Essential elements of providing good quality advice

What are the essential elements to providing good quality advice?

The Royal Commission and subsequent enforceable undertakings highlighted many shortcomings in the provision of advice that resulted in poor client outcomes.

Let’s look at the essential elements required to provide good quality advice and demonstrate that you, as a Licensee, have acted in the client’s best interest.

There are no silver bullets here: follow the Regulatory Guides; use some common sense; and always focus on what is best for your client.

An ASIC report dating back to 2012 (prior to the introduction of the FOFA reforms best interests duty on 1 July 2013), ‘REP 279 shadow shopping study of retirement advice’ remains relevant today where ASIC identified a range of principles that underpin good quality advice:

Step 1 – Investigation of personal circumstances, goals and objectives

To demonstrate that you have acted in the client’s best interest and comply with s961B of the Corps Act, it is critical to investigate and identify the client’s personal circumstances including their goals and objectives.

Standard 2 of the FASEA Code of Ethics places further obligations on Advisers in this area – it expects Advisers to make broader inquiries into the client’s circumstances, long-term interests and likely future circumstances.

In a recent workshop with one of our clients, one Adviser told us about using the ‘10, 3 and now’ approach as a prompt for client discussions. Using specific timeframes helps the client to visualise and discuss their future with you – this will assist you to not only scope the advice but also have the foundation on which to develop a plan that will lead them to a better position.

The client conversation(s) complemented with professional guidance should tell a story about your clients – the key here is to ensure all of this information is clearly documented and recorded on the client file. This is a key artefact used to demonstrate best interest, and in cases of product replacement details how the benefits of the new product are relevant. More on this below.

Step 2 – Developing and providing sound strategic advice

This is the one area that we consistently encounter issues and where much of the criticism of the industry is based. In many cases, the decision on what product to recommend has been made before any strategic considerations.

Both REP 279 and RG 175 clearly state that a sound strategy is a key component of good quality advice. These guidelines are a clear indication from ASIC that product recommendations should follow, rather than direct the strategic advice.

Providing your client with sound strategic advice is fundamental to being regarded in the best interests given the client’s relevant circumstances. In considering strategies and alternatives, you should ask yourself:

Will the strategy secure their financial future?
Will the strategy achieve their goals and objectives?
Does the strategy overcome any issues or problems that need to be addressed?
Is the strategy consistent with their risk tolerance?

Once you have determined what strategies will assist the client in attaining their goals and objectives, then and only then should you commence the process of providing financial product advice.

And again, make sure you document the strategies you have considered, link them to the client’s relevant personal circumstances and determine whether its puts them in a better position.

Step 3 – Financial product advice

RG 175 provides a very clear indication of what the expectations are when providing financial product advice. If you recommend a product that is more expensive and where the benefits are not aligned to your client’s circumstances, then the advice may be considered inappropriate.

In RG 175, ASIC use the example of advice to consolidate three funds into a new fund which has higher fees than the existing three. The advice document confers the following benefits because of switching:

A more varied menu of investment options.
The ability to switch daily.
Reports and educational material that are easier to understand.

Because the file could not demonstrate that any of these benefits were of any relevance to the client’s personal circumstances, the advice would be considered inappropriate.

In summary, when providing financial product advice, there are four key steps one should take:

Research the existing product.
Make sure the benefits of the new product are aligned to your client’s personal circumstances and needs.
Be able to communicate in a clear and concise manner why the product you have recommended will place them in a better position.
Evidence of all of this on the client file.

Step 4 – A clear and concise Statement of Advice

The final key element is a clear, concise and effective SoA. Remember that the SoA is for the client - not for the Adviser to try and demonstrate best interest obligations. The best interest obligations must be considered in its entirety – file notes, fact finder, workpapers, research, advice etc.

Here are some of our tips when preparing a SoA:

Start with an executive summary that paints a picture of the client, it tells their story.
Clearly state the client’s goals and objectives.
State what strategies you are recommending to help them achieve their objectives and why it is appropriate (include risks and disadvantages).
Bring it all together in a concise statement that demonstrates how they will be in a better position because of your advice.

Of course, there are other legislative requirements that need to be included as set out in RG 175 (such as product replacement if applicable), but if you focus on the four key elements above, your SoA will go a long way to being clear, concise and effective.

How can Hall Advisory help?

Hall Advisory provides advisory services across the financial services sector.

We can assist you in assessing the quality of your advice and whether it meets the best interest obligations by:

Conducting file reviews to complement your monitoring and supervision obligations.
Reviewing your procedures, processes, templates used in the delivery of advice to ensure they are fit for purpose and assist your AFSL in complying with the legislative environment.
Providing tailored coaching sessions with staff.
Developing and facilitating workshops to support better practices.
Uplifting operational processes, procedures and templates to meet regulatory and business requirements, in a fit for purpose manner.

Contact us for a confidential, no-obligation consultation to talk about how we can support you on your obligations in running an AFSL.