Making a recommendation to use a platform for investment purposes is a common strategy among financial advisers. Advisers must ensure they are complying with the best interests duty and related obligations throughout the entire advice process. From the initial discussion, through research, until the final advice, these obligations apply to an even greater degree.
When advisers recommend retail clients use (or switch to) a platform or they advise on investments to be held (or that are already held) through a platform, they are not only required to comply with the best interests duty, but also to:
• Provide appropriate advice i.e. is the platform likely to leave the client in a better position?
• Warn the client if the advice is based on incomplete or inaccurate information; and
• Prioritise the client’s interest over any other interest.
These requirements are designed to protect the client, whilst giving them enough information to make an informed decision before proceeding with the recommendation.
A fine line between general and personal advice
During the interview process, clients would usually like to know more about what sort of investment strategies will be considered for their circumstances. Advisers, on the other hand, might want to discuss some general strategies in order to measure the client’s engagement with the advising process. This exchange of ideas represents the fine line between general and personal advice.
The client’s rights in a platform are technically a financial product. Any recommendation intended to influence (or that could reasonably be regarded as intended to influence) the client’s decision to use a specific platform can be interpreted to be personal advice. It is therefore important to avoid premature product recommendations via emails and in meetings, in order to avoid unintentional breaches of the best interests duty and related obligations.
Discussions about a platform (or any other financial product) will not be considered personal advice, if it has been made clear to the client that the information was given as ‘general advice’. That is to say, the advice was provided without taking into consideration the client’s objectives and financial situation. Consequently, the client should only consider its appropriateness in light of their own objectives and financial situation (also known as ‘General Advice Warning’).
It is recommended to use ‘Strategy Papers’ with the proper ‘General Advice Warning’ to avoid giving early personal advice, before proceeding with a full financial plan or scaled advice.
Recommending investment through a platform
When recommending a platform, advisers need to consider the client’s objectives, financial situation and risk tolerance in order to assess whether the strategy is likely to leave the client in a better position.
In order to achieve this, advisers should consider:
• What is the benefit for the client to invest via a platform, rather than invest directly in the same product and/or securities?
• How do the features of the recommended platform align with your client’s financial goals?
• What are the range of investments available and how are they appropriate for the client?
• Does the client have specific investment considerations e.g. environmental, social or ethical considerations? If so, do they align with the investments offered by the platform?
• How much would it cost, taking into consideration the cost of the underlying investments and adviser’s fees?
• Are there any significant tax consequences that the client should know about?
• What would happen if the client wants to leave the platform or stop receiving ongoing advice?
Once these questions are answered, the adviser should be able to comply with the best interests duty by clearly explaining why the platform is being recommended including its risk and benefits.
Selecting a suitable platform
Once it has been established why is it appropriate to recommend a platform, the adviser needs to determine which platform suits the client’s needs.
When conducting this assessment, it is important to consider the following questions:
• Does the platform operator have an investment committee?
• What are the aspects that influence the selection of investments?
• Are there any administrative or technological factors that influence the investment selection which are relevant to the client?
• To what extent (if any) is the investment selection constrained by the range of products issued by or affiliated with related entities of the platform operator?
• What are the platform’s policies on how they will deal with investors who stop receiving advice from an adviser?
• Can the adviser demonstrate they have conducted a reasonable investigation into the platform they are recommending?
Advisers are expected to disclose the platform (and underlying investments) selection processes whilst providing personal advice to retail clients and recommending the use of one platform over another (or any platform at all).
Disclosing this information through an Investor Directed Portfolio Services (IDPS) guide or Product Disclosure Statement (PDS) is not enough to ensure compliance with your best interests duty. It is therefore good practice to personalise the advice without relying solely on product text available through software or marketing material.
Fees, costs and managing conflicts of interest
The advice document should clearly disclose any remuneration to be received by the adviser and any other interest that might be capable of influencing his advice. The disclosure of fees and costs associated with the platform investment can be done through the IDPS guide or PDS. It is good practice to explain to the client the cumulative impact of all fees and costs of the overall strategy (i.e. in addition to the adviser’s fee, the total costs of the platform and the recommended underlying investments).
Identifying conflicts of interest is not always easy. If the adviser, or its Australian Financial Services (AFS) licensee, has any association with the platform operator, potential conflicts might arise. In this situation, it is expected from the platform operator and the AFS licensee, to take reasonable steps to:
• Identify the arrangements that may give rise to conflicts of interest; and
• Ensure that proper measures are in place to manage those conflicts.
The best way of documenting any steps to manage those conflicts is in the written agreement between the AFS licensee and platform operators. However, avoidance of the material conflict is always the best approach.
Top 5 Tips for Investment Platform Recommendations
• Beware of premature product recommendations when discussing potential strategies with a client. Always use the ‘General Advice Warning’.
• Consider the benefits for the client to invest via a platform in light of their financial objectives, financial situation and risk tolerance.
• Conduct a comprehensive investigation and determine if the recommended platform is likely to leave the client in a better position.
• Demonstrate how does the platform meets the client’s financial objectives, not just claim to do so.
• Identify any arrangement that may give rise to a conflict of interest and have measures in place to manage it. If possible, avoid any conflict all together.
