The obligation to review financial advice arises implicitly from several licensee obligations related to supervision of representatives, acting fairly, and having adequate risk management and compensation measures in place (Corporations Act 2001, ss. 912A, 912B).

Advisers are also required to act with reasonable skill, and to provide personal advice that is appropriate and in a client’s best interests (ASIC Act 2001, s. 12ED; Corporations Act 2001 ss. 961B, 961G; ASIC RG175.162). Further, Financial Ombudsman Service (FOS) applies a “common law duty to ensure that proper reviews … [are] conducted regularly” (FOS Determination 227484).

What appears to underpin all this is that over time, not only do markets and investments change, but so too do a client’s circumstances. Nothing is static. For example, clients may purchase a house or start a family without telling their adviser until much later. At the very least, advisers should tell clients that if their circumstances change the advice needs to be reviewed to ensure ongoing appropriateness.

If the appropriateness of advice is point-in-time sensitive and because everything changes over time, then offering periodic advice reviews is a sensible proposition – not only from a client relationship perspective, but also to manage your risks.

What do ASIC and FOS say?

In Regulatory Guide 175, ASIC says that whether reviews should be offered depends on the subject matter of the advice and the circumstances. This includes the details of any recommendation made, the volatility of any investment returns and the likelihood of a change in the client’s circumstances.

The FOS takes a similar approach, and various past determinations have shown that whether an adviser should review their own advice depends on:

  • What representations were made to the client about reviewing advice
  • Whether any fees were paid creating a reasonable belief that reviews would be conducted
  • The reasonableness of the client’s expectation.

These same determinations consistently show that if a review service was offered or declined, this should be reflected in file notes and/or the SoA (FOS Determinations 16956, 20186, 20968, 22825, 203349, 204373, 279580, 308559, 321807, 323704).

Good practices

All of this is probably not very radical. We know that many advisers believe regular reviews go hand in hand with maintaining strong client relationships. Provided that clients are not overserviced, appropriately periodic reviews form the backbone of an advice value proposition. From a risk-management perspective, regular reviews help your practice manage any risks related to the advice you have given and help ensure that your advice remains appropriate. However, reviews cost your practice time and resources. Therefore, the commercial reality of needing to be remunerated for service should be factored into the equation so you find a balance between the risks and returns.

What about when the advice is not yours?

Under the Corporations Act, a licensee is generally only responsible for the conduct of their own representatives (Corporations Act 2001, s. 917B, 917C). If a person incurs loss due to advice, they can sue the adviser’s licensee to try to recover those losses (s. 917E as well as common law principles). Hence the need for professional indemnity insurance or having capacity to self-insure (ASIC RG126).

Generally speaking, and unless the parties to a sale agree otherwise, when a business purchases the assets of another business it also acquires the liabilities and risks associated with those assets. In advice practices, this means that after you become responsible for servicing a client you may also become responsible for any losses that the client suffers afterward – even if those losses ultimately flow from someone else’s advice.

What will be considered “reasonable”?

On this point, FOS said in 2012 that “the period of loss for which a previous provider can be liable will depend on when the new provider should have reviewed the client’s position and what advice would have been reasonable at that time” (FOS Determination 227484). Under common law principles, what will be considered reasonable depends on the circumstances, including:

  • The nature of client’s circumstances that are known (or ought reasonably to be known)
  • The nature of the client’s portfolio and the strategies employed.

That is, the standard varies depending on the client and the risks and complexity of the past advice. It may not be enough for an adviser to say they didn’t know their recently acquired client was funding their portfolio of stocks through margin lending or was exposed to high-risk unlisted managed funds. If you are considering buying a client book, you should know what risks all of those clients are exposed to. That is, do your due diligence.

If something outlined above prompts you to consider whether you are reviewing your clients’ situations regularly enough, that’s also a sensible review to undertake. Regular reviews can assist you to manage your risks and maintain strong client relationships. If you offer reviews to your clients, record that you’ve done so. If a client tells you that they don’t want reviews, record that. Try also putting the terms of review into writing, and only take responsibility for what you have the capacity and expertise to do.

Even if you are not currently providing a client with reviews or they have declined an offer to, consider what it may look like if you are receiving any adviser service fees or other ongoing remuneration.

Importance of due diligence

When next looking to buy a client book or absorb clients from another licensee – say, through authorising a new representative – don’t overlook the importance of due diligence. Consider the work that may be involved and keep in mind that a bulk transfer often involves substantial work after the transfer. If you think reviewing all client portfolios within three to six months is unachievable, you might need to renegotiate the terms of sale to reflect the risks you’ll acquire – for example, staggering the transfer into tranches. You should also check with your professional indemnity insurer what they expect of you, or get legal advice about limiting the liability you acquire.

Above all, remember there is no one correct or best way to provide financial advice or to review it – it always depends on the circumstances.

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