In our world, “execution only” does not refer to punishment handed down during the French revolution, nor does it involve a guillotine. Instead it occurs when a client asks a financial adviser to complete a transaction on their behalf without advice. It may also be referred to as “nil” or “transactional advice”.
This article explores when it is ok to complete an execution-only transaction and when it is not. It also details the key processes that you, as a financial adviser, can put in place if you do decide to go ahead.
A client has asked me to complete an execution-only transaction. What do I do?
When faced with a potential execution-only scenario, it is vital that you ask your client a series of questions before deciding whether to proceed. Such questions include:
- What is the reason for this request?
- Is the client aware of all risks, consequences and implications of their instruction?
- Are there better options for the client?
- Would the client be better off with advice?
To illustrate why it is so important to ask a client these questions, consider the following scenario:
A client asks to cancel insurance cover. They may be doing so because of cash-flow issues and are unaware that there could be other alternatives. They may not know that it could be difficult to obtain cover in future, or that there may be alternatives such as funding through superannuation.
When should I avoid execution-only transactions?
Remember, for an activity to be defined as “execution only”, you cannot have directly or indirectly educated, persuaded, instigated or coached your client to ask you to execute the transaction. No advice, whether personal or general, may be given.
An execution-only transaction would not be suitable when:
- You have directly or indirectly influenced the client in relation to the transaction. For example, you have provided your opinion in relation to the ABC managed fund, at which stage the client wishes to invest into the ABC fund. This would not constitute an execution-only scenario and would constitute either general or personal advice.
- The client has provided insufficient detail for the transaction to be performed. For example, the client has advised they wish to withdraw funds from an investment portfolio yet has not advised from which investment they wish to make the withdrawal. In this instance, you would be required to provide advice in relation to where the client should withdraw the funds.
- The client has asked to make additional contributions into their superannuation fund and has instructed you to assist with this transaction. You are aware that the client has already reached the maximum limit for contributions for the current financial year. In this situation, you should inform the client of the ramifications if they were to make further contributions and decline to act on this request, or make an offer to provide advice.
When is an execution-only transaction acceptable?
While all acceptable execution-only scenarios will differ and OK cannot purport to know what is best for your individual client, here are some fictitious examples of when it may be appropriate:*
- The client asks to withdraw $1000 from their investment, superannuation or pension portfolio and states that this amount is to come from the cash account
- The client wishes to purchase 100 ABC shares at market value
- The client wishes to make a contribution into their superannuation fund, states the relevant investment option and is not exceeding any contribution cap
- The client has an income protection policy in place and has received a salary increase since it was put in force. They wish to increase the monthly benefit to reflect the maximum cover based on their increased salary.
*Examples assume that the adviser has not influenced the client in any way in relation to the client’s decision to ask the adviser to execute the transaction and all relevant steps identified in this article have been adhered to.
Is there anything else I should know?
While legislation is relatively silent regarding execution-only, the Financial Planning Association of Australia code of professional practice notes that it is important to:
- Provide the client with the product disclosure statement (PDS) for the product
- Inform the client of the fees, charges and commissions
- Before providing the service(s), the adviser must ensure that the client understands the difference between financial planning services and execution-only services.
I am confident that it is right for me to proceed with an execution-only transaction. What processes can I follow?
If execution-only is an acceptable way to proceed, then it may be wise to:
- Retain sufficient file notes documenting that the transaction is made under the client’s direction and that the adviser has in no way influenced the client in making this decision
- Provide, and retain in the client’s file, some form of warning statement to the client which includes, but is not limited to, the following points that the client has acknowledged and understood:
- That no financial advice has been provided by the adviser in respect to the transaction
- The risks of making a decision on a financial product without advice being provided to the client
- The difference between financial planning services and execution-only services
- The possibility of the transaction not being appropriate for the client’s needs, objectives or financial situation. This statement should also restate the client’s instructions and detail any warnings and risks associated with the transaction that has been given to the client.
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- Provide the client with a current Financial Services Guide
- Maintain some form of execution-only register
- Complete anti-money laundering and counter-terrorism financing procedures
- Provide any other relevant disclosure, adviser fees, brokerage, commission, benefits, PDS, etc.
In summary, it is important that you, as a financial adviser, have a clear understanding of what may constitute an execution-only scenario, as well as having sufficient documentation on file in the event of the transaction being called into question in future. If you engage in an execution-only transaction when personal advice should have been provided, you may find yourself in breach of the Corporations Act 2001. You should either develop your own policy for these situations or follow the guidelines of your licensee.
