Consideration is an active duty
As an advice professional, you know that before you can make any financial product recommendation, you’re required to make a reasonable investigation to identify the financial products that “might achieve those of the objectives and meet those of the needs of the client.”
This is not ‘best practice’. It’s a core obligation.
It’s not necessary to investigate every product on the market, but it’s got to be expansive enough to satisfy an objective person “with a reasonable level of expertise”. First, assume you need a process robust enough to satisfy your compliance officer (notwithstanding they may be neither objective, reasonable nor expert).
Second, recognise that your APL is a tool and not a fence. I understand you use your Licensee’s Approved Product List. I appreciate the argument that your Licensee wouldn’t have chosen those products unless they were ‘best of breed’ but, when recommending a new product, you must prioritise your client’s interests ahead of your own and make enquiries. You cannot fail to do so because you’re APL (or your Authorised Representative Agreement) limits you to a defined list of financial products.
Your APL is like a Blackberry on 3G – useful in certain circumstances but restrictive and not something you’d like to depend on. Irrespective of your APL, you must investigate, and independently consider, any financial product you’d like to recommend or replace. Don’t just take my word. In the Basis Capital Determination, FOS confirmed that simply choosing a product on your Licensee’s APL does not satisfy your obligations. You “must go beyond this to demonstrate care and a detailed understanding of the product before he can assume it suitable for a particular client.”
It’s not just FOS’ view. ASIC has also found that many advisers fail to adequately research the products and platforms they recommend or recommend to be replaced. Given your obligation to address, and disclose, “all known or reasonably ascertainable charges incurred, or benefits lost, by the client; and any other significant consequences of the replacement” how can you satisfy this requirement without active investigation and consideration?
Replacement product issues are frequently identified during compliance reviews. We’d appreciate you’re probably all over this topic, but we thought we’d share the top five questions we’re asked by advisers on this topic. Hopefully, our answers will help.
How many comparisons do I need?
“Data! Data! Data!” He cried impatiently. “I can’t make bricks without clay.” — Sherlock Holmes, The Adventure of the Speckled Band
You’re not required to investigate every single product available, but you are, reasonably enough, expected to conduct a reasonable investigation of any financial products that you might choose to recommend or recommend be replaced.
An advice professional will do this as a matter of course. Remember though that it’s a scalable obligation and the scope of your research and enquiry will depend on your client’s circumstances and needs. You’re not obligated to identify the ‘perfect’ product nor to review x+ 4 products before making a recommendation, but you must investigate a number of options. Dante De Gori, CEO of the FPA has suggested that a pragmatic response to this obligation is to investigate;
1. The current strategy or product
2. The new recommended product
3. An alternate but not recommended product
For example, a client with no specific lifestyle or medical circumstances that calls for pre-assessments may need less research to be carried out as the potential restrictions or risk of a provider not offering cover, are minimal.
It may be that an investigation into their existing provider and a handful of other providers may be sufficient, providing the products meet their needs and there is sufficient consideration of the research collected. However, a client with specific medical or lifestyle circumstances may require further investigation.
This is also applies to investment recommendations.
As we noted previously, the cancellation of cover can be disastrous for clients who are unable to obtain cover elsewhere, but there can also be significant taxation disadvantages or disproportionality large exit fees in certain products. Once these products have been exited and the loss or damage has been crystallised, there isn’t much that can be done to reverse it.
For insurance, do I need a like-for-like quote?
Yes, but not in all cases.
In reality, this entirely depends upon the client objectives and specific circumstances and the availability of alternatives. For example, their occupation or medical history may limit the options available to them and prevent you from being able to obtain comparable cover from another provider.
Remember, just as form follows function, product follows strategy.
For example, when the cover already exists, it needs to be considered against the client’s needs and objectives. Until features, terms and costs have been confirmed, it’s difficult, if not impossible, to recommend a change in product.
“Efficiency is doing things right; effectiveness is doing the right things.”
— Peter Drucker
Industry practice may be to provide a like-for-like comparison for all relevant providers. Again, you’ll decide what providers are relevant to the client’s circumstances based on your knowledge, experience and research. (Just a reminder, they’re not a relevant provider if their product/service won’t or can’t satisfy the client’s needs and objectives).
This is why cost and affordability needs to be considered.
Be warned, it’s not appropriate for you to automatically exclude required products and services on the basis of cost. Research and recommend what your professional judgement determines they need and identify the tension and trade-off between what they need and what they’re prepared to pay.
But appropriateness is important. Insurance needs to be fit for purpose, sustainable and not place the client in a worse position attempting to pay for it. Discovering what is driving their decision will assist in both determining the best way forward as well as the steps which must be taken on the way through.
If a client concern relates primarily to their expenditure and reducing debt, then further thought needs to be given to cost. If this aspect of the policy is readily available, then a reasonable step would be to obtain a quote for assessment.
Do I have to get a quote from the existing fund if the client doesn’t have risk cover?
Advice is a methodical series of considering and assessing multiple strategies and products that may meet a client’s identified needs and objectives.
Demonstrating that a product change is in the Best Interests of the client requires a reasonable research, analysis and consideration. Rolling over superannuation benefits to obtain “better cover” requires you to do more than list product features or terms that are different to those offered by their current fund.
In instances where your client has a superannuation policy within a fund that generally provides insurance, you need to consider whether their existing provider can provide the insurance they require and on what terms.
However, your research may identify that the current fund is simply unable to satisfy your client’s needs.
Does the product I recommend have to be cheaper?
This is not required.
What you are required demonstrate that the product you recommend is in the client’s Best Interests.
This can require a balancing act worthy of Phillipe Petit, but your success depends primarily on what your client needs, wants and is willing to forgo to reach their goals.
Remember that you have to demonstrate that the client’s interests have been prioritised over yours, your Licensee and any associates.
The cheapest product may not be the best option for your client, but if you’re going to recommend a product which is similar materially, then evidence is needed to show that you have considered the quantitative and qualitative aspects, and effectively explained your decision.
“Just give me a reason and I’ll come running
When I have reasons, I know the way. ”
— John Farnham, Reasons
How do I show that I’ve conducted a reasonable investigation into a product?
The simple answer is to consider alternate strategies and document your research and consideration. We’ve previously addressed this (here).
“Always approach the client’s needs and objectives with an absolutely blank mind. It is always an advantage. Form no theories, just simply observe and draw inferences from your observations.”
— Sherlock Holmes, The Adventure of the Cardboard Box
Advisers’ research into, and consideration of, alternative strategies and products is often overlooked or poorly documented. It doesn’t need to be and, again in my personal experience, most failures are the result of the adviser’s poor record keeping processes.
I appreciate that some advisers can be unsure where to retain this information, or where to record their analysis, but they have options. Here are some suggestions:
1. Retain research, comparisons and notes in a product folder;
2. Retain quotes and client-specific details on the client file;
3. Incorporate, reference and detail the research and analysis within the advice document itself (supported by the information on file); and
4. Live data can be retained in a spreadsheet.
If you liked this you may like:
Frequently Asked Questions
There is no fixed number of products an adviser must compare before recommending a replacement product. The obligation is to conduct a reasonable investigation into the financial products that might achieve the client’s objectives and meet their needs. The scope of that investigation depends on the client’s circumstances, the type of advice, the risks involved and the consequences of replacing the existing product.
In practice, advisers should usually consider the client’s existing product, the proposed replacement product and at least one reasonable alternative. More investigation may be required where the client has complex needs, existing insurance cover, health or occupation issues, legacy product features, tax consequences, exit fees or other factors that make replacement higher risk.
The key point is that the adviser must be able to explain why the investigation was reasonable. A simple product comparison is rarely enough. The file should show what options were considered, why some were rejected, why the recommended product was appropriate and how the client’s interests were prioritised.
Unsure how this applies to you? Get a clear answer in a 15-minute call with a compliance specialist. Book your call.
No. A replacement product doesn’t have to be cheaper than the client’s existing product. Cost is important, but it’s not the only relevant factor.
A more expensive product may still be appropriate if it better meets the client’s needs, provides more suitable features, improves cover, addresses an identified gap or supports the recommended strategy.
However, where the replacement product is more expensive, the adviser needs clear evidence showing why the additional cost is justified.
An adviser should consider both quantitative and qualitative factors. These may include fees, premiums, benefits, product features, exclusions, tax consequences, administration, investment options, insurance terms, service quality and any benefits lost by replacing the existing product. The client should also understand the trade-offs. If the recommended product is materially similar but more expensive, the file needs a particularly clear explanation of why replacement is in the client’s interests.
Unsure how this applies to you? Get a clear answer in a 15-minute call with a compliance specialist. Book your call.
No. An approved product list may be useful, but it is not enough on its own to justify a product replacement recommendation.
An APL is a licensee control. It helps manage product governance, research and adviser access to approved products. However, the adviser still needs to consider the client’s relevant circumstances and conduct a reasonable investigation into products that may meet the client’s objectives and needs. Simply choosing a product because it appears on the APL does not prove that the product is suitable for the client.
An adviser should be able to show that they understood the existing product, investigated the proposed replacement, considered reasonable alternatives and assessed the consequences of replacement. This includes charges, benefits lost and other significant consequences. The APL may support the process, but it does not replace adviser judgement, client-specific analysis or file evidence.
Unsure how this applies to you? Get a clear answer in a 15-minute call with a compliance specialist. Book your call.
An adviser should obtain a like-for-like insurance comparison where it is relevant and reasonably available, but it is not required in every case.
The purpose of the comparison is to understand whether the existing cover, proposed cover and available alternatives meet the client’s needs. A like-for-like quote can be useful where the client is replacing existing insurance, changing ownership or funding arrangements, or moving between superannuation funds. It can help identify differences in premiums, definitions, exclusions, loadings, waiting periods, benefit periods and other policy terms.
However, a strict like-for-like comparison may not always be possible. The client’s occupation, health, underwriting position, existing policy terms or market availability may limit the options. In those cases, an adviser should document why a direct comparison was not available and what alternative analysis was undertaken.
Insurance replacement is high-risk because poor advice can leave a client uninsured, underinsured, or unable to obtain equivalent cover. Advisers should avoid cancelling existing cover until the replacement position is clear and the consequences have been explained.
Unsure how this applies to you? Get a clear answer in a 15-minute call with a compliance specialist. Book your call.
An adviser can prove reasonable investigation by keeping clear evidence of the research, comparison, analysis and client-specific reasoning that supported the recommendation.
The file should show the client’s objectives and needs, the existing product, the proposed replacement product, the alternatives considered, and the reasons each option was accepted or rejected. It should also record the consequences of replacement, including costs, benefits lost, tax implications, insurance implications, exit fees, product features and any other material trade-offs.
Good evidence may include product research, comparison reports, quotes, adviser notes, client emails, modelling, product disclosure material, strategy analysis and the advice document itself. The evidence should not sit as disconnected attachments. It should support a clear chain of reasoning from the client’s circumstances to the recommendation.
A reasonable investigation is not demonstrated by volume alone. It is demonstrated by relevant, client-specific analysis that shows the adviser actively considered the available options and recommended a product that was appropriate for the client.
Unsure how this applies to you? Get a clear answer in a 15-minute call with a compliance specialist. Book your call.
