“All advice and financial recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s relevant circumstances. 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.”
— Code of Ethics Standard 5: Best Interest and appropriateness
FASEA: Putting the Fun back into Fundamentals
Standard 5 requires an adviser to ensure that any recommendations they provide are appropriate to a client’s individual circumstances, and that the client understands the advice.
This Standard also has links to Standard 2 (best interests) and Standard 6 (broader long-term interests and likely circumstances).
Advice which does not satisfy needs and objectives and critical aspects of the client’s relevant circumstances is unlikely to be appropriate.
Great advice is built from the ground up. The discovery process is key, and this is where we shall begin.
Relevant circumstances, and goal and objective setting: A very particular set of skills
““I don’t know who you are. I don’t know what you want. But if we sit down and talk about it, I have a very particular set of skills that I have acquired during my career. Skills that can assist you in meeting your goals and objectives.””
— Liam Neeson, CFP
As an advice professional, you are required to actively consider your client’s relevant circumstances in relation to the advice being sought.
You also need to identify other areas which may be relevant, external to their initial reason for seeking advice. This is directly linked to Standard 2, and the platform for good advice requires more than a basic understanding of your client, or a superficial acknowledgment of their needs.
In my view, this is the ‘make or break’ part of the advice process. Poorly assessed circumstances and/or generic and vague goals and objectives rarely lead to awesome advice.
From what I’ve seen, good advisers don’t just listen to their clients, they challenge them. By doing so during the discovery process, they increase the quality and quantity of information they have about their client, which helps them understand, empathise with, and engage their client.
The collection of the ‘factual information’ is not the most glamourous or interesting part of the discovery process. Sometimes it’s like pulling teeth, but if the client understands why you’re asking, why you need to know, and how much better your advice will be if they answer, they’ll generally engage. When they engage,the advice is usually higher in quality.
Obtaining your client’s goals and objectives is the fun part. Without coercion, you need to assist the client in putting their goals and objectives into words, and identifying relevant needs. In some cases, the client has already done this part for you, but this doesn’t mean you don’t need to try to understand them any less, or not consider/skip the step of considering the client’s relevant circumstances associated with those goals, objectives and needs.
If their goals are properly identified and prioritised, the objectives will be clear and obvious. If both goals and objectives are well understood and properly recorded, your recommendation will be clearer, less generic and, more-importantly, better.
This will make it much easier to satisfy Standards 5.
“And how is clarity to be achieved? Mainly by taking trouble and by writing to serve people rather than impress them.”
— Frank Laurence Lucas
947B(6) requires the information within the Statement of Advice to be worded and presented in a clear, concise and effective manner. You also need to avoid misleading or deceptive conduct when providing advice (S12DA).
In addition to assessing your client’s financial literacy, experience, preferences and communication skills, you need to provide advice that is clearly explained in terms which are likely to be understood by your client.
It is critical that technical jargon is removed and only information which is relevant to the advice is provided.
Relying on cookie cutter explanations, vague commentary, and reasoning which is not based on the client and their objectives is likely to be inappropriate. If the advice is not clear, concise and effective, then it is difficult to confirm that the client understands the advice.
We’ve long argued that advice documents should be shorter and personalised for each client in question, and we also appreciate that there is an ‘art’ to doing this well. It can be difficult sometimes to place yourself in the client’s shoes, but this is an important part of the process also.
As advisers, you are dealing with advice documents every single day. Converse to this (for efficiency’s sake), your clients are not, their level of familiarity is not the same as yours, and sometimes this can be taken for granted. Ask yourself whether you could understand the advice if you weren’t so familiar with it, and whether it aligns with what you initially intended.
We’d also suggest not only ensuring your advice documents are clear, concise and effective, but also that an executive summary is included. Provide brief particulars regarding your recommendations, reasoning, and the risks and implications of accepting the advice may help to avoid any potential misunderstandings.
Signed, sealed, delivered. I’m yours.
Ooh baby, here I am signed, sealed, delivered…but wait!
You are required to provide your client with a Statement of Advice anytime that personal advice is being provided to a retail client. There are some cases where this is not required, but for the purpose of this article, we’ll assume that one needs to be provided.
Advisers will usually save evidence of their advice on file, whether it be electronically or in person. The second step would be to retain evidence that the client accepted the advice and has agreed to proceed to implementation. The majority of most Authority to Proceed documents have an acknowledgement which states that the client understands the advice, but the Code of Ethics requires more than a signature as evidence of understanding.
You must take additional steps to ensure your client understands the advice prior to them signing the Authority to Proceed.
The simplest way to do this is to provide some insight into the interactions with your clients during presentation. You may want to highlight why it’s in the best interests of the client, how you explained the benefits, costs and risks of the advice, and how it meets their circumstances, and their long-term investment objectives.
This may include references to the client’s ability to follow the advice, questions they may have had, whether they could summarise the advice, and whether they may need to take the advice home and consider it further before accepting.
Using professional judgement is crucial during this process and, as always, your file needs to support your conclusions, and evidence your reasonable grounds as to why you believe that you have satisfied your duties and obligations.