“I tell the kids, somebody’s gotta win, somebody’s gotta lose. Just don’t fight about it. Just try to get better.”
— Yogi Berra, ASIC Delegate
In a previous article, we highlighted 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). Well, that number is even larger now, so we’re even more confident extrapolating from our data.
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, as we recently noted,
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.
The reality is that by making simple changes to your processes, you’ll make significant improvements. Exceeding compliance, and improving quality, is well within your grasp.
Let’s start with five ‘better practices’ that good advisers follow.
One: The client’s needs and objectives are clearly identified and recorded
The law requires advisers to make adequate inquiries to ascertain a client’s investment objectives, financial situations and particular needs to ensure the advice provided is appropriate and suitable. Professional advisers will often exceed these minimum expectations by considering other non-financial needs and concerns that may be as important, or even more important to the clients than their financial concerns.
The starting point is for the adviser to clearly identify the objectives, financial situation and needs of the client. For example:
Bob and Sally, you have sought our advice to assist in planning towards your retirement. Specifically, you wish to achieve the following:
- Bob, you wish to permanently retire in 2029 when you turn 67 with an income from all sources of $52,000p.a. in today’s dollars. You wish to have your retirement savings last you at least until your life expectancy of 85.
- Sally, you are already retired and wish to continue to receive an income of $36,000p.a. In today’s dollars. You wish to have your retirement savings last you at least until your life expectancy of 87.
- You both wish to assess your risk appetite and adjust your portfolios to match the outcome to ensure the correct balance between risk and return is achieved.
- You both have existing death and total permanent disability insurance cover inside your super funds and wish to assess, given your current position with debts and liabilities, whether you need to adjust, retain or cancel your cover in order to meet your main retirement objectives.
- You both wish to ensure your retirement savings are structured in as tax efficient a manner as possible, with consideration given to your adult children, should they inherit any of the proceeds in the future.
- You both wish to engage a financial advice professional to manage your strategy and regularly review your progress towards your goals.
In all too many cases we see cases like that of Bob and Sally’s with their needs and objectives recorded as follows:
- Review our super and insurance.
A set of needs and objectives that apply the SMARTP methodology is a great place to start. SMARTP stands for Specific, Measurable, Achievable, Realistic, Timebound and Prioritised. Having this structure in mind will ensure that you are making adequate inquiries into the client’s objectives and situation.
- Take the time to write their needs and objectives as a letter to them restating why they have engaged you and what drove them to do so.
Two: Existing products were properly considered
The Law addresses the Regulator’s fear of “product pushing” in a surprisingly indirect fashion given the explicit focus on advice quality and process. It is made clear that recommending a product before formulating the financial strategy is inconsistent with the Best Interest Duty.
The law seeks to prevent “churning” (the replacement of portfolios and policies contrary to the interests of the client) by requiring advisers to consider, assess and disclose all known or reasonably ascertainable charges incurred, or benefits lost, by the client, and any other significant consequences of the replacement.
In fact, where an adviser recommends that their client replace their financial product with another financial product, the law, reflecting consumer and industry concerns, requires the adviser to demonstrate that the change is in the best interests of the client and prioritises the client’s interests over their own.
In practice, we see many examples of advice outcomes that involve the client making adjustments to their existing products and avoiding the need to replace.
Some great examples include:
- Retaining their existing super account and implementing the full strategic advice.
- Making adjustments to their existing insurance policies to meet their needs.
- Retaining their existing insurance and topping-up with another provider.
- Quantifying the ‘cost’ benefits of making a product change and understanding that saving $30 p.a. at product level is not worth the change.
- Demonstrating that their existing product was considered, and attempts were made to see if they could implement the required changes on the existing platform (even where a replacement was ultimately made).
Making references to the fact that you considered the existing products is not sufficient. Great advisers provide working papers and supporting correspondence and research to demonstrate the steps taken.
Three: The client’s tax position, liabilities and cash-flow was considered
Financial planning is not specialised taxation advice, but effective financial planning requires an adviser to consider and make recommendations appropriate for their client’s current and anticipated tax position. A client’s tax position is an aspect of their relevant personal circumstances and any strategic or financial product recommendation will touch upon their income, assets and tax liability.
Accordingly, most advice should contain a consideration of, or reference to, the client’s tax position and the implications of your advice. Completing financial analysis and/or cash flow projections are two ways by which you can help to ensure the ongoing sustainability of the strategy you recommend. In fact, by more effectively utilising a client’s available capital and income, you are helping to ensure that all the client’s resources are directed towards achieving their objectives. In some respects, financial advice is becoming less about product selection and more about financial coaching; focused on budgeting, debt and income management.
In order to satisfy this shift in consumer and regulatory expectations, financial advice should contain a personalised financial analysis that addresses the client’s need for regular income, product liquidity, investment growth and the serviceability of any associated loans. Where the advice involves insurance, gearing or illiquid investments these aspects become more important and must be clearly documented in the Statement of Advice.
- Advice that addresses long term substantial modelling to support the advice and the benefits of the strategic advice
- Timing CGT events to enhance the tax outcomes both now and into the future
- Redeploying long term excess cashflow to meet other needs and objectives
- Use of Debt recycling strategies
Remember that great advice is worthless if the client does not have sufficient capital or cash flow to implement and maintain the strategy.
Four: The proposed strategy is reasonably likely to exceed the client’s objectives
When assessing how well a recommendation will deliver to a client’s objectives, the law states that a professional adviser, acting in the best interests of their retail client, should identify their client’s objectives, financial situation and needs before providing a financial product recommendation. While advisers are expected to make additional enquiries if they identify other reasonably relevant matters, they’ll meet their statutory obligations if they base their recommendation on their careful and objective consideration of their client’s relevant circumstances.
Acting in your client’s best interest means more than simply providing the best advice you can; it means providing advice that is appropriate and satisfies your client’s instructions and their material needs and objectives. Great advice often hinges on a recommendation that is reasonably likely to exceed the client’s stated objectives (without additional risk or significant costs) and which leaves them in a significantly better financial position.
Remember too, that a client’s needs and objectives aren’t limited to the information or instructions they’ve provided to their adviser. An advice professional is expected to move beyond that starting point to identify the reasonably relevant matters, determine the proper scope of the advice and base all their judgments in advising the client on the client’s relevant circumstances.
- A client that sets out a very specific objective which the adviser has expanded upon and then provided advice that not only addresses the original objective but captures further recommendations that significantly improves the client’s position.
- An adviser recommending a portfolio with significantly lower exposure to growth assets (compared to their risk profile score) in order to achieve the client’s stated retirement income objective without more risk than is necessary.
Five: The SoA is highly detailed, personalised and contextualised
A real point of difference in an advice file can often be as simple as a well-structured ‘client story’ in the opening pages of the Statement of Advice, that not only provides a crystal clear client profile for the reader to understand, but also demonstrates to the client that the adviser listened and took on board the specifics that the client shared with them.
These detailed and personal notes also go a long way to tying the actual recommendation back to how it will not only meet or exceed their stated objectives, but how the advice is tailored to factor in specifics that the client story captures.
- A client story that captures the activities that a retiree plans to undertake in retirement, the costs associated with them and more importantly showing how the advice has factored in the capital expenses and modelled the impact on their portfolio.
- A client story that captures details of the client’s family members and how the advice they seek ties into their plans for other family members.
As with all advice, there is no ‘one size fits all’ solution. There is, however, the opportunity to shift your focus as an adviser towards what matters the most and how you can add that extra layer and extra consideration to your advice process; to ensure that your client’s best interests are being met, and their objectives exceeded where possible. Clear and thorough documentation will go a long way towards improving your advice, and being credited with a ‘better practice’ point.
Building these five observations into your standard advice process is by no means a guarantee that you will be awarded a ‘better practice’ point every time, but it will place your advice practices above the minimum standard, will lead to better client experiences and will have a positive impact on your future advice assurance file reviews.