“Ongoing service, like Santa’s workshop, is the place where magic happens”
— Gertrude Claus, Practice Manager
Not too long ago, we explained that while gathering around the water-cooler for our annual pre-Christmas shindig, a particularly enthusiastic Compliancer was moved to belt out a rendition of the 12 days of Christmas. As you know, there’s no party like a compliance party, and that courageous contralto inspired this article to help advisers start 2023 strong.
What we neglected to mention is that more angelic voices joined the chorus.
Most advent calendars offer useless trinkets, toys and chocolates; as titans of industry we won’t waste your time with anything less than profound insights and hard-won lessons.
Tip Seven: Soften client regret
On the seventh day of Christmas, my adviser recommended I replace my existing products….
The most common replacement of product advice is that of a superannuation arrangement. Often the reason for recommending the replacement product is clearly documented in the SOA. It may be that it is aligned with a firm’s investment philosophy, research house or long term tracked experience and performance, aligned with the client’s needs, objectives, preferences and subject matter.
Where an adviser recommends replacing one financial product with another, the law 947D, reflecting consumer and industry concerns, requires the adviser to demonstrate that the change is in the best interests of the client following a reasonable investigation s961B(2)(e). This also means proving that the adviser has prioritised the client’s interest over their own, those of their licensee or any associate.
Section 947D goes on to require that the adviser needs to consider, assess and disclose all known or reasonably ascertainable charges incurred, benefits lost temporarily or otherwise and any other significant consequences of the replacement. While your client may benefit from acquiring the new product you’ve recommended, it is important that they understand the benefits they’ll lose as a result of replacing their existing product.
Ensure any loss of access to cheaper products, buy/sell costs, CGT implications of not converting to a pension in the same trustee structure, ancillary benefits, loss of definitions in insurance products, automatic increases and disclosure periods are documented and explained within your SOA.
Tip Eight: School Scrooge
On the eighth day of Christmas my adviser explained alternative investment products available to me
Aligned with Best Interest duty, an adviser is obligated to follow a methodical process to not only consider alternative strategies for a client, but also alternative products. Many advisers tend to stop their research advice process at platform comparisons. Even though ASIC effectively deem a platform as a financial product, the most pertinent consideration is at portfolio level.
With a wide range of investment types now available, such as direct shares, SMAs, MDAs, ETFs, specialist and diversified managed funds and so on, alternatives are also a relevant part of a reasonable investigation s961B(2)(e). This includes the use of a model portfolio on a like for like, sums invested and asset allocation basis. For insurance, this means a like for like on sum insured and feature comparison.
As alternatives do not necessarily need to be included in the SOA, they can form part of your working papers, Code of Ethics Standard 5 requires you to evidence that your client understands your advice based on your consumer protection document.
Incorporate into your research process, a file note which explains the alternative products considered at portfolio level which can also meet the client’s needs. If this work is completed at investment committee level, it needs to be documented at client file level along with the relevant TMDs for both platforms and products.
Talk to the conclusions of your research in your SOA.
Tip Nine: Give the gift of understanding
On the ninth day of Christmas my adviser explained the true cost of the plan to me
Advisers are cognisant of their obligations under corporation’s law to make fee disclosures in their SOA. Code of Ethics Standard 7 imposes a reasonableness test.
The use of terms of engagement helps to satisfy the obligation not to commence acting on behalf of a client without their informed consent to fees and terms of service aligned with Standard 4. Standard 7 relates not only to the disclosure of association, benefits and remuneration received for an adviser or their principal, but also the cost of ongoing advice, which more often than not, the client is informed about at plan presentation time.
The adviser has the ability to charge a fixed fee, asset based fee or a combination of both. Sometimes this fee can include a portfolio management fee. For large sums invested, the size of an asset based fee can exceed the value of the advice if the advice does not involve entities or significant complexity. Another relevant scenario is when a client is charged a high ongoing fee where it may be apparent the client may not have the financial confidence to question the fee with informed consent.
The client priority rule s961J kicks in if it is perceived that the adviser is charging a level of ongoing fee just because they can.
Ensure your file evidences the clients understanding of fees, the impact on their return on investment and the value of advice to confirm informed consent has been achieved.
Tip Ten: Confirm changes
On the tenth day of Christmas adviser explained my insurance was not accepted as expected
There appear to be more situations than previous, where underwriting terms are imposed on insurance applications in the form of loadings or more commonly exclusions as the insurer determines which risks they don’t want to assume.
There appears to be thinking amongst advisers that the decision to proceed with amended terms is that of the client.
In most circumstances, when an offer of amended terms is received, the adviser is required to re-confirm the clients relevant circumstances re-consider the replacement advice recommended and consider any alternative strategies and product strategies available to the client. This may involve the need for an additional ROA or SOA.
Consider implementing a fee for insurance advice or a charging model which helps to facilitate on commercial terms, the delivery of appropriate insurance advice and implementation of insurance advice.
Default to an ROA process for amended terms offered by insurance product providers. Please liaise with your Licensee for their variation standard.
Tip Eleven: Connect with your client
On the eleventh day of Christmas my adviser explains how I can stay connected
Some key quotes from Commissioner Hayne’s final report included:
“Failings of organisational culture, governance arrangements and remuneration systems lie at the heart of much of the misconduct examined in this commission.”
“In almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place. “
“There was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it.”
In relation to ongoing service, advisers recognise as a result of the Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Royal Commission, that they have to deliver on their promise.
However, some advisers believe that conducting the review meeting is sufficient enough to constitute a service proposition and evidence their contractual arrangement has been met. Remember, the quality of a client review matters.
An adviser is obligated to adequately confirm during review meetings either via telephone, Zoom or face to face, that a previous SOA had been provided, that there are no significant changes to the clients relevant personal and financial circumstances including their goals and needs, evidence of how clients are tracking to their goals is on file, that there is no change in risk profile and the basis for that risk profile has not changed and ultimately your further advice is provided via an ROA or SOA.
How a client understands what service they are entitled to receive for the fees they are paying is required on file as per Code of Ethics Standard 5.
Capture in your file notes your clients understanding of their contracted arrangements. Confirm whether more services or fewer services are required each year. Ensure an assessment of significant changes is an adviser assessment not a client assessment. Ensure your assessment is between current review and the situation in the original SOA not a year on year assessment.
If a Fixed term arrangement is in place, ensure it does not act as or mimic an ongoing service arrangement requiring fee disclosure statements to be issued.
Tip Twelve: Value current products
On the 12 day of Christmas we all rest in best interests
There was much consternation in the industry when the catch all phrase of best interest duty was introduced as part of the FOFA reforms.
961B(2)(g) says an adviser must have “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.
Stripped bare, the safe harbour steps was about an adviser having a methodical advice process to adequately identify the client’s relevant circumstances, adequately considering them and adequately addressing them with personal advice, future considerations or by a specialist referral. In reality, the consternation complicated a simple concept and that is, as Simon Sinek went viral for, articulating to your clients the concept of ‘why’.
Many clients procrastinate about their finances because they know they should do something but most of the time they don’t know why. Why should they engage with you? Why should they engage in an advice process? Why should they become more financially literate and confident? Why should they pay your fees?
Mostly, the reasons are based on or driven by non-financial goals. Determining what money means to your client, what it needs to achieve for them and how it makes them feel underpins a successful outcome. Best interest duty is not onerous if viewed from the lens of doing our best for them, in the capacity we have, in light of how well we run our advice businesses.
Files which consistently exceed best interest duty evidence a consistent, replicable and efficient advice process, a business which evidences positive intent and more often than not exceed the outcomes a client expects in both advice and service.
Bill Bachrach in the 16th printing of his book in 2006 dedicated it to trusted advisers everywhere…………
those ‘who work hard every day to help people align their financial choices with their core values so they can have a better quality of life
We see you and appreciate how hard you work to help others.
All of us at Assured Support hope you have a Merry Christmas and a safe and prosperous New Year.