“All advice and financial recommendations that you give to a client must be in the best interests of the client and appropriate to the client’s relevant circumstances. You must be satisfied that the client understands your advice, and the benefits, costs and risks of the financial products that you recommend, and you must have reasonable grounds to be satisfied.” — Code of Ethics Standard 5: Best Interest and appropriateness
Key Insight: Standard 5 requires more than technically correct advice. It requires advice that is in the client’s best interests, appropriate to the client’s relevant circumstances and properly understood by the client. For advisers, that means clear discovery, clear reasoning and clear communication. For licensees, it means the file must evidence how the adviser reached those conclusions.
Standards: Putting the Fun back into Fundamentals
Standard 5 requires an adviser to ensure that any recommendations they provide are appropriate to a client’s individual circumstances and that the client understands the advice.
This Standard also has links to Standard 2 (best interests) and Standard 6 (broader long-term interests and likely circumstances).
Advice that does not satisfy the needs and objectives and the critical aspects of the client’s relevant circumstances is unlikely to be appropriate.
Great advice is built from the ground up. The discovery process is key, and this is where we shall begin.
Standard 5 shouldn’t be treated as a restatement of the statutory best interests duty.
The statutory obligations require an adviser to act in the client’s best interests, provide appropriate advice and prioritise the client’s interests where there is a conflict. Standard 5 adds an ethical and professional overlay.
It requires an adviser to be satisfied that the advice is in the client’s best interests, appropriate to the client’s relevant circumstances and understood by the client. In practice, this means an adviser must be able to explain not only what was recommended, but why it was suitable, why it was better than reasonable alternatives, what risks and trade-offs were explained, and why the adviser had reasonable grounds to believe the client understood the advice.
Relevant circumstances, and goal and objective setting: A very particular set of skills
““I don’t know who you are. I don’t know what you want. But if we sit down and talk about it, I have a very particular set of skills that I have acquired during my career. Skills that can assist you in meeting your goals and objectives.”” — Liam Neeson, CFP
As an advice professional, you are required to actively consider your client’s relevant circumstances in relation to the advice being sought.
You also need to identify other areas that may be relevant, external to their initial reason for seeking advice. This is directly linked to Standard 2, and the platform for good advice requires more than a basic understanding of your client or a superficial acknowledgment of their needs.
In my view, this is the ‘make or break’ part of the advice process. Poorly assessed circumstances and/or generic and vague goals and objectives rarely lead to awesome advice.
From what I’ve seen, good advisers don’t just listen to their clients; they challenge them. By doing so during the discovery process, they increase the quality and quantity of information they have about their client, which helps them understand, empathise with, and engage their client.
The collection of the ‘factual information’ is not the most glamorous or interesting part of the discovery process. Sometimes it’s like pulling teeth, but if the client understands why you’re asking, why you need to know, and how much better your advice will be if they answer, they’ll generally engage. When they engage,the advice is usually higher in quality.
Obtaining your client’s goals and objectives is the fun part. Without coercion, you need to assist the client in putting their goals and objectives into words and identifying relevant needs. In some cases, the client has already done this part for you, but this doesn’t mean you don’t need to try to understand them any less, or not consider/skip the step of considering the client’s relevant circumstances associated with those goals, objectives and needs.
If their goals are properly identified and prioritised, the objectives will be clear and obvious. If both goals and objectives are well understood and properly recorded, your recommendation will be clearer, less generic and, more importantly, better.
This will make it much easier to satisfy Standard 5.
Clarity
“And how is clarity to be achieved? Mainly by taking trouble and by writing to serve people rather than impress them.” — Frank Laurence Lucas
947B(6) requires the information within the Statement of Advice to be worded and presented in a clear, concise and effective manner. You also need to avoid misleading or deceptive conduct when providing advice (S12DA).
In addition to assessing your client’s financial literacy, experience, preferences and communication skills, you need to provide advice that is clearly explained in terms that are likely to be understood by your client.
It is critical that technical jargon is removed and only information that is relevant to the advice is provided.
Relying on cookie-cutter explanations, vague commentary, and reasoning that is not based on the client and their objectives is likely to be inappropriate. If the advice is not clear, concise and effective, then it is difficult to confirm that the client understands the advice.
We’ve long argued that advice documents should be shorter and personalised for each client in question, and we also appreciate that there is an ‘art’ to doing this well. It can be difficult sometimes to place yourself in the client’s shoes, but this is an important part of the process also.
As advisers, you are dealing with advice documents every single day. Conversely, for efficiency’s sake, your clients are not; their level of familiarity is not the same as yours, and sometimes this can be taken for granted. Ask yourself whether you could understand the advice if you weren’t so familiar with it, and whether it aligns with what you initially intended.
We’d also suggest not only ensuring your advice documents are clear, concise and effective, but also including an executive summary. Providing brief particulars regarding your recommendations, reasoning, and the risks and implications of accepting the advice may help avoid any potential misunderstandings.
Signed, sealed, delivered. I’m yours.
Ooh baby, here I am signed, sealed, delivered…but wait!
You are required to provide your client with a Statement of Advice anytime that personal advice is being provided to a retail client. There are some cases where this is not required, but for the purpose of this article, we’ll assume that one needs to be provided.
Advisers will usually save evidence of their advice on file, whether it be electronically or in person. The second step would be to retain evidence that the client accepted the advice and has agreed to proceed to implementation. The majority of most Authority to Proceed documents have an acknowledgement which states that the client understands the advice, but the Code of Ethics requires more than a signature as evidence of understanding.
You must take additional steps to ensure your client understands the advice prior to them signing the Authority to Proceed.
The simplest way to do this is to provide some insight into the interactions with your clients during presentation. You may want to highlight why it’s in the best interests of the client, how you explained the benefits, costs and risks of the advice, and how it meets their circumstances and their long-term investment objectives.
This may include references to the client’s ability to follow the advice, questions they may have had, whether they could summarise the advice, and whether they may need to take the advice home and consider it further before accepting.
Using professional judgment is crucial during this process, and, as always, your file needs to support your conclusions and provide evidence of your reasonable grounds as to why you believe that you have satisfied your duties and obligations.
Professional judgment should be reinforced by process. If you want to use a checklist, ensure that it includes:
- Client goals and objectives, recorded in the client’s own language where possible.
- Relevant circumstances, including financial position, needs, preferences, experience, literacy and constraints.
- Scope of advice and any limitations.
- Alternatives considered and why they were rejected.
- Benefits, costs, risks and consequences of the recommendation.
- Evidence that the client had an opportunity to ask questions.
- File note of the advice presentation meeting.
- Evidence of your basis for concluding the client understood the advice.
Why does Standard 5 matter for licensees?
Although the Code applies directly to relevant providers, it still matters to licensees.
Although a licensee isn’t required to operationalise the Code, a licensee must not prevent or discourage advisers from complying with the Code.
More practically, Standard 5 is relevant to the licensee’s supervision, monitoring and advice quality framework. Where advice files do not show clear client objectives, relevant circumstances, adviser reasoning, risks, trade-offs and client understanding, the issue is rarely confined to ethics. It may also indicate weaknesses in advice process, file evidence, supervision or training.
For licensees, the point is not to convert every Code Standard into a separate checklist obligation. It is to recognise that advice which fails Standard 5 is more likely to attract client complaints, AFCA scrutiny, remediation issues and ASIC concern.
Unsure whether your advice files demonstrate Standard 5 compliance? We can review the evidence, identify gaps and help strengthen your advice process before ASIC, AFCA or a client complaint tests it.
Further reading
Frequently Asked Questions
Standard 5 requires financial advisers to be satisfied that the advice is in the client’s best interests, appropriate to the client’s individual circumstances and understood by the client.
That requires more than completing a fact-find, producing a Statement of Advice, or obtaining a signed Authority to Proceed. The adviser needs to make reasonable enquiries, understand the client’s relevant circumstances, identify clear objectives and explain the advice in a way the client can understand. The adviser should also be able to show why the recommendation is appropriate, what alternatives were considered, what risks and trade-offs were explained, and why the client was likely to understand the advice.
Standard 5 is important because it focuses on the quality of the advice relationship, not just the advice document. A technically correct recommendation can still be problematic if the client’s objectives were poorly defined, the client’s circumstances were not properly considered, or the client did not understand the consequences of acting on the advice.
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No. A signed Authority to Proceed is useful evidence that the client agreed to proceed, but it is not enough by itself to prove the client understood the advice.
Client understanding is a substantive issue. The adviser should be able to show that the client understood the recommendation, the reasons for it, the costs, the risks, the consequences and any material trade-offs. This may be evidenced by file notes, meeting records, client questions, adviser responses, presentation notes, emails, or other records that show how the advice was explained.
For example, if the advice involves replacing a product, changing investment risk, increasing debt, commencing an SMSF strategy or altering insurance cover, the file should show that the client understood both the benefits and the consequences. A signed form does not prove that an explanation occurred. It only proves that the client signed.
Good file evidence should show the path from recommendation to informed consent. That means the adviser should record what was explained, what the client asked, what concerns were raised and why the adviser was satisfied that the client understood the advice before proceeding.
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The best interests duty is a statutory obligation under the Corporations Act. Standard 5 is an ethical and professional obligation under the Code of Ethics. They overlap, but they are not identical.
The statutory best interests duty focuses on whether the adviser has acted in the client’s best interests and complied with the related obligations to provide appropriate advice and prioritise the client’s interests. Standard 5 adds a professional lens. It requires the adviser to be satisfied that the advice is in the client’s best interests, appropriate to the client’s circumstances and understood by the client.
In practice, this means the adviser should not treat Standard 5 as a document checklist. The adviser needs to demonstrate judgement. They should be able to explain why the advice is suitable for this client, in these circumstances, at this time. They should also be able to show that the client understood the recommendation and its consequences.
For licensees, the distinction matters. The Code applies directly to relevant providers, and licensees must not prevent or discourage advisers from complying with it. However, Standard 5 also has practical relevance to monitoring and supervision because weaknesses in Standard 5 evidence often indicate broader issues with advice quality, training, processes, or supervision.
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Advisers should keep evidence that shows how they identified the client’s relevant circumstances, assessed the client’s objectives, developed the recommendation, explained the advice and satisfied themselves that the client understood it.
Useful evidence may include a completed fact-find, detailed file notes, records of client discussions, scope notes, research, strategy comparisons, replacement analysis, risk profile records, modelling, client emails, advice presentation notes, and records of client questions. The Statement of Advice is important, but it should not be the only evidence. The file should support the advice document and show the adviser’s reasoning.
The best evidence is usually contemporaneous. A short, clear file note made at the time of the client meeting is often more useful than a reconstructed explanation created after a complaint, review or regulator request. The file should make it easy for a reviewer to understand what the adviser knew, what the adviser considered, what was recommended, what was explained and why the client proceeded.
The practical test is simple. If a person who was not present at the meeting reviewed the file, could they understand why the advice was in the client’s best interests, why it was appropriate and why the adviser believed the client understood it?
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Standard 5 matters to licensees because it is closely connected to advice quality, monitoring outcomes and complaint risk.
The Code applies directly to relevant providers. A licensee is not required to operationalise each Standard as if it were a separate licensee obligation. However, a licensee must not prevent or discourage advisers from complying with the Code. In addition, licensees are expected to maintain supervision and monitoring arrangements that help identify poor advice, weak file evidence, inappropriate recommendations and process failures.
A Standard 5 issue is rarely just an ethics issue. If advice files do not show clear objectives, relevant client circumstances, adviser reasoning, risk explanations, trade-offs, and client understanding, the licensee may have a broader problem with advice quality. Those weaknesses can lead to client complaints, AFCA disputes, remediation exposure, breach assessment issues and ASIC concern.
For licensees, the practical response is not to turn Standard 5 into a mechanical checklist. The better approach is to ensure that advice review processes test the substance. Reviews should consider whether the file shows a coherent path from client circumstances to recommendation, and from recommendation to informed client acceptance.
Unsure how this applies to you? Get a clear answer in a 15-minute call with a compliance specialist. Book your call.
