Kayaking on the Maribyrnong River three years ago with a friend, a financial adviser, our conversation turned to work. We spoke of some of the less than favourable qualities of Statements of Advice (SoAs) – lengthy and repetitious, “clunky” to read and non-specific. We asked: ideally, if an SoA contained nothing else, what would you want in it?
An SoA must be worded and presented in a clear, concise and effective way (see note 1) while also satisfying several other mandatory disclosure requirements. How does an adviser meet all their obligations in preparing it, not spend excessively long on the task, and still manage to bring the document to life?
This article suggests one way to think afresh about that challenge.
Generate the story in a discussion paper
Back to the river and our question. The consensus was generate a discussion paper with two pages (or passages) of targeted text. One would set out the substance of the advice. The other would explain its risks in light of the client’s financial situation and goals.
Executed well, might this thinking form the building block for a SoA?
Having met with the client, taken instructions, obtained financial statements and researched suitable strategies, advisers have a very good understanding of the client. Therefore, before it is time to draft the SoA, you could write a discussion paper, using the following approach.
Off the top of your head, write the first page of content, clearly expressing the rationale for a strategy and why it is likely to achieve or move the client closer to their goal. On the second page, write the explanation, incorporating the disadvantages.
Now, you’ve generated the story – the basis for the SoA.
Creating this paper has advantages, including:
- It is a tangible education tool;
- It informs the client;
- It facilitates a ‘meeting of minds’ before the client commits to the adviser preparing a SoA;
- It records what was discussed;
- It can be marketed as an advice process; and
- It serves as the basis for a SoA before the adviser does a lot more work.
Articulate multiple strategies using a common theme
The story approach may work for a straightforward plan with one or two strategies. For multiple strategies something in addition to the story may be needed to tie an ultimate SoA together into a readable whole.
This could be achieved by identifying in the discussion paper the common theme flowing though each of separate strategies. An obvious example is a client’s developing cash flow position.
In a fictitious example, Jane and Peter approach their adviser with multiple goals. These include reduction of taxation liability, salary sacrificing and building super for retirement, discharge of mortgage by their retirement, investment for their niece’s and nephew’s future education, and obtaining personal risk cover.
Using the couple’s annual cash flow surplus as the starting point, the adviser could articulate in the discussion paper the proposed strategies as follows (see note 2):
| Summary of client’s strategies (Year 1) | Personal cash flow amount | Costs and benefits of strategies for clients |
| Current cash flow surplus (income net of tax (incl. Medicare Levy) and living expenses) | $47,080 | |
| PLUS net tax benefit from redeeming cash and fixed facilities totalling $36,000 (applied to reduce mortgage from $130,000 to $94,000) | $542 | Joint tax saving of $542 ($254 for Peter and $288 for Jane) |
| PLUS personal taxation benefit of salary sacrificing strategy (concessional contributions – Jane $16,675, Peter $8,000; tax savings – Jane $6,188 and Peter $2,808) | $8996 | Reduces personal tax payable by a total of $8,996; extra contributions tax payable (15%) – Jane’s account $2,501, Peter’s account $1,200 |
| LESS pre-tax income salary sacrificed to super (above) | $24,675 | Extra contribution to clients’ super funds totalling $24,675; net effect of salary sacrificing to super on personal cash flow is a reduction of $15,679 ($24,675 – $8,996) |
| LESS allocation for Investment Bond ($10,142 pa for 12 years) | $10,142 | Invested in balanced option earning approx. 6% after management fees, investment will be worth approx. $171,096 in 12 years |
| LESS net increase to yearly mortgage repayments based on balance of $94,000 and fixed interest rate of 6% (P & I) for a 7 year fixed term (re-financed from a 7% interest-only line of credit) | $ 7378 | By increasing annual repayments to $16,478 (from $9,100), the mortgage will be paid off in 7 years |
| LESS additional savings of $4,000 pa (non-concessional contributions into Jane’s superannuation fund) | $ 4000 | Builds up Jane’s super balance for retirement |
| LESS total premiums payable on Income Protection and Trauma insurances (Jane – $3,977 and Peter – $3,566) | $ 7543 | Clients protect their wealth |
| Cash flow surplus after recommendations implemented | $ 2880 |
Using a table such as the above, advisers can show clients that at any stage of a multi-pronged strategy, they can ascertain their cash flow position (or surplus), and they can understand where they have come from and where they are going.
Whatever your approach, constructing a quality SoA first requires advisers to step back, get control of their client’s financial situation and suitable strategies, and produce a meaningful narrative. Thinking this way maximises the chances of producing a higher quality document which is personalised and therefore more meaningful to the client.
NOTES:
1. Section 947B(6) of the Corporations Act 2001 (the Act) (SoA given by licensee).
2. The amounts used are for example purposes only.
