“I can see clearly now the scope’s confirmed.
I can see all obstacles in my way.
Gone are the data gaps that had me blind.
It’s gonna be a bright (bright)
Bright (bright) sunshiny day.”
— Jimmy Cliff, “I can see clearly now”
Obstacles AND SHORT CUTS
In a previous article, we identified the ten most common advice failures.
Unsurprisingly, inadequate or ineffective scoping was one of the top ten failures but, it’s important to realise that this failure (or poor record keeping) is often the underlying cause of qualitative, conduct and BID failures.
Too often we limit our consideration of scoping to the rare occasions where the scope is not determined by the client, or the scope of the advice is not effectively established (or agreed to) but the more common failures occur when the scope is not documented effectively or is not adequately defined, contextualised or explained.
The latter failures are manageable. The former failures are alarming.
With reference to the 2020 data we recently published, we’ll dive into the three most common advice failures we encounter and offer some tips to avoid them.
1. The scope of the advice was not determined by the client.
Reviewers’ concerns about “appropriateness” of advice often arise when the recommendations provided aren’t likely to satisfy the client’s needs and objectives, or critical aspects of the client’s relevant circumstances. While there are numerous ways to address these presumptions, the failures raise immediate concerns about the adviser’s intent.
Intent, and competence, are default presumptions particularly when it cannot be confirmed who is scoping the advice, or whether the adviser has adequately considered the client’s relevant circumstances to begin with. This often occurs where the decisions being made by the adviser appear more aligned with their own interests rather than their client’s. Even when conflicts aren’t the cause, an adviser’s decision to reduce the scope of the advice sought by their client is problematic (especially where there is a material detriment to the client).
For example, an adviser may include superannuation in the scope of the advice but exclude insurances. The superannuation gets rolled over and any insurances that are attached are lost. This can be very damaging for the client, and particularly when other insurance may not be available.
Occasionally, it appears that the adviser has already conceived the advice prior to meeting with the client. This is particularly obvious where the scope is manufactured so that aligned products or cookie-cutter strategies can be recommended.
2. There was no agreement documenting the scope of the advice being sought.
It’s entirely unreasonable to expect a client ,especially one that has never received advice, to know what ‘scope’ of advice or understand the consequences and implications of limiting the adviser’s activity. It’s entirely reasonable that a client would expect their identified needs to be considered in conjunction with their specific requests.
They don’t know what they don’t know, so it is the adviser’s role to identify, assess and alert the client during the process.
If the scope has been determined without consideration of the client’s requests and instructions, or their understanding of the risks and implications of their decisions in not receiving advice in certain areas, it exposes the client to outcomes which may not be in their interest. It also exposes the adviser to complaints, claims and further action.
Without clearly addressing scope, including consequences and limitations, there’s a real danger that the advice may be inadequate, or inappropriate to circumstances. This is why great advisers take care to properly document this element; they outline the areas which will and won’t be addressed (and why) in a clear and transparent fashion help the client to make an informed decision.
An example of this occurring is when the scope of the advice is reduced or limited and the file does not indicate that the client is fully aware of the implications. It is unclear how the position was reached, and the client does not appear to have made the decision after being informed of the risks. The process is not documented and the scoping statement within the Statement of Advice itself may be lacking explanation also.
3. The scope of the advice as not adequately defined, contextualised or explained.
As we have noted before, the adviser needs to confirm the subject matter of the advice being sought. This process needs to be documented and where necessary, the adviser must also assist the client in uncovering and establishing their needs and objectives. This includes any assumptions being made, as well the explanation for the exclusion of certain areas.
The scope of the advice can be limited due to an assortment of reasons and it’s important to document any specific reasons for the limitation of the scope of advice and consider these requests, prior to providing the advice.
An example of this is when the client may limit the scope of the advice but it is unclear why. There may also be a situation where areas are scoped out without explanation.
Reasonable inquiries into, and adequate consideration of, your client’s relevant circumstances is your paramount responsibility.
Professional advisers will routinely go above and beyond the minimum requirements of the law. The file will include a precise account of the interactions, placing as much weight on the client engagement and enlightenment as the scope itself. They will also use a Terms of Engagement (or equivalent) to formally establish the nature of the service.
I would like to be clear on this – It’s not so much about the fact that the Terms of Engagement are being provided, it’s about what is in them.
Incorporating TOE into the scoping process helps the adviser confirm appropriateness and “disclose in writing the nature of the services offered and any limitation on [their] capacity to serve” the client.
The Statement of Advice is also an opportunity for the adviser to clearly explain the scope and address the products and services which are being excluded.
In order to improve scoping, may I suggest that everything is on the table in the beginning and let the client drive the reduction of scope. Provide the relevant warnings during the process and consider the outcome in terms of the client’s interests.
- Put everything on the table in the beginning
- Let the client be in the driver seat for the scoping discussions
- Provide the relevant warnings during the process
- Consider the risks in terms of the client’s circumstances and interests
- Document assumptions and considerations
- Integrate checklists to prompt discussions
- Reconfirm the client’s instructions and address any mismatches and conflicts between objectives, needs and circumstances
- Confirm the relevance of trigger events and document the reasonings for exclusions
- Build a filtering process into the discovery process to assist with scope
- Explain the consequences of excluding areas from scope
- Consider the appropriateness of excluding certain areas
- Clearly document the agreed scope and formalise by providing a Terms of Engagement