There is always a better way”
— Thomas Edison, Advice Coach
Giving advice is not simple; it requires learning, practice, and constant improvement. It can lead to great results but can also have severe consequences if not done correctly. Most advisers we work with are well-engaged and understand their responsibilities, but sometimes they miss important details. At Assured Support, our experienced review team, having examined over 19,000 advice files from 208 Licensees, offers insights and practical advice in this issue.
In this article, the formidable Advice Team tackle four common errors and offer solutions. Hear from Emmanuel on risk profiling, Pana on Product Research, Keith on Ongoing Service and Ben on Risk Advice.
Manny on Risk Profiling
Introduction
When advisers evaluate their clients’ risk profiles and decide on asset allocations, they often fail to document changes in outcomes or address variances at the time of advice.
Case Study
For instance, we’ve seen cases where a client’s risk profile changed from ‘balanced’ to ‘growth’ without any documented reasoning or adequate warnings about the implications. Also, we’ve noticed discrepancies in recommended asset allocations and individual asset weightings, not aligning with set parameters.
Analysis
Although Licensees may guide on allowable variances in asset allocation, advisers must still document their reasons for any deviations and ensure they match the client’s risk profile. The lack of documentation makes it hard to justify changes and assess if the risk profile is suitable, especially when a less risky approach might meet the client’s needs and objectives.
Solutions
To prevent these issues, advisers should:
- Document any recommendations to change risk profiles in the client file.
- Clearly explain the reasoning for variances in individual asset allocations in the advice document.
Changes in risk profiles can be due to new circumstances, needs, objectives, or reassessment of how to meet objectives. For example, a retiree might need more risk to cover income shortfalls, or a windfall might allow for a less risky approach. Documenting these decisions and their rationale is crucial.
Pana on Product Research
Introduction
When recommending product replacements, advisers must thoroughly research financial products based on the client’s circumstances, objectives, needs, and any product provider affiliations. We’ve seen advisers focus only on comparing platforms without considering the underlying investments and the many ways to align them with the client’s risk profile.
Case study
In one case, an adviser suggested rolling over superannuation benefits to a new wrap platform with an SMA, but only considered one portfolio option.
Analysis
The relationship between the product and Licensee wasn’t adequately managed. This limited research is problematic, especially when the approved product list includes other similar but unbiased options.
Solutions
To avoid this issue, advisers should:
- Clearly define client needs and objectives, including investment preferences, risk appetite, and financial literacy, during the discovery pro. Document key discussions leading to recommendations.
- Evaluate whether the current product meets the client’s needs and objectives, both in its current state and with potential modifications.
- Research viable products and investments that align to the needs of the clients. – if using an investment philosophy, then use the APL to compare viable alternatives as a starting point. Save this research on file and provide additional explanation if needed.
- Discuss with the client the strategy and the alternatives that have been considered and why these have been discarded.
Keith on Ongoing Service
Introduction
The transition to the new obligations concerning fee disclosure statements (FDSs), ongoing service agreements (OSA), and ongoing fee arrangements (OFA), as mandated by the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2021, concluded on 30 June 2022. While many advice businesses have adapted well, common issues persist, particularly regarding the alignment of annual reviews with FDS and OSA timelines.
Case Study
A scenario involving a new client agreement from 12 September 2022, with an annual review conducted outside the stipulated period, highlights two primary concerns: failure to meet contracted services and inaccuracies in the FDS.
Analysis
- The need for accurate documentation reflecting the actual services provided, not just intended actions, as per legislation Corporations Act 2001 – Sect 962H.
- Challenges in maintaining alignment of review dates with the annual service agreement.
Solutions
- Proactive scheduling of annual reviews well before the anniversary date.
- Ensuring the FDS accurately reflects services rendered.
- Comprehensive documentation to record any delays or deviations in service delivery.
Broader Considerations
While these examples are simplified, complexities such as ongoing product fee consents and varied financial advice business models necessitate a keen focus on aligning review timings with OSA obligations and maintaining FDS accuracy.
Ben on Insurance Advice
Introduction
ASIC Report 413, though nearly a decade old, remains a critical resource for advisers and compliance staff, providing insights into risk advice and ASIC’s expectations.
Case Study
An instance of inadequate insurance needs analysis for a couple seeking insurance advice.
The advice was primarily client-driven with minimal adviser input, lacking a thorough assessment of the clients’ circumstances and needs.
Analysis
- The scenario highlighted the importance of the process in meeting Best Interest Duty, emphasising the appropriateness of advice over actual outcomes.
- The challenge of confirming the appropriateness of advice in the absence of a comprehensive evaluation of clients’ relevant circumstances, objectives, and needs.
Solutions
- Documenting key conversations to establish a starting point for insurance needs assessment.
- Integrating client requests with a thorough consideration of their circumstances and identified needs.
- Factoring in current and future goals and the affordability of premiums from both cash flow and superannuation perspectives.
