationship.
2. The file contained inadequate information on the client’s existing superannuation arrangements
A critical element evidencing that the adviser has met their statutory obligations relates to ensuring the file includes enough information to evidence the appropriateness of the advice given. This is not always done. For example, an adviser cannot simply ignore the current super fund and recommend a new one, nor by-pass the insurances which may be contained within, or base their recommendations upon incomplete or inaccurate information. At a minimum, an adviser should collect balances, fees and charges, taxable components, investments and allocation, ancillary benefits, exit costs and insurances for a retail fund. When the advice involves a Self-Managed Super Fund, these obligations should include the adviser’s consideration of the Trust Deed and Investment Strategy.
Regardless of the difficulties, inefficiencies or client requests, this must be collected and assessed to confirm the appropriateness of the advice. I see a lot of common errors such as advisers’ failures to confirm that their recommendation to maintain insurance within super is, in fact, sustainable beyond the immediate term. For example, the adviser may have simply accepted the balance provided by the client but neither confirmed the balance, or level and frequency of contributions, through their independent assessment. It is also distressingly common to see existing insurances arrangements ignored and replaced without assessment.
How to fix it?
- Obtain statements from the existing superannuation providers;
- Record and retain the elements which the advice is based upon;
- Obtain copies of Trust Deeds, Investment Strategy documents and Fund audits and Tax Returns; and
- Contact the client’s accountant or administration provider to confirm any missing details.
3. A methodical and considered process for product selection was not followed
Where it’s necessary to recommend that a client acquire financial products to achieve their goals and objectives, an adviser is first expected to both investigate and consider the financial products the adviser may recommend and the financial products the adviser may recommend be replaced. The law, and industry practice, requires an active assessment of needs, objectives and products BEFORE the provision of a financial product recommendation. Now, the law does not require that every single product on the market should be researched and considered, but an adviser’s process must be robust and expansive enough to demonstrate that a reasonable process was followed. In general, the Licensee’s Approved Product List may be a good place to start but it cannot limit an adviser’s scope and the fact that the product is on the APL does not mean that it is appropriate. In my view, good advisers supplement their analysis with their critical consideration of objective financial product research (often third-party research) and the application of that analysis to the client’s relevant personal circumstances.
The depth and range of the research required entirely depends on the scope of the advice and the client circumstances, goals, needs and objectives. In fact, although some advisers limit their investigation according to the value of the the client, the ‘adequacy’ of their product selection is largely determined by context. For instance, if a client’s needs and objectives are complex and require products with specific features, there may, in reality, be only a small number of products that will satisfy their needs and additional investigations will be required. Even where the clients’ needs appear generic and universal, an adviser still has an obligation to apply their professional judgment to the clients’ circumstances; this requires a methodical and considered product selection process.
Often, more significant issues are suggested (or exposed) by an adviser’s failure to demonstrate why, how and to what extent a recommended product will either solve a problem for a client or help them achieve their goal. Sometimes, this error results from poor documentation or from the adviser assuming that their reasoning is obvious. In other cases, the error is the result from habitual conduct or unthinking compliance with often inappropriate processes. Neither cause forgives or excuses the adviser’s failure to discharge their professional duty.
Too often, we see advice where products are selected and recommended without anything to demonstrate a conscious and considered process. Far too often, product selection appears to be driven by convenience or artificial and commercial limits imposed on, or assumed by, the adviser. Reconciling commercial and professional duties can be challenging for some advisers, but neither conflicts nor convenience forgive poor processes or an adviser’s failure to prioritise their clients’ interests. A review of ASIC administrative actions will clearly reveal the Regulator’s view of ‘cookie-cutter’ recommendations and boiler-plate advice. Most advisers understand that no product/platform/service suits all clients regardless of their specific needs and circumstances, but too frequently this reality is over-looked in their advice process.
How to fix it?
- Document your product selection process and apply it consistently;
- Create an advice process checklist;
- Review your recommendations for consistent patterns and conduct trends;
- Understand how to recommend (or obtain permission to recommend) non-approved products;
- Invert your advice process to start with assuming the client’s current products are appropriate and do not need to be replaced;
- Document the assumptions or considerations in the process of actively assessing products during the construction of the advice; and
- Save all of the research and assessment information on file.
4. The explanation of how the recommendation will satisfy the client’s needs and objectives was insufficient or unclear
‘Appropriateness’ simply requires that the recommendation provided is, at the time it was provided, likely to meet the client’s identified needs, goals and objectives. In ASIC’s view, while the Best Interest Duty is largely a matter of process (with compliance determined with reference to whether the client, as a result of the advice, is likely to be placed ‘in a better position’), appropriateness is a qualitative measure (determined by reference to likely outcomes and consequences).
The relatively common downfall for many advisers is their inability (or unwillingness) to adequately articulate and explain the reasons for their recommendations beyond asserting generic benefits or satisfying imprecise and undefined needs. In some cases, even these inadequate steps are omitted. The lack of any attempt to explain the adviser’s reasoning (or demonstrate their logic) suggests, or proves, a lack of due care and diligence. It’s often more than poor process and inefficiency; it is, in the most profound failures, the result of a ‘product sales’ process and disinterest in the process, delivery and provision of professional services. As we’ve previously stated, your advice document should clearly, effectively and convincingly link your recommendations to your clients’ circumstances and stated objectives, and explain why, how and to what extent, your client’s needs will be satisfied if they implement your advice. It also helps to show how they’ll be in a better position if the advice is implemented.
Advisers have varied approaches to this challenge and achieve vastly different outcomes. Some routinely and uniformly provide generic explanations that offer little proof that the adviser has even considered the elements upon which their advice is based. Others offer highly personalised commentary referencing specific factors and providing reasoned arguments directly linked to their clients’ goals and objectives.
Templated advice and generic explanations are insufficient. References to irrelevant product features and benefits detract from the advice and compromise its appropriateness. The lack of a clear narrative that presents a compelling rationale to support the adviser’s product recommendations raises additional questions about the adviser’s motivation and competency.
How to fix it?
- Great advice is built on an exceptional discovery process. Review your approach, get training or speak with an advice coach;
- Document and explain any assumptions which were made and pivotal decisions which occurred during the advice process;
- Integrate these elements into the explanations for the products and strategies which are being recommended and the reasoning for the replacement of any products (where applicable); and
- Remove generic text and boiler-plate explanations from your advice template.
5. The alternatives considered were not real alternatives
Great advice considers a range of strategies and products which may be employed to meet the client needs and objectives. Frequently, this standard practice is not adequately demonstrated by the information retained in the client file. Sometimes, we encounter advisers that do not consider alternate products or strategies at all, but these advisers are quite rare. More frequently, the adviser simply hasn’t documented their process.
Rarely only one product or strategy that meets the client’s identified needs and objectives. An adviser’s professional duties and obligations require their consideration of a range of strategies and products. There is also an expectation that this consideration provides the pool from which the most suitable and appropriate product and strategy will be chosen. When this process is not documented, and the decisions, priorities and reasoning are not apparent, it detracts from the advice and undermines its appropriateness.
In a previous article we referred to the FPA’s expectations for considering and researching alternative product and strategies. The FPA consider that an appropriate approach considers:
- the existing strategy/product; and
- the new, and recommended strategy/product; and
- an alternate but not recommended strategy/product.
Unfortunately, many advisers are not even close to meeting these simple guidelines; we commonly see the existing strategy/product overlooked and the only alternatives considered are products and strategies, like self-insurance, that would not satisfy the client’s needs. Some advisers are genuinely surprised that the Courts have specifically addressed the characteristics of alternative products. The key to ensuring that your approach is aligned with your obligations and duties is to objectively consider the appropriateness, and consistency, of your selection process and, specifically the range and depth of your analysis. Some select alternatives to make the recommendation look better, or limiting their research to products which provide efficiencies or additional benefits to the adviser.
Please remember that for an alternate strategy to be considered a genuine alternative, it must be both relevant, realistic and appropriate. Some advisers assert that the consideration of alternatives is is one of the more difficult elements to grasp. In our view, advice requires the bona fide consideration of options, so the consideration of alternatives is the easiest and most fundamental part of the advice process. Alternatives should not be tacked on at the end to sell the preferred strategy, but used to challenge the benefits and appropriateness of the preferred strategy.
To be clear, stating that ‘self-insurance’ or ‘maintaining the status quo’ were considered are not real alternatives given that they are often unrealistic and unlikely to satisfy the clients’ needs. We would caution against their reflexive use and, if they were the only alternatives considered, we’d recommend advice coaching and additional training.
How to fix it?
- Document the alternate options during the advice process;
- Remove templated alternative strategies from your advice documents;
- Focus on what was considered, why it was considered and what it was about the strategy or product which would not meet the needs and objectives;
- Provide further information if needed and document findings, considerations and specific risks.