In a recent meeting with senior managers from the Australian Securities and Investment Commission (ASIC) I asked, “Are you seeing any new trends in advice that don’t meet your standards?”
The frustration was palpable. They responded with a collective roll of their eyes.
“No new trends – just the same old one: fundamentally poor advice.”
So what does ASIC mean when it says ‘fundamentally poor advice’? It is advice that does not meet the client’s situation, needs, and/or objectives.
In order to ensure that you are not issuing ‘fundamentally poor advice’ – here are some simple steps to remember:
- Spend quality time working out your client’s precise situation, needs, and objectives – and then document these in the Statement of Advice (SoA).
- This might take a few meetings to get right because often individuals don’t have full recall of their situation, needs and objectives in the first instance
- If their situation, needs, and objectives are competing – then it is your job to prioritise them
- Include a ‘consideration of time frames’ and a list of investment horizons
- Be very specific about your client’s risk tolerance.
Achieving these initial steps will put you in the best position to assist your client in the long term – so take the time to get it right. It might take several meetings, but if you don’t get these initial elements correct your advice will struggle to comply.
An extra component to remember here is to ‘scope out’ advice that is not taken into consideration. Remember though, you can’t scope out matters which are obvious and for which you have a duty of care.
- Make sure your advice matches the needs expressed during the initial consultation.
Your recommendations should directly respond and correspond with your client’s situation, needs, and objectives.
Your advice should not consider, or prioritise, other things. For example; if step one does not refer to life insurance, then you should not recommend life insurance. If you think your client needs life insurance and they haven’t mentioned it, the way to handle this is to have that discussion with your client and document this in the SoA. The point here is you should not be recommending strategies in your SoA that are not in line with what you have described as your client’s situation, needs and objectives.
- Include comprehensive explanations of the decisions contained in your recommendation.
Bridging the gap between situation, needs and objectives on the one hand and your recommendations on the other is a common omission in SoAs. Your SoA must explain why your recommendation is in your client’s best interests, given their situation, needs and objectives. There must be a reason or reasons why the recommended investment is more suitable to them than their existing investment and this must be included in your advice.
- When reaching each decision or recommendation you must communicate clearly to your client why you chose your particular recommendation. Your reasons must be consistent with the client’s situation, needs, and objectives
- If a client’s prioritised objective is to save on fees, for example, then the fund you recommend would need to satisfy that objective and you would need to explain how it does. You could not make such a statement if you recommend a fund with higher fees.
Practice makes perfect
Of course – there are many other aspects of good advice, but perfecting the three initial (and crucial) steps outlined above will put you in good stead when aiming to provide ‘fundamentally sound advice.’
At the end of the day, a simple test is to ask yourself: would you be happy for your mum and dad or your children to receive this advice? Would your advice record their key requirements and support the recommendations made in a wide range of future scenarios? Remember, it is not necessarily what they want to hear – it’s about what they need to hear in their best interests.
I know it can be more difficult in practice. But that is the point: like many things – it is all about practice. And practice makes perfect!
