“Everyone is ignorant, only on different subjects”
— Will Rogers
Subject, scope and scale
In a previous article, we addressed common scoping failures and, through the magic of Jimmy Cliff, explored the obstacles and data gaps that most commonly undermine the quality of advice.
The article obviously hit the spot because we were inundated with follow-up questions from advisers seeking more clarity about legal requirements, regulatory expectations and the practical issues of managing these and client expectations.
Given our willingness to shamelessly pander to prospective clients, we invited two of our team to go “back to basics” and unpack subject matter, scoping and scaling advice.
In this article, two CompliancersTM go head to head and explore:
- What is subject matter?
- What is scoping?
- Why does scoping matter?
- What does bad scoping look like?
- What does good scoping look like?
- How can I do better?
“The two main causes of files being assessed as non-compliant were:
(a) the advice provider failed to identify the subject matter of the advice and the member’s objectives, financial situation and needs; and
(b) the advice provider failed to conduct a reasonable investigation into financial products and base all judgements on the member’s relevant circumstances.”
— ASIC Report 639 “Financial Advice by Superannuation Funds”
What is subject matter?
BEN
Aside from often being confused with scope, subject matter is distinct from scope and refers to what the client is seeking advice in relation to.
Initially, it may only include one specific item, or one area of circumstance, but it is likely to change as the advice process moves along.
In my view, subject matter is a living, breathing organism that evolves through the advice process. I believe it is made up of the reasons for seeking advice, stated and uncovered personal and financial objectives and adviser identified needs.
To put it simply, what was discussed.
SEAN
Ben’s right to suggest that subject matter and scope are different; they’re clearly related but easy enough to identify if you know what you’re looking for. I know I’ve seen financial services lawyers declare that they are the same thing, but, as most advisers know, they’re really not.
RG175 makes 85 distinct references to “subject matter” in its guide on conduct and disclosure and, unsurprisingly, their approach is generally consistent with s961B(2)(b)(i). Interestingly, “subject matter” isn’t mentioned explicitly in the SOA requirements (s947A and s947B), it’s not a defined term and it’s curiously absent from the Regulations. It seems to be, for all intents and purposes, a term introduced by ASIC to better explain “the basis of the advice”.
Until the FOFA reforms, it was simply a pragmatic statement of regulatory expectations that may have aligned with the Associations’ preferences (RG 175.182(c)(i). The shape and boundary of “subject matter” is never explicitly defined, except contextually, and this equivocation is the reason why “scope” is problematic for some advisers; subject matter is refined, by iteration, instruction and expertise, to determine the “scope” of the advice. It might have originally been a regulatory creation but subject matter is an inextricable part of your Best Interest Duty. In their recent review of the advice provided by superannuation funds, ASIC noted that 49% failed to satisfy the best interest duty because of a failure to properly identify the subject matter.
In fact, RG 175.282 suggests that it’s a sequential process; the scope of advice can only be determined after you have identified the subject matter of the advice sought by the client.
If that’s too esoteric, let’s use an analogy; your ambition to “renovate your house” is the reason you’ve chosen to speak to an architect (“subject matter”), but “renovation” is too broad a topic to constructively address with any clarity. So, you think about timeframes, capabilities, resources , needs and preferences , and decide to focus on your kitchen, because that’s the most pressing need (“scoping”). That process of deciding what you need not only defines the scope of the advice, but influences the conduct (enquiries and processes) of the other party (“scoping”).
If you’re focusing on your kitchen, your architect doesn’t need to investigate patio furniture or pagoda options. If your client wants to talk about their super (subject), but only wants advice on which of the internal options best suit them (scope) then you won’t investigate, address and compare other funds or other structures (scale).
REPORT 639
What is scoping?
SEAN
‘Scoping’ is the process of refining your clients’ preferences, needs, resources, capabilities and timeframes to clearly identify their needs and objectives to identify whether, and how, you can serve them. It’s the application of structure, process and reason to identify needs and clarify what may be vague or undefined objectives. It’s the steps you take to arrive at the right destination.
BEN
Scoping is a delicate matter and needs to be handled with care. It is sometimes mismanaged, documented poorly and not given the necessary time in the advice process. The FASEA Code of Ethics has been in place for almost 18 months now and it is imperative that advisers consider the client’s relevant circumstances and actively consider the client’s broader, long-term interests, likely circumstances and the broad effects of the advice itself. This makes scoping more important than ever.
Sometimes we find that the process itself gets a little muddled up and over-complicated. There are some who assume because of FASEA that they must provide advice for everything they uncover. It would be fantastic if we could, but the reality is that it is not always affordable, necessary, or required.
Aside from being confused with subject matter, ‘scoping’ simply refers to the process of defining what will and won’t be included in the advice, after discussing and considering the subject matter.
During the process, the adviser will often offer a range of services and advice options to assist the client. This process should be documented clearly within the file and include the discussions, warnings and adviser considerations.
Scoping can be driven by a client request, or a methodical and active consideration of each area or concern of the client, and everything in between. The client may want to accept all of the advice and services offered, or just one. It’s this process that is of the utmost importance as it sets the path of the advice.
As always, acting solely on a client’s request is fraught with danger.
To put it simply, what will be addressed.
“An advice provider can determine the scope of the advice only after identifying the subject matter of the advice sought by the member: see RG 175 at RG 175.282.”
— ASIC Report 639 “Financial advice by superannuation funds”, 124
Why does scoping matter?
BEN
From the client perspective, it mainly comes down to being able to make informed decisions.
From the adviser’s perspective, the way in which the scoping is handled is directly linked to duties and obligations, best interest duty and appropriateness.
If a client has never received advice before, or their understanding of their own financial circumstances is limited, then they may not know what questions to ask. They may also be unaware of the impact that their decisions may have on other areas of their life. When the risks of scoping out critical areas are not explained, then the decision cannot be confirmed as being informed.
Concerns with appropriateness are often directly linked to poor scoping of the advice too. If the advice does not satisfy the client’s needs and objectives, or critical aspects of their relevant circumstances, appropriateness cannot be confirmed.
Scoping sets the foundation for the advice and will affect the process from the moment it is decided upon. The adviser’s actions will be guided by it the whole way through the development of the advice.
SEAN
If you don’t properly scope the advice, it’s impossible to provide appropriate advice or demonstrate that you’ve acted in your clients’ best interests.
You also make your job impossible, if you stop with the subject matter, for example “wealth creation” or “superannuation”, how can you possibly provide a “clear, concise and effective” advice document that addresses every possible option, strategy and product. As bad as that might be for you in terms of liability, how could a retail client possibly understand, and reasonably consent, to advice that addresses everything?
ASIC RG175
What does bad scoping look like?
BEN
Bad scoping can give the appearance that the adviser has either consciously ignored the client’s relevant circumstances; manufactured changes to the client’s objectives to suit their own interests; or failed to take them into account altogether.
Poor scoping can be very similar to bad scoping, but the exclusions or inadequate consideration of objectives or circumstances does not appear to be conscious. The impact on the client can be like the above, but the adviser may have had pure intentions.
Ineffective scoping is usually associated with a poorly documented process and there does not appear to be a significant, or material and negative effect on the client. This may be associated with an oversight by the adviser, or insufficient documentation of the warnings given, or areas excluded.
SEAN
Bad scoping, in my experience, delivers an outcome that’s more aligned with the advisers’ convenience and interests, than the client’s needs and objectives.
Scoping is about applying your expertise, empathy and experience to your client’s problems and needs and working hard to satisfy them. Good scoping can emerge from bad processes, but good consumer outcomes can never emerge from bad scoping.
“In some cases, the process of making inquiries might lead to different or additional areas of advice that are also relevant to the member. This will require further discussions with the member and, potentially, a revision of the scope of the advice: see RG 175 at RG 175.306.”
— ASIC Report 639 “Financial advice by superannuation funds”, 126
What does good scoping look like?
SEAN
“Good scoping” looks like purposeful and reflective consideration. That may be hard to picture, but it’s not just clearly defined advice parameters but the file-notes and other indicators that show the adviser took the time to understand their client, explained what they need to focus on and addressed that topic – clearly, concisely and effectively.
BEN
Good scoping comes down to a few things being done well.
- Clearly documenting the subject matter and assisting the client with uncovering and prioritising their goals and objectives;
- Uncovering any identified needs and discussing these thoroughly;
- Considering the relevant circumstances in conjunction with the subject matter, goals and objectives and identified needs (within notes, research and financial information);
- Involving the client in the scoping discussions, offering relevant warnings and risks (when prioritising or excluding areas);
- Offering a Terms of Engagement which includes relevant discussion points, confirmation of scope and costs of the advice;
- Providing a clear scoping statement within the Statement of Advice.
Overkill? Maybe.
But like I said, scoping sets the scene for the advice and can make or break it.
Another thing to consider is time. Often, the advice which is scoped well early can make the process itself easier (and shorter). Time does not need to be spent in areas which are not related to the advice and the adviser can focus on what they need to do knowing exactly what needs to be included in research and advice document.
How can I do it better?
BEN
Whilst the law is flexible enough to recognise that the client may choose what advice they seek, and that limitations may be imposed during these discussions, it is also a requirement that the adviser considers the client’s relevant circumstances in connection with those requests when providing advice (so does FASEA). The adviser needs to ensure that any relevant areas which may be scoped out of the advice have been adequately considered and the client is aware of the impact.
A good starting point is to remember that a client can exclude areas from scope, but the adviser should not. There are always exceptions to the rule, but this is a good place to start.
Scoping can be limited by a range of factors and it is just as important to record the reasoning for areas being excluded, along with any specific client requests. Integrating these into the commentary can make it a lot clearer for the client to understand when reading and considering the advice.
SEAN
Apparently, Michelangelo claimed that he didn’t carve marble into figures but instead freed the figures from the marble.
Scoping isn’t about imposing your preferences on your client, but helping them identify, with clarity and specificity, what needs and objectives they’ll prioritise.
Scoping is as much about client service as compliance; it helps you refine goals, clarify your thinking and develop better strategies.
We’re moving from a disclosure-focused regime to engagement-focused regime and the best way to manage that transition, and better scope advice, is to understand that your role is to guide your clients and not direct them. Slow down, ask clarifying questions and take the time to properly consider their timeframe, capabilities, resources , needs and preferences.
Some tips
- Carry out a thorough discovery process and document this in detail.
- Create a checklist to provide prompts and reminders.
- Identify the client’s relevant circumstances, validate these and actively consider them during the entire process.
- Provide additional assistance when the client is having trouble articulating their objectives.
- Offer education, provide warnings and obtain confirmation, understanding and consent.
- Include detailed recordings of client interactions and responses to education and questions.
- Providing a Terms of Engagement which outlines the scope and cost of the advice can assist in the management of obligations.
- Providing a clear scoping statement within the advice document itself which outlines the specifics of the services is also important.
- Ensure that any limitations are addressed for items that are in scope and also that there is an explanation as to why certain areas have been excluded.
- And remember that a client may not know the ‘scope’ of the advice is, or the risks of excluding relevant, or important and connected aspects of their circumstances.
