Clear and effective lines of communication between financial planners and paraplanners, and a clear-headed approach to a Statement of Advice, can help financial planning practices maximise efficiency and compliance.
Integrity Compliance director Rhett Das told the 2017 FPA Professionals Congress that it’s a common error to believe more has to go into an SoA than the law dictates, and to overwrite what does go in, often making the document irrelevant to the client, and therefore less effective, and creating problems later on if the advice received is unclear or misunderstood.
Das said many financial planners have never read Australian Securities and Investments Commission (ASIC) Regulatory Guide RG 175, which sets out what should be in an SoA. As a result, a templated approach to creating the document can make it less effective than it could and should be in setting out the reasons for the planner’s advice and strategies.
Das said there are some things the law states must go into an SoA, including the name and the contact details of the entity providing the advice, and a statement setting out the actual advice, covering why it is deemed to be appropriate for the client, what risks are associated with it, and what the client should do next.
Only the essential information
The law states that an SoA should also include information about the basis on which the advice is given, an outline of the client’s goals and attitudes to risk. It should also cover the adviser’s remuneration, and any referral fees received. Das said advisers should also feel free to add information, provided it is relevant, that is not prescribed by law – an executive summary of the advice, for example, and projections to help explain the possible outcomes.
But he urged advisers to avoid using templates, which can introduce extraneous and irrelevant (and often simply incorrect) material, and to proofread the document carefully before sending it to the client.
“I’ve got practices that read their stuff four times; I’ve got practices that don’t read it at all,” Das said. “I had one guy, I was reading his file, and he moved a schoolteacher [client] out of a defined benefit super fund. And no one had proofread his file. If they had done that, I am pretty sure that would have been stopped.”
In a fortunate, happy ending to that story, Das said, the client had some money left in the end and was able to move money back into the fund.
Macquarie equities financial planner, and former paraplanner, Kaori Brown said it takes an average of 6.4 hours to prepare an SoA, but they are more costly and more time-consuming when communication between adviser and paraplanner is muddled or not handled well.
“A lot of people are using someone else to write your advice document,” she said. “But…ultimately you are responsible for the document you are providing to your client. You want to make sure your Statement of Advice accurately represents your advice.”
Brown said a common shortcoming in communications between adviser and paraplanner is simply that the the scope of advice is unclear. She said the scope of advice is like the frame of a house – if it’s not constructed properly it will affect the overall outcome.
Communication with paraplanners
Brown said the client’s objectives are often set out unclearly, or sometimes omitted altogether. And there can be an insufficiently clear link between those objectives and the adviser’s recommendations. File notes and documents can be illegible – poorly scanned, for example, or down to the adviser’s poor handwriting. And
when paraplanners are provided with too much irrelevant information or not enough, it can make SoA preparation a more protracted and less efficient process.
Brown said advisers should monitor the communication with paraplanners, and if the same issues come up over and over, or if the paraplanners are consistently requesting more of a particular kind of information, it could pay to develop checklists to ensure the paraplanners get everything they need at the outset.
Das said it is often unclear under what circumstances a Record of Advice (RoA) can be issued instead of a new, full-blown SoA. He said the Corporations Act regulations provides clarity around “all the situations in which you don’t need to use an SoA – in particular, regulation 7.7.10AE [covers this].
“We get people emailing us saying, ‘Do we have to do an SoA?’, and then other people say, ‘I’m just going to do an SoA because the RoA is 24 pages anyway’.
“When you break it down, it’s really not that hard,” Das said. “If you have previously given a client advice, and an SoA sets out their situation and their personal needs, and nothing has really changed – and you’ve checked with the client that nothing has significantly changed in their circumstances – then the basis on which you gave your advice hasn’t significantly changed, either. You can probably get away with an RoA.
“Where we struggle, though is if you’ve changed licensee and you gave the client advice under the old licensee…Then, you cannot give an RoA. That’s actually in the regulations.”