Previously, we’ve addressed aspects of the advice process including Goals and Objectives and File Notes, but with ASIC’s recent focus on vertical integration (Report 562), we thought we’d discuss the perennial issue of alternate strategies.
In my experience, many advisers struggle with identifying and articulating strategies. It’s hard to generalise why but many often struggle because they only start to consider alternatives after they’ve formed their recommendation.
Cynics might suggest that alternative strategies, in these cases, are only included to make the advisers’ recommendation appear more considered, less biased and more reasonable. I don’t believe that was the intent of the legislation, but have you ever wondered why advisers need to ‘waste time’ thinking about and recording strategies and products that are inferior to what they recommended?
Brakes, mirrors or air-bags?
Sean Graham, the Managing Director of Assured Support, argues that there are three ways advisers can see their obligation to consider ‘alternate strategies’:
1. It slows down the adviser’s drive towards a (potentially inappropriate) recommendation (“brakes”). The obligation doesn’t require you, as the adviser, to change your recommendation but it does require you to pause and consider the other options before you proceed;
2. It demands that the adviser consider the recommendation they’re about to offer and reflect on the appropriateness and suitability of the recommendation and viable alternatives. (“mirrors”); and
3. It adds depth to the recommendation and provides consumers with detailed information of all the strategies and products the adviser could have recommended with the aim of protecting the adviser/licensee (“air-bags”). This type of padding is often used to legitimise a pre-determined recommendation, or when materially inadequate alternatives are presented, to validate the recommendation. ‘Cookie-cutter’ advice models tend to trivialise the need for alternatives or, more commonly, rely on mandated disclosure of often irrelevant, impractical or impossible alternatives. Self-insurance anyone?
As a former adviser, I agree with Sean’s metaphors of brakes and mirrors but, I’m sure that none of the SoA’s I provided ever contained ‘padding’. (In fact, the 90+ page documents that were prepared by the centralised paraplanning unit from lock-down templates, were in retrospect ‘clear, concise, and affective’. And I’d say that even if there wasn’t a Royal Commission into Banking).
Considering alternatives is never a waste of time. The simple truth is that the consideration of alternatives is a fundamental part of a professional advice process.
It helps to prove your advice is in the best interests of your client and that you have prioritised their interests over expediency.
The continuing obligation
The advice process itself should be seen as a series of considered, tested and validated (or discarded) strategies that are likely to deliver the client’s desired outcomes. Regularly (and competently) considering alternatives not only improves the quality of the advice that is being given, it also combats the view that financial advice is synonymous with ‘churning’ and ‘product flogging’.
An agent selling a single product has no interest in alerting a prospective buyer to better alternatives, but an objective and professional adviser understands the importance of informed consent in building a sustainable and profitable business.
Those of you that have read RG90 would have noted that ASIC’s example SoA did not include any alternate strategies. I appreciate that it was not an oversight and that they were consciously omitted, but personally, I think ASIC missed a perfect opportunity to guide the industry to better practices. I appreciate that their previous endorsement that “the document should…clearly state the alternative products or strategies that were considered in reaching the recommendation and why the recommendation is appropriate in light of the alternatives considered.”
So, ASIC consider ‘alternative strategies’ are both explanation and demonstration. Focused on relevancy and clarity, ASIC appreciate that this obligation should improve advice outcomes. ASIC approach the obligation from a principle-based perspective and allow Providers the flexibility to decide the appropriate approach.
The FPA, in contrast, have released a document titled Taking Other Steps to provide assistance for advisers to better manage their advice process and, address alternate strategies and products at different stages of the advice journey.
Dante De Gori, CEO of the FPA, has previously said that the FPA’s minimum expectation for compliance with the Best Interests requirements is:
1. Maintaining current strategy/product (ie: change nothing)
2. The new, and recommended strategy/product
3. An alternative but not recommended strategy/product
“Those are not alternatives in any meaningful sense…A true alternative was necessarily an alternative within the scope of the advice (the adviser) had been retained to provide”
— Commonwealth Financial Planning Limited v Couper  NSWCA 444. at 25
Section 961B of the Corporations Act requires the adviser to consider a range of strategies and products and to conduct a reasonable investigation into any financial products that are to be recommended and when dealing with replacement advice and this reasonable investigation includes any existing products.
Prior to researching and considering any additional or alternative products, the adviser needs to determine whether the recommended strategy can be implemented within the existing product. Only then should the additional research be done, and further consideration being given as to whether there is a better way of meeting client goals. It is also very important to note that any findings need to be documented and if there is to be a replacement, outline the specific reasons as to why it does not meet the client’s goals and objectives.
Another key area in these considerations is relevancy. The second last step of best interests duty requires that all judgements are to be based on circumstances, so the alternate strategy should be relevant to the situation.
Final thoughts on alternative strategies
Generally speaking, ‘self-insuring’ is not a viable or real alternate strategy for parents of small children in school, paying off a mortgage with minimal savings.
When breaking down the documentation of the alternate strategy, there should be a focus on the structure of the alternate strategy itself so that your research and considerations can be adequately explained.
When constructing, and documenting, alternate strategies:
1. Always start with the client goals, basing all judgements on client circumstances
2. Outline What alternate strategies/products were considered
3. Explain why you considered it (Relevancy – relate back to the client goals and objectives)
4. Explain how the alternate strategy/product does not meet the client needs (there should already be enough explanation as to why the recommended strategy/product is being recommended)
5. Provide the proof in the file for any statements that are being made.
In our article “Risk Advice and Advice Risk” we referred to Commonwealth Financial Planning v Couper  NSWCA 444 and the Court of Appeal’s view of alternative strategies.
It’s a worthwhile read for any adviser and I endorse the author’s view that “advice must involve the objective consideration of alternatives”. Professionalism requires advisers both to consider real, meaningful and relevant alternatives as part of their advice process and to explicitly link those alternatives to the client’s needs and objectives.
Embracing this obligation will not only minimise your compliance risk but significantly improve the quality of your advice.