The Financial Ombudsman Service Australia received 2288 disputes in the Investments and Advice sector from July 1, 2016 to April 30, 2017. At April 2017, 22 per cent of the financial service providers involved in these disputes identified as financial advisers or planners. This makes it the sales and service channel with the second-highest disputes. The highest was life insurers, coming in at 31 per cent.
Based on disputes lodged at FOS, financial planners face certain key risks in the provision of advisory services to clients. These include inadequate clarity about the terms of engagement, lack of clear communication in words the client can understand about the advice process and the recommendations made, inadequate explanation or understanding by the client about the trade-offs that may be required between risk and meeting objectives, failing to match strategy and product recommendations to the clients’ objectives, and a lack of diligent and objective assessment of concerns raised by clients about the advice they have received.
Building a resilient advisory process will help you reduce these issues in your business. Here are some steps you can take to achieve that.
The difference between general and personal advice
FOS encounters many instances where there is a disconnect between the client’s expectations about the advisory services they will receive and the service actually provided. In our experience for example, confusion can arise about the difference between personal and general advice.
Personal advice is distinguished from general advice by considering one or more of a person’s objectives, financial situation or needs, or where a reasonable person may have expected this – section 766B(3). Moving into the realm of personal advice triggers additional consumer protection provisions in the Corporations Act for retail clients.
FOS members who seek to argue that a client received general advice from an adviser must ensure that the client has not only understood the nature of the advice to be provided, but also its limitations. Accurate record keeping, including file notes of meetings and other conversations with the client will help. Providing a written general advice warning may not always be sufficient of itself if it is not adequately brought to the attention of the client. This warning must be prominent in our view, clearly explained to the client and given at the same time as the advice.
FOS recognises that simply having personal information about the client does not lead to an inevitable assumption that personal advice has been given. But being clear about the type of advice you are giving at each step of the way and the limitations on that advice can help to reduce risk.
Determine whether advice is likely to improve the client’s position
In assessing whether the advice given is in the client’s best interests, FOS has regard to the law and good industry practice, including that outlined in relevant codes of professional practice.
This includes looking at both the process and procedure of providing the advice under section 961B(1) of the Corporations Act and the appropriateness, content and substance of that advice under section 961G.
Ultimately, we ask, ‘Is the client likely to be in a better position if they follow the advice provided?’
Financial services providers and advisers must be able to demonstrate they have clearly followed the safe harbour steps to successfully meet these tests, including:
- Identifying the objectives, financial situation and needs of client
- Identifying the subject matter of the advice that has been sought
- Making reasonable attempts to obtain complete and accurate information
- Assessing whether the adviser has the expertise to provide the advice on the subject matter, a step in our experience that is sometimes overlooked.
- If recommending a financial product, ensuring reasonable investigation and assessment of the information gathered has been conducted and recorded
- Exercising judgement based on the client’s relevant circumstances and clearly linking recommendations made to the achievement of the clients objectives
- Identifying, considering and/or taking other steps at the time the advice is provided that would be reasonably regarded as being in the best interest of the client.
Checklist for giving quality advice
Clients need to be well informed in language they understand in order to fully engage in the advice process and make informed decisions. When assessing the quality of your advice and whether it is achieving that outcome, think about how to reduce some of the common risks identified in FOS disputes. Ask the following questions:
- Have we clearly heard and understood the client’s objectives? Do we write them down using the client’s own words?
- Have we assessed whether our services are suited to the client or do we try to shape the client to fit?
- Have we clearly explained what type of service we will and will not provide?
- Have we adequately assessed tolerance to risk of each client (if more than one)?
- Have we detailed and explained how the strategy we have recommended will achieve the client’s goals?
- Are there inconsistencies or a mismatch between the risk in the strategy and risk required to achieve the client’s objectives within the required timeframe? Have we explained any trade off that may need to be considered by the client?
- Have we detailed how conflicts between goals, available resources and the willingness to take risk have been resolved?
- Can the applicant afford any recommended strategies/investments, such as gearing, and have we adequately assessed and considered their current and future financial circumstances?
- Have we considered relevant alternatives?
- Have we kept adequate records and detailed file notes of the advice process to demonstrate steps taken?
What else can you do?
For more information, the FOS’s top 10 tips for getting financial advice right can be found on our website, along with our published decisions.
June Smith is lead ombudsman (investments and advice) at the Financial Ombudsman Service (Australia).