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FINS5537-fins5537代写
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FINS5537: Financial Planning Advice & Ethics
Lecture Nine
The Client Adviser Relationship
Conscious and unconscious Biases
Behavioural Finance
Lecturer: Nidal Danoun
n.danoun@unsw.edu.au
FINS3637: Wealth Management Advice
FINS5537: Financial Planning Advice & Ethics
FINS3637: Wealth Management Advice & Ethics
Lecture Four & Five
Providing Advice
&
Statement of Advice
Lecturer: Nidal Danoun
n.danoun@unsw.edu.au
References and Readings
• RG90
• RG175
• Thomson Financial Planning Handbook
• Financial Planning in Australia 2019 Essentials Edition, LexisNexis
• Financial Planning 2nd edition, Wiley
• Corporations Act (Chapter 7)
What is advice
Let us get back to basics – think about the following:
• What does the word or the term advice means to you?
• If you were looking for advice from a professional, a friend or a family
member, what would you expect from the person providing you the advice?
• i.e. listen, understand you, empathise with you, understand what advice
you are seeking and why, etc.
• In one or two words what would expect the advice to be?
• Tailored, personal, unbiased, not conflicted
• Would it be fair and reasonable to expect the above and for the advice to
be in your best interest?
What is advice – Some Dictionary definitions
• An opinion that someone offers you about what you should do or
how you should act in a particular situation
Cambridge English Dictionary
• Guidance or recommendations offered with regard to prudent future
action.
Dictionary Google
Synonyms: guidance, advising, counselling, counsel, help, direction,
instruction, information, enlightenment, etc
What is a statement of Advice?
Do you consider the SOA an advice document or a disclosure document?
The Statement of Advice (SoA)
An advice document striving to ensure the following:
• Acknowledging client's circumstances, needs, concerns goals and
objectives.
• Formulating a strategy consistent with the client's circumstances, needs,
concerns goals and objectives.
• Clearly and unambiguously sets out the advice (including its scope and
basis) and the reasoning that underpinned it.
• Meeting Best interest duty in spirit and in form
• Obtain clients acknowledgement and understanding of the advice
presented, and, if satisfied the authority to proceed.
• Compliant with the law and professionally presented.
The Statement of Advice (SoA)
Substance over form
The Spirit of the legislation should always be the aim.
Although the form is important and there a clear need to comply
with, the spirit is the key.
Best practice, compliance with the law, evidence and record
The Statement of Advice (SoA)
What is the reality on the ground?
ASIC Reports, PJC and senate
enquiries, FSI and Royal Commission,
The Current Regulatory Framework
The current disclosure regime produces
complex and lengthy documents that often
do not enhance consumer understanding of
financial products and services, and impose
significant costs on industry participants.
The Financial System Inquiry – Final Report
The Current Regulatory Framework
The Wallis Inquiry’s approach to consumer regulation was based
primarily on disclosure. It did not restrict either the design of financial
products or the type of financial products that could be marketed to
retail clients. The focus of consumer protection was on regulating
disclosure rather than products themselves. The disclosure regime was
implemented as a principles-based approach to allow maximum
flexibility for product issuers. However, it has subsequently been driven
by an industry culture of legal compliance, rather than a focus on how
best to inform consumers. This has resulted in lengthy and complex
documents, rather than short, targeted documents that highlight
product features, risks and rewards.
The Financial System Inquiry – Final Report
ASIC view of the SOA- Clear, concise and effective presentation
• RG 175.203 Clear, concise and effective presentation of SOAs
promotes understanding of advice by retail investors. We consider
that the presentation requirements are as important as the content
requirements in preparing an SOA.
• Regulatory Guide 90 Example Statement of Advice: Scaled advice for a
new client (RG 90).
• RG 244 also contains some examples of SOAs illustrating our
interpretation of clear, concise and effective disclosure.
ASIC view of the SOA- Clear, concise and effective presentation
RG 175.204 An SOA should:
(a) contain all key information in the body of the document instead of
relegating some key information to an appendix;
(b) be tailored to the client and not contain any irrelevant information such
as generic research or educational materials that are not relevant to the
SOA (this information can be made separately available to retail investors
on request); and
(c) avoid unnecessary repetition of content where it would not enhance
consumer understanding.
Note: Some consumers may not read the example SOA from cover to cover. Therefore, some repetition of
content may be used to ensure that important sections of the SOA can be read on their own without referring to
other sections.
ASIC view of the SOA- Clear, concise and effective presentation
. RG 175.205 Useful presentation tools include: (a) headings, irrespective of
the length of the document; (b) a table of contents; (c) a description of the
purpose of the document; (d) an executive summary to highlight the most
important information; (e) logical sequencing of information and grouping of
related information; and (f) tables and graphs that are clearly explained.
RG 175.206 Language should be used accurately and consistently throughout
the SOA
ASIC view of the SOA- Clear, concise and effective presentation
. RG 175.207 In particular, when preparing an SOA, providing entities should keep the following in mind:
(a)the existing SOA provisions are very flexible, and providing entities should take a flexible approach to
their SOAs (e.g. we expect providing entities to generally provide a short and simple SOA for short and
simple advice);
(b)extraneous information (i.e. information that the law does not actually require to be included in the
SOA, such as detailed research) should not be included if it results in the SOA not being clear, concise and
effective. If extraneous information is included, it should be clearly distinguishable from the mandatory
information;
(c)the clear, concise and effective obligation does not mean that information required by the SOA
provisions can be left out. Rather, the clear, concise and effective obligation affects the way that a
providing entity presents the required information. This includes trying to present the information in as
brief a manner as reasonably possible, without compromising its accuracy;
(d)the most important information in an SOA should be highlighted—for example, in an executive
summary that summarises the key information and indicates where more detail can be obtained. This is
especially important where the SOA is long (e.g. more than 10 pages);
ASIC view of the SOA- Clear, concise and effective presentation
(e)the longer the SOA, the more important it will be to include navigational aids such as a table of
contents;
(f)legal, industry or technical jargon should be avoided where possible, especially where advice is
provided to relatively unsophisticated clients;
(g)where the use of legal, industry or technical terms is unavoidable, the meaning of these terms should
be explained in simple, plain English; and
(h)there is no one ‘correct’ or ‘ideal’ format for an SOA—the law provides flexibility in tailoring the format
and presentation to the particular information needs of retail investors. Consumer testing can help a
providing entity to assess the effectiveness of various disclosure formats.
Note: When an SOA is required, it must be provided in printed or electronic form to the client. See RG 221
for information on how an SOA can be delivered digitally.
Providing the SoA
• The SoA must be provided at the same time, or as soon as practicable
after, personal advice is provided to a retail client. In any event, it
must be provided before any financial service related to the advice
is provided. For example, any request to transact or to implement the
adviser's recommendation – such as arranging for a financial product
to be issued – cannot be effected unless a SoA has been prepared and
presented to the client. As the SoA is the adviser's consideration of
clients' relevant circumstances and the adviser's recommendation
tailored to the client's needs and objectives, it is critical that clients
read and understand the advice before they decide to act on it.
Providing the SoA
• It is prudent, and a best practice encouraged by ASIC, for advisers to provide their clients with an adequate opportunity to
consider their advice before they are required to act upon it.
• The law does allow advisers to provide additional services, without first providing a SoA, in “time critical” cases where:
• the client has expressly instructed the adviser to act immediately or by a specified time; and
• it is not reasonably practicable to provide a SoA before acting in accordance with the client's express instructions.
• Advisers must provide clients with a SoA as soon as practicable after executing the client's instructions and within 5 days
of performing the service: see s 946C of the Corporations Act 2001.
• Advisers do not need to provide a SoA:
• if the client they are advising is not a retail client;
• If the advice relates to basic deposit products, non-cash payment products related to basic deposit products or
traveller's cheques;
• for products able to be traded on a licensed market, where the client has consented not to receive a SoA for
“further market-related advice”: s 946B. However, this exclusion requires that the client was previously provided
with a SoA (the initial advice) and further presumes that neither their relevant personal circumstances nor the
basis of the advice have significantly changed since the initial advice was provided. →Incorporate by reference
Types of SOAs
• Financial planning advice can generally be classified into three main
types:
• Issue specific or scaled advice.
• Comprehensive or holistic financial advice.
• Ongoing advice.
• Scaled advice is personal advice that is limited in scope.
• The Australian Government’s Future of Financial Advice (FoFA)
legislation aims to remove affordability barriers related to financial
advice.
Types of SOAs
• Issue specific or scaled advice:
• Addresses particular aspects of a client’s personal finances.
• Comprehensive or holistic financial advice:
• Developing a comprehensive financial plan to help meet a client’s overall
financial needs and goals.
• Ongoing advice:
• provided to ensure that financial strategies remain in line with objectives,
new strategies are developed to meet changing circumstances or to take
advantage of new opportunities.
The importance of effective communication in an SOA
• An SOA should provide:
• detailed strategies and projected outcomes for each of the recommendations
raised
• and how these will meet the client’s stated objectives.
• The SOA should be written in plain English and prepared with the
client’s level of financial sophistication in mind.
• Should also serve as an educative tool.
• Should not be used as a compliance tool or a mechanism to protect the
planner against liability.
The importance of effective communication in an SOA
• Regulatory Guide 168 Disclosure: Product Disclosure Statements (and
other disclosure obligations) contains ASIC’s Good Disclosure
Principles.
• Help product issuers and financial planners comply with the
disclosure requirements.
• Also promotes good disclosure outcomes for consumers.
The importance of effective communication in an SOA
• The Good Disclosure Principles (RG 168.2) consist of the following:
a) Disclosure should be timely.
b) Disclosure should be relevant and complete.
c) Disclosure should promote product understanding.
d) Disclosure should promote product comparison.
e) Disclosure should highlight important information.
f) Disclosure should have regard to consumers’ needs.
The importance of the planner-client relationship
• Technical knowledge and a comprehensive knowledge of financial
products will not be sufficient on its own.
• A planner needs to exhibit:
• excellent communication skills in order to develop a thorough understanding
and appreciation of the client’s personal, financial and emotional situation.
• competence in communicating strategies and concepts in terms that are
understood by the client and in a way that encourages the client to appreciate
the importance of acting upon the advice.
The importance of the planner-client relationship
• A significant body of research has looked into some of the more
important factors that determine an effective client–professional
relationship.
• Three types of trust are important:
• Trust in technical competence and knowhow.
• Trust in ethical conduct and character.
• Trust in empathic skills and maturity.
The importance of the planner-client relationship
• Obligations at the initial client meeting:
• Prior to engaging the services of a financial planner, an introductory meeting
takes place.
• Provides the means by which a financial planner and client are able to
ascertain the extent to which they have the confidence and trust to work
constructively together.
• If either party does not feel comfortable with the relationship, the financial
planning process should not continue.
Ethical and legal compliance issues
• Financial planners must be familiar with all regulatory requirements
as well as their professional obligations.
• Members of the FPA and Association of Financial Advisers (AFA) are
required to comply with a Code of Conduct.
• Members of the AFA are similarly guided by six principles of
professionalism that form the basis of the AFA Code of Conduct —
Principles of Practice.
Ethical and legal compliance issues
• Both sets of codes are based on the planner:
• having a fiduciary obligation to look after the best interests of the client
without bias or conflict
• and in a manner that establishes a relationship of trust, confidence and
discretion.
Ethical and legal compliance issues
• Client records:
• All information contained within a client’s file is stored safely and kept confidentially.
• Includes records such as SOAs, ROAs, letters, authorities to proceed, client invoices
and receipts.
• A 7-year period is specified by the Corporations Act and Anti-Money Laundering and
Counter-Terrorism Financing Act 2006.
• Must also strictly adhere to the guidelines of the Privacy Act 1988.
• Access to client records:
• The courts and ASIC have the right to access client records as part of any investigation.
• Ownership of client records:
• Clients have the right, at all times, to be able to identify the licensee who bears the ultimate
liability for the advice provided.
Ethical and legal compliance issues
• Disclosure of remuneration:
• The disclosure of fees and has become an important and contentious issue within the
financial planning profession.
• Ethical and legal obligation to disclose all fees, commissions and any material interests that
may result from their recommendations.
• Refer to RG 175 and 182.
• Refer to sections 947B, 947C, 947D, 1013D and 1017D of the Act.
• Remuneration models vary within the financial planning industry and includes:
• commissions
• fee-for-service
• hourly rate.
• The FoFA package of reforms released in 2010 ban conflicted remuneration structures,
including commissions and volume-based payments effective from 1 July 2013.
• The ban currently excludes insurance products held outside of a member’s superannuation
accounts
Important components of an SOA
• There is no set format or template for an SOA, s. 947B(2) of the Act
does set out a range of issues that are common to every SOA.
• RG 175.151 sets out the information that is required to be disclosed
within an SOA.
• The main components of an SOA:
• the title ‘statement of advice’ must be disclosed on the cover or at the front
of the SOA, as well as other disclosures (such as contact details, basis for
advice, etc.)
Important components of an SOA
• The main components of an SOA:
• covering letter
• contents page
• cover page
• executive summary
• scope of advice
• important information about the client (current situation,
personal financial statements)
• what the client wants to achieve
• the advice to the client (Strategy and recommendation).
• The main components of an SOA:
• Other disclosure requirements:
• The cost of the advice and how the planner is paid.
• Specific disclaimers.
• How to proceed.
The Client-Adviser Relationship
The financial-planning process
• A financial plan documents:
– where a client is now
– where they want to go
– how they will get there.
• A financial plan considers:
– relevant timeframes relating to goals
– an analysis of client tolerance for risk.
The 6 steps of the financial planning process
We’ll go through these key steps discussing what is
involved
• Step 1
• Step 2
• Step 3
• Step 4
• Step 5
• Step 6
Collect and assess the financial data of the client.
Determine the objectives and goals of the client.
Identify any financial problems that may exist.
Prepare a written plan.
Obtain informed consent and Implement the agreed
written plan.
Establish an ongoing pattern of review.
Constructing a Statement of Advice
Steps in the financial-planning process
Constructing a Statement of Advice
Step 1: Collect client data
• Life cycle
• Each life stage presents differing issues and problems.
• There are a number of identified life stages
• Savings versus consumption phase
• Early family formation
• Wealth accumulation phase
• Approaching retirement
• Post-retirement.
Constructing a Statement of Advice
Step 1: Collect client data
• Step 1 Data Gathering
– Adviser must give a Financial Services Guide
(FSG) to a person as soon as practicable once
it is clear they may become a client.
– FSG should include:
• Identity of AFSL holder and authorised
representative status
• Services available
• Associations
• Fee disclosure
• Dispute resolution processes.
Constructing a Statement of Advice
Step 1: Collect client data
• Quantitative data
• The information in this category includes:
• financial data
• personal information as to age and investment time horizons
• financial objectives.
• Qualitative data
• The information in this category includes:
• goals and objectives
• issues and concerns
• preconceptions as to the client’s needs in retirement
Constructing a Statement of Advice `
Step 1: Collect client data
• Data collection instruments are many and varied, but
the information collected will include:
– personal details
– current situation
– financial position
– goals and objectives
– risk tolerance
– insurance and risk management issues
– Investments
– superannuation and retirement
– social security
– estate planning.
Constructing a Statement of Advice
Step 2: Determine the objectives and goals of the client
• Step 2 Analysis and Strategy Formulation
• Needs to determine:
– current cash flow
• surplus (savings capacity)
• deficit (debt or asset sales).
– net worth
• statement of assets and liabilities.
– goals
• what assumptions about the future are realistic?
• what goals are achievable?
Constructing a Statement of Advice
Step 2: Determine the objectives and goals of the client
• Establish risk tolerance.
• Review risk profile instrument.
– See example www.finametrica.com.au
• Categorise client as a risk profile type.
• Relate risk profile to asset allocation.
• Consider principles of behavioural finance.
Constructing a Statement of Advice
Risk tolerance
• Risk is the uncertainty of the expected investment returns actually
being delivered and is measured by the volatility of investment
returns.
• Risk tolerance is a measure of an individual’s willingness to accept
a level of investment risk in exchange for higher potential returns.
– Attitude to risk
• Risk Capacity → the risk the investor can afford to take
– Risk budget
Constructing a Statement of Advice
Risk tolerance
• Some of the key ingredient of a client risk profile
– Risk Tolerance
– Risk Capacity
– Goals and objectives
– Time horizon
– Liquidity and income needs
– The investor investment experience
– Special circumstances
• Limitation of risk profiling questionnaires
– Starting point and not the main decider
Constructing a Statement of Advice
Risk Profile
• Risk Profile Categories
– Very conservative
– Conservative
– Average investor
– Growth investor
– Aggressive growth investor.
• Goal based risk profiling
Constructing a Statement of Advice
Step 3: Identify problems
• Step 3 Identify problems
• Problems may include:
– inadequate insurance
– inadequate retirement saving
– spending exceeding income
– excessive high interest and non-deductible debt, such as
credit card debt
– poor financial administration and record keeping
– tax inefficient ownership of assets and structures that do
not maximise social security entitlements.
Constructing a Statement of Advice
Steps 2 and 3: Identify goals, objectives, issues, financial situation
• If, after analysis, some goals are unattainable or not
obtainable within the timeframe the client has set, then
the financial adviser must work with the client to
• determine trade-offs
• prioritise the goals.
• Assumptions
• The financial adviser will have to make certain assumptions.
• The financial adviser must ensure that the client understands
the need for these assumptions and how they will impact the
advice being given.
• These assumptions will need to be tested at each annual
review.
Constructing a Statement of Advice
Step 4: Structuring the Statement of Advice (SOA)
• Step 4 Written SOA
• Test scenarios, then document conclusions and
recommendations about
– insurance and estate planning
– adequacy of retirement savings program
– asset allocation (consistent with risk profile)
– investment vehicles
– investment products.
• The Statement of Advice is a comprehensive
document with explicit recommendations to meet
client goals.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Most SOAs are written with a standardised format.
Tostart they have
• a personalised and complying covering letter
• a standardised and complying cover page
• an Executive Summary that provides the client with a general
understanding of the actions recommended and a summary of
expected outcomes
• a table of contents that clearly outlines the structure of the SOA.
• The covering letter should
• be written on letterhead with contact information (address,
telephone number, email, etc.).
• include the name of the licensee and its licence number and ABN .
• be signed by the financial adviser, stating that he or she is an
Authorised Representative (or Representative) of the Licensed
Dealer.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Cover page
• All SOAs require a cover page that provides the
following information:
• that it is a Statement of Advice
• the name of the recipient
• the date the SOA becomes effective
• the name and contact details of the financial adviser who
provided the SOA
• the name and contact details of the licensee who authorised
the SOA
• a statement that the SOA is private and confidential.
length and in bullet point form.
• Table of Contents
• This page clearly outlines the structure of the plan and can be used
in future to locate specific sections of the plan.
• All pages should be numbered, even those in appendices.
• Use major headings so that the plan does not seem to be overly
complex.
• The body of the SOA usually has six distinct parts:
• The basis for advice
• The recommendations
• An implementation schedule
• Fee disclosures and disclaimers
• Client sign-off with authority to proceed
• Appendices including product disclosure statements.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Executive summary
• The Executive Summary should be no more than two pages in
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Cash flow and balance sheet
• Risk tolerance assessment
• Assumptions
• Concerns and issues.
• The recommendations statement of strategy
• The client needs to see a clear statement of the strategy
behind the recommendations.
• The strategy must be flexible enough to deal with the likely
changes of circumstances.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Risk Management should include strategies for coping
with:
• the death of the client(s) and loss of financial stability for
their dependants
• accidents causing permanent and total disablement to the
client(s) or a dependant
• loss of the ability to earn an income due to illness or accident
• the costs associated with a traumatic illness
• the need for private hospital cover.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• It is important to discuss strategies for risk
management, such as:
• avoidance or elimination of the risk
• often not possible.
• management and control
• to some extent possible
• can lower insurance premiums.
• self-insurance
• transfer of the risk.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Estate planning
• Most clients are uncomfortable discussing death, Wills
and disposal of their wealth.
• However, it is important to point out to clients the
importance of having a written structure (a Will) to
back up their wishes on the transference of their
wealth.
• In this section, there is tendency to include generic
information (i.e related to wills and POA). Avoid using
large volume of generic information and try at all time
to relate information to the clients specific
circumstances.
• While the adviser is not a legal practitioner, it is the adviser’s
responsibility to discuss these matters with the client and
prepare the client for a visit to an appropriate legal professional.
• Such discussion should revolve around issues such as Wills,
beneficiaries, trust mechanisms to preserve assets, insurances and
other taxation structures, as well as powers of attorney.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Taxation
• While no strategy should be recommended simply for
tax reduction purposes, a financial adviser must
thoroughly understand the tax implications of the
recommended strategy and product selected.
• Wherever a discussion of taxation occurs, the financial
adviser must clearly inform the client that he or she is
not a tax adviser.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Investment recommendations
• Investment recommendations first need to be generic
and should move from the most tax-effective (usually
superannuation) to the least tax effective (usually
managed funds).
• Each recommendation must be referenced to the
client’s risk tolerance asset allocation or the asset
allocation agreed to by the client.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Within the investment strategy, it is important to
consider the most appropriate investment vehicles (tax
structures). For example:
• holding assets personally (direct investments)
• unit trusts
• insurance bonds
• superannuation-based investments
• retirement and non-retirement income streams.
• For most clients, investment recommendations will be a
mix of all of the above.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Superannuation, retirement planning and social
security issues
• In relation to retirement planning, there are both financial
and emotional considerations.
• It is the role of the adviser to look at the client holistically and
view retirement first as a lifestyle choice.
• Specific product recommendations
• After the generic discussion on strategies, specific products
must be recommended.
• It is necessary to clearly identify the characteristics of each
product, the product provider and how the product matches
the client’s risk profile and financial needs.
• Each and every product should be fully justified.
• Post-implementation cash flow
• The client must be able to see that they can afford to
implement the recommendations.
• A post-implementation cash flow will show the client that
he or she still has enough money to manage daily living requirements, even
after implementing the recommendations.
Fees and commissions
• The regulatory environment and best practice require that a
financial adviser disclose all fees and commissions to the
client in dollar and percentage terms.
• Disclosure of capacity
• The financial adviser reminds the client what areas of
financial advice he or she may provide and the types of
products and services he or she can offer.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Disclaimers
• act as a warning as to how the information provided in the
plan can be used and that it is specific to the client and not
for general use.
• point out to the client upon what the client can rely.
• are used to avoid possible legal action by making the client
aware of the scope of the advice.
• Monitor and review process
• This needs to be personalised for the specific client.
• The client needs to know what the annual review process will
be, what will be discussed, and the cost.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Implementation schedule
• This schedule is a detailed statement of all actions, including
the completion of forms, the drawing of cheques and the
making of appointments that the client and the financial
adviser need to undertake, in order to implement the plan.
Constructing a Statement of Advice
Step 4:The preparation of a written plan
• Authority to proceed
• The Authority to Proceed is a formal business letter provided by
the financial adviser for the client to sign. It asks the client to
confirm that he or she has received and read the Financial
Services Guide, agrees with the risk tolerance assessment, has
received and read the Privacy Statement, and so on.
• The client(s) to sign and date the document.
• Appendices
• Appendices should be strictly limited.
• They should contain the financial worksheets that back up
the recommendations in the SOA and summary graphs.
The Client-Adviser Relationship
Step 4: Structuring the Statement of Advice (SOA)
• Step 4 Written SOA
• Test scenarios, then document conclusions and
recommendations about
– insurance and estate planning
– adequacy of retirement savings program
– asset allocation (consistent with risk profile)
– investment vehicles
– investment products.
• The Statement of Advice is a comprehensive
document with explicit recommendations to meet
client goals.
Constructing a Statement of Advice
Step 5: Recommendations and implementation
• Step 5 Implementation
• Authority to Proceed - informed concent
• Critically important phase
• Cements future relationship with client
• Implementation schedule designed and
documented
• Client service agreement signed
• Summary of client–adviser agreement
– confirms actions as specified in written SOA.
Constructing a Statement of Advice
Step 5: Recommendations and implementation
• Step 5 Implementation → Implement the agreed plan
• Authority to Proceed - informed concent
• Critically important phase
• Cements future relationship with client
• Implementation schedule designed and
documented
• Client service agreement signed
• Summary of client–adviser agreement
– confirms actions as specified in written SOA.
• The implementation of the recommendations can make or break
the relationship with the client.
Constructing a Statement of Advice
Step 6: Review and monitor
• Scheduled reviews are essential to allow for the changing
nature of the client’s circumstances and that of the external
environment (legislative, market, economic, other, etc).
• The adequacy of the client’s insurance cover and or investment
should be reviewed.
• Where additional actions need to be taken by the client
and or the client’s circumstances have significantely
changed , a new SOA needs to be issued.
Constructing a Statement of
Advice Step 6: Review and monitor
• Step 6 Monitor and Review
• Agreement about the terms of the ongoing
relationship with the client
• Necessary to ensure currency and
appropriateness of plan for client needs
• Completes the planning process
• Frequency of review depends on many factors
– e.g. how often, size of portfolio, market changes.
• Generally annual reviews are recommended.
Appendix
Constructing a Statement of Advice
Critical elements
• The SOA provides details of:
• the basis for the advice
• the rationale behind the advice
• a restatement of the advice, its benefits and drawbacks
• benchmarks that the client can use to measure progress
towards goal achievement
• the cost of implementation of the plan and any other
benefits the financial adviser may receive
• a detailed implementation plan.
Remember ! - Disclosure documents required in respect of the provision of financial products
• Statement of advice (SOA):
• An SOA must include:
• the name of the party providing the advice
• a statement setting out the advice
• the reasoning or basis that led to that advice
• the remuneration and other benefits received by the provider of the advice
• all conflicts of interest that may affect the advice.
Remember ! - The legal obligations relating to the provision of financial advice
• Pt 7.7 of the Act. Part 7.7A deals with the ‘best interest’ duty.
• Arose out of the FoFA reforms introduced in 2012.
• On 13 December 2012 ASIC released guidance on the best interests
duty in an update to RG 175 Licensing: Financial product advisers —
conduct and disclosure.
• Regulatory guide was updated in October 2013.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• The best interest duty mean that a planner has 4 separate duties – a duty to:
• act in the client’s best interests
• provide advice that is appropriate
• provide an advice warning
• prioritise the client’s interests in the event of a conflict.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Act in the client’s best interests:
• Provide advice to a client that would leave them in a better position.
• This process should involve identifying and assessing the:
• client’s relevant circumstances and disclosing this through instructions.
Remember ! – The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Act in the client’s best interests:
• This process should involve identifying and assessing the:
• subject matter of the advice sought by the client.
• scope of the advice required.
• expertise of the advice provider.
• financial products that can be recommended.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Provide APPROPRIATE advice :
• Advice must only be provided if it would be reasonable to conclude that the advice is
appropriate to the client.
• Advice and recommendation meets the clients GENUINE goals and objectives
• Client in a better position
• Better position DOES NOT have equate perfect position
• Address the client special circumstances
• Address the risks associated with the advice and how they can be mitigated
• BEST PRCATICE highlight alternatives
• Provide an advice warning:
• Determining whether the client has provided all relevant information needed to enable
the adviser to provide advice that is in the best interests of the client.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Prioritise the client’s interests in the event of a conflict:
• Advice provider must prioritise the interests of the client if the advice provider knows
that there is a conflict between the interests of the client and the interests of the adviser.
Remember ! - Ethical and legal compliance issues
• Disclosure of remuneration:
• The disclosure of fees and has become an important and contentious issue within the
financial planning profession.
• Ethical and legal obligation to disclose all fees, commissions and any material interests that
may result from their recommendations.
• Refer to RG 175 and 182.
• Refer to sections 947B, 947C, 947D, 1013D and 1017D of the Act.
• Remuneration models vary within the financial planning industry and includes:
• commissions
• fee-for-service
• hourly rate.
• The FoFA package of reforms released in 2010 ban conflicted remuneration structures,
including commissions and volume-based payments effective from 1 July 2013.
• The ban currently excludes insurance products held outside of a member’s superannuation
accounts
Summary
• Key components of an SOA:
• covering letter
• contents page
• cover page
• executive summary
• scope of advice
• important information about the client
• what the client wants to achieve
• the advice to the client.
• Other disclosure requirements:
• The cost of the advice and how the planner is paid.
• Specific disclaimers.
• How to proceed.
• Appendices
• Consider the reason and the purpose of every section
• Consider compliance including BID, substance over form, professionalism and ethics
Lecture Nine
The Client Adviser Relationship
Conscious and unconscious Biases
Behavioural Finance
Lecturer: Nidal Danoun
n.danoun@unsw.edu.au
FINS3637: Wealth Management Advice
FINS5537: Financial Planning Advice & Ethics
FINS3637: Wealth Management Advice & Ethics
Lecture Four & Five
Providing Advice
&
Statement of Advice
Lecturer: Nidal Danoun
n.danoun@unsw.edu.au
References and Readings
• RG90
• RG175
• Thomson Financial Planning Handbook
• Financial Planning in Australia 2019 Essentials Edition, LexisNexis
• Financial Planning 2nd edition, Wiley
• Corporations Act (Chapter 7)
What is advice
Let us get back to basics – think about the following:
• What does the word or the term advice means to you?
• If you were looking for advice from a professional, a friend or a family
member, what would you expect from the person providing you the advice?
• i.e. listen, understand you, empathise with you, understand what advice
you are seeking and why, etc.
• In one or two words what would expect the advice to be?
• Tailored, personal, unbiased, not conflicted
• Would it be fair and reasonable to expect the above and for the advice to
be in your best interest?
What is advice – Some Dictionary definitions
• An opinion that someone offers you about what you should do or
how you should act in a particular situation
Cambridge English Dictionary
• Guidance or recommendations offered with regard to prudent future
action.
Dictionary Google
Synonyms: guidance, advising, counselling, counsel, help, direction,
instruction, information, enlightenment, etc
What is a statement of Advice?
Do you consider the SOA an advice document or a disclosure document?
The Statement of Advice (SoA)
An advice document striving to ensure the following:
• Acknowledging client's circumstances, needs, concerns goals and
objectives.
• Formulating a strategy consistent with the client's circumstances, needs,
concerns goals and objectives.
• Clearly and unambiguously sets out the advice (including its scope and
basis) and the reasoning that underpinned it.
• Meeting Best interest duty in spirit and in form
• Obtain clients acknowledgement and understanding of the advice
presented, and, if satisfied the authority to proceed.
• Compliant with the law and professionally presented.
The Statement of Advice (SoA)
Substance over form
The Spirit of the legislation should always be the aim.
Although the form is important and there a clear need to comply
with, the spirit is the key.
Best practice, compliance with the law, evidence and record
The Statement of Advice (SoA)
What is the reality on the ground?
ASIC Reports, PJC and senate
enquiries, FSI and Royal Commission,
The Current Regulatory Framework
The current disclosure regime produces
complex and lengthy documents that often
do not enhance consumer understanding of
financial products and services, and impose
significant costs on industry participants.
The Financial System Inquiry – Final Report
The Current Regulatory Framework
The Wallis Inquiry’s approach to consumer regulation was based
primarily on disclosure. It did not restrict either the design of financial
products or the type of financial products that could be marketed to
retail clients. The focus of consumer protection was on regulating
disclosure rather than products themselves. The disclosure regime was
implemented as a principles-based approach to allow maximum
flexibility for product issuers. However, it has subsequently been driven
by an industry culture of legal compliance, rather than a focus on how
best to inform consumers. This has resulted in lengthy and complex
documents, rather than short, targeted documents that highlight
product features, risks and rewards.
The Financial System Inquiry – Final Report
ASIC view of the SOA- Clear, concise and effective presentation
• RG 175.203 Clear, concise and effective presentation of SOAs
promotes understanding of advice by retail investors. We consider
that the presentation requirements are as important as the content
requirements in preparing an SOA.
• Regulatory Guide 90 Example Statement of Advice: Scaled advice for a
new client (RG 90).
• RG 244 also contains some examples of SOAs illustrating our
interpretation of clear, concise and effective disclosure.
ASIC view of the SOA- Clear, concise and effective presentation
RG 175.204 An SOA should:
(a) contain all key information in the body of the document instead of
relegating some key information to an appendix;
(b) be tailored to the client and not contain any irrelevant information such
as generic research or educational materials that are not relevant to the
SOA (this information can be made separately available to retail investors
on request); and
(c) avoid unnecessary repetition of content where it would not enhance
consumer understanding.
Note: Some consumers may not read the example SOA from cover to cover. Therefore, some repetition of
content may be used to ensure that important sections of the SOA can be read on their own without referring to
other sections.
ASIC view of the SOA- Clear, concise and effective presentation
. RG 175.205 Useful presentation tools include: (a) headings, irrespective of
the length of the document; (b) a table of contents; (c) a description of the
purpose of the document; (d) an executive summary to highlight the most
important information; (e) logical sequencing of information and grouping of
related information; and (f) tables and graphs that are clearly explained.
RG 175.206 Language should be used accurately and consistently throughout
the SOA
ASIC view of the SOA- Clear, concise and effective presentation
. RG 175.207 In particular, when preparing an SOA, providing entities should keep the following in mind:
(a)the existing SOA provisions are very flexible, and providing entities should take a flexible approach to
their SOAs (e.g. we expect providing entities to generally provide a short and simple SOA for short and
simple advice);
(b)extraneous information (i.e. information that the law does not actually require to be included in the
SOA, such as detailed research) should not be included if it results in the SOA not being clear, concise and
effective. If extraneous information is included, it should be clearly distinguishable from the mandatory
information;
(c)the clear, concise and effective obligation does not mean that information required by the SOA
provisions can be left out. Rather, the clear, concise and effective obligation affects the way that a
providing entity presents the required information. This includes trying to present the information in as
brief a manner as reasonably possible, without compromising its accuracy;
(d)the most important information in an SOA should be highlighted—for example, in an executive
summary that summarises the key information and indicates where more detail can be obtained. This is
especially important where the SOA is long (e.g. more than 10 pages);
ASIC view of the SOA- Clear, concise and effective presentation
(e)the longer the SOA, the more important it will be to include navigational aids such as a table of
contents;
(f)legal, industry or technical jargon should be avoided where possible, especially where advice is
provided to relatively unsophisticated clients;
(g)where the use of legal, industry or technical terms is unavoidable, the meaning of these terms should
be explained in simple, plain English; and
(h)there is no one ‘correct’ or ‘ideal’ format for an SOA—the law provides flexibility in tailoring the format
and presentation to the particular information needs of retail investors. Consumer testing can help a
providing entity to assess the effectiveness of various disclosure formats.
Note: When an SOA is required, it must be provided in printed or electronic form to the client. See RG 221
for information on how an SOA can be delivered digitally.
Providing the SoA
• The SoA must be provided at the same time, or as soon as practicable
after, personal advice is provided to a retail client. In any event, it
must be provided before any financial service related to the advice
is provided. For example, any request to transact or to implement the
adviser's recommendation – such as arranging for a financial product
to be issued – cannot be effected unless a SoA has been prepared and
presented to the client. As the SoA is the adviser's consideration of
clients' relevant circumstances and the adviser's recommendation
tailored to the client's needs and objectives, it is critical that clients
read and understand the advice before they decide to act on it.
Providing the SoA
• It is prudent, and a best practice encouraged by ASIC, for advisers to provide their clients with an adequate opportunity to
consider their advice before they are required to act upon it.
• The law does allow advisers to provide additional services, without first providing a SoA, in “time critical” cases where:
• the client has expressly instructed the adviser to act immediately or by a specified time; and
• it is not reasonably practicable to provide a SoA before acting in accordance with the client's express instructions.
• Advisers must provide clients with a SoA as soon as practicable after executing the client's instructions and within 5 days
of performing the service: see s 946C of the Corporations Act 2001.
• Advisers do not need to provide a SoA:
• if the client they are advising is not a retail client;
• If the advice relates to basic deposit products, non-cash payment products related to basic deposit products or
traveller's cheques;
• for products able to be traded on a licensed market, where the client has consented not to receive a SoA for
“further market-related advice”: s 946B. However, this exclusion requires that the client was previously provided
with a SoA (the initial advice) and further presumes that neither their relevant personal circumstances nor the
basis of the advice have significantly changed since the initial advice was provided. →Incorporate by reference
Types of SOAs
• Financial planning advice can generally be classified into three main
types:
• Issue specific or scaled advice.
• Comprehensive or holistic financial advice.
• Ongoing advice.
• Scaled advice is personal advice that is limited in scope.
• The Australian Government’s Future of Financial Advice (FoFA)
legislation aims to remove affordability barriers related to financial
advice.
Types of SOAs
• Issue specific or scaled advice:
• Addresses particular aspects of a client’s personal finances.
• Comprehensive or holistic financial advice:
• Developing a comprehensive financial plan to help meet a client’s overall
financial needs and goals.
• Ongoing advice:
• provided to ensure that financial strategies remain in line with objectives,
new strategies are developed to meet changing circumstances or to take
advantage of new opportunities.
The importance of effective communication in an SOA
• An SOA should provide:
• detailed strategies and projected outcomes for each of the recommendations
raised
• and how these will meet the client’s stated objectives.
• The SOA should be written in plain English and prepared with the
client’s level of financial sophistication in mind.
• Should also serve as an educative tool.
• Should not be used as a compliance tool or a mechanism to protect the
planner against liability.
The importance of effective communication in an SOA
• Regulatory Guide 168 Disclosure: Product Disclosure Statements (and
other disclosure obligations) contains ASIC’s Good Disclosure
Principles.
• Help product issuers and financial planners comply with the
disclosure requirements.
• Also promotes good disclosure outcomes for consumers.
The importance of effective communication in an SOA
• The Good Disclosure Principles (RG 168.2) consist of the following:
a) Disclosure should be timely.
b) Disclosure should be relevant and complete.
c) Disclosure should promote product understanding.
d) Disclosure should promote product comparison.
e) Disclosure should highlight important information.
f) Disclosure should have regard to consumers’ needs.
The importance of the planner-client relationship
• Technical knowledge and a comprehensive knowledge of financial
products will not be sufficient on its own.
• A planner needs to exhibit:
• excellent communication skills in order to develop a thorough understanding
and appreciation of the client’s personal, financial and emotional situation.
• competence in communicating strategies and concepts in terms that are
understood by the client and in a way that encourages the client to appreciate
the importance of acting upon the advice.
The importance of the planner-client relationship
• A significant body of research has looked into some of the more
important factors that determine an effective client–professional
relationship.
• Three types of trust are important:
• Trust in technical competence and knowhow.
• Trust in ethical conduct and character.
• Trust in empathic skills and maturity.
The importance of the planner-client relationship
• Obligations at the initial client meeting:
• Prior to engaging the services of a financial planner, an introductory meeting
takes place.
• Provides the means by which a financial planner and client are able to
ascertain the extent to which they have the confidence and trust to work
constructively together.
• If either party does not feel comfortable with the relationship, the financial
planning process should not continue.
Ethical and legal compliance issues
• Financial planners must be familiar with all regulatory requirements
as well as their professional obligations.
• Members of the FPA and Association of Financial Advisers (AFA) are
required to comply with a Code of Conduct.
• Members of the AFA are similarly guided by six principles of
professionalism that form the basis of the AFA Code of Conduct —
Principles of Practice.
Ethical and legal compliance issues
• Both sets of codes are based on the planner:
• having a fiduciary obligation to look after the best interests of the client
without bias or conflict
• and in a manner that establishes a relationship of trust, confidence and
discretion.
Ethical and legal compliance issues
• Client records:
• All information contained within a client’s file is stored safely and kept confidentially.
• Includes records such as SOAs, ROAs, letters, authorities to proceed, client invoices
and receipts.
• A 7-year period is specified by the Corporations Act and Anti-Money Laundering and
Counter-Terrorism Financing Act 2006.
• Must also strictly adhere to the guidelines of the Privacy Act 1988.
• Access to client records:
• The courts and ASIC have the right to access client records as part of any investigation.
• Ownership of client records:
• Clients have the right, at all times, to be able to identify the licensee who bears the ultimate
liability for the advice provided.
Ethical and legal compliance issues
• Disclosure of remuneration:
• The disclosure of fees and has become an important and contentious issue within the
financial planning profession.
• Ethical and legal obligation to disclose all fees, commissions and any material interests that
may result from their recommendations.
• Refer to RG 175 and 182.
• Refer to sections 947B, 947C, 947D, 1013D and 1017D of the Act.
• Remuneration models vary within the financial planning industry and includes:
• commissions
• fee-for-service
• hourly rate.
• The FoFA package of reforms released in 2010 ban conflicted remuneration structures,
including commissions and volume-based payments effective from 1 July 2013.
• The ban currently excludes insurance products held outside of a member’s superannuation
accounts
Important components of an SOA
• There is no set format or template for an SOA, s. 947B(2) of the Act
does set out a range of issues that are common to every SOA.
• RG 175.151 sets out the information that is required to be disclosed
within an SOA.
• The main components of an SOA:
• the title ‘statement of advice’ must be disclosed on the cover or at the front
of the SOA, as well as other disclosures (such as contact details, basis for
advice, etc.)
Important components of an SOA
• The main components of an SOA:
• covering letter
• contents page
• cover page
• executive summary
• scope of advice
• important information about the client (current situation,
personal financial statements)
• what the client wants to achieve
• the advice to the client (Strategy and recommendation).
• The main components of an SOA:
• Other disclosure requirements:
• The cost of the advice and how the planner is paid.
• Specific disclaimers.
• How to proceed.
The Client-Adviser Relationship
The financial-planning process
• A financial plan documents:
– where a client is now
– where they want to go
– how they will get there.
• A financial plan considers:
– relevant timeframes relating to goals
– an analysis of client tolerance for risk.
The 6 steps of the financial planning process
We’ll go through these key steps discussing what is
involved
• Step 1
• Step 2
• Step 3
• Step 4
• Step 5
• Step 6
Collect and assess the financial data of the client.
Determine the objectives and goals of the client.
Identify any financial problems that may exist.
Prepare a written plan.
Obtain informed consent and Implement the agreed
written plan.
Establish an ongoing pattern of review.
Constructing a Statement of Advice
Steps in the financial-planning process
Constructing a Statement of Advice
Step 1: Collect client data
• Life cycle
• Each life stage presents differing issues and problems.
• There are a number of identified life stages
• Savings versus consumption phase
• Early family formation
• Wealth accumulation phase
• Approaching retirement
• Post-retirement.
Constructing a Statement of Advice
Step 1: Collect client data
• Step 1 Data Gathering
– Adviser must give a Financial Services Guide
(FSG) to a person as soon as practicable once
it is clear they may become a client.
– FSG should include:
• Identity of AFSL holder and authorised
representative status
• Services available
• Associations
• Fee disclosure
• Dispute resolution processes.
Constructing a Statement of Advice
Step 1: Collect client data
• Quantitative data
• The information in this category includes:
• financial data
• personal information as to age and investment time horizons
• financial objectives.
• Qualitative data
• The information in this category includes:
• goals and objectives
• issues and concerns
• preconceptions as to the client’s needs in retirement
Constructing a Statement of Advice `
Step 1: Collect client data
• Data collection instruments are many and varied, but
the information collected will include:
– personal details
– current situation
– financial position
– goals and objectives
– risk tolerance
– insurance and risk management issues
– Investments
– superannuation and retirement
– social security
– estate planning.
Constructing a Statement of Advice
Step 2: Determine the objectives and goals of the client
• Step 2 Analysis and Strategy Formulation
• Needs to determine:
– current cash flow
• surplus (savings capacity)
• deficit (debt or asset sales).
– net worth
• statement of assets and liabilities.
– goals
• what assumptions about the future are realistic?
• what goals are achievable?
Constructing a Statement of Advice
Step 2: Determine the objectives and goals of the client
• Establish risk tolerance.
• Review risk profile instrument.
– See example www.finametrica.com.au
• Categorise client as a risk profile type.
• Relate risk profile to asset allocation.
• Consider principles of behavioural finance.
Constructing a Statement of Advice
Risk tolerance
• Risk is the uncertainty of the expected investment returns actually
being delivered and is measured by the volatility of investment
returns.
• Risk tolerance is a measure of an individual’s willingness to accept
a level of investment risk in exchange for higher potential returns.
– Attitude to risk
• Risk Capacity → the risk the investor can afford to take
– Risk budget
Constructing a Statement of Advice
Risk tolerance
• Some of the key ingredient of a client risk profile
– Risk Tolerance
– Risk Capacity
– Goals and objectives
– Time horizon
– Liquidity and income needs
– The investor investment experience
– Special circumstances
• Limitation of risk profiling questionnaires
– Starting point and not the main decider
Constructing a Statement of Advice
Risk Profile
• Risk Profile Categories
– Very conservative
– Conservative
– Average investor
– Growth investor
– Aggressive growth investor.
• Goal based risk profiling
Constructing a Statement of Advice
Step 3: Identify problems
• Step 3 Identify problems
• Problems may include:
– inadequate insurance
– inadequate retirement saving
– spending exceeding income
– excessive high interest and non-deductible debt, such as
credit card debt
– poor financial administration and record keeping
– tax inefficient ownership of assets and structures that do
not maximise social security entitlements.
Constructing a Statement of Advice
Steps 2 and 3: Identify goals, objectives, issues, financial situation
• If, after analysis, some goals are unattainable or not
obtainable within the timeframe the client has set, then
the financial adviser must work with the client to
• determine trade-offs
• prioritise the goals.
• Assumptions
• The financial adviser will have to make certain assumptions.
• The financial adviser must ensure that the client understands
the need for these assumptions and how they will impact the
advice being given.
• These assumptions will need to be tested at each annual
review.
Constructing a Statement of Advice
Step 4: Structuring the Statement of Advice (SOA)
• Step 4 Written SOA
• Test scenarios, then document conclusions and
recommendations about
– insurance and estate planning
– adequacy of retirement savings program
– asset allocation (consistent with risk profile)
– investment vehicles
– investment products.
• The Statement of Advice is a comprehensive
document with explicit recommendations to meet
client goals.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Most SOAs are written with a standardised format.
Tostart they have
• a personalised and complying covering letter
• a standardised and complying cover page
• an Executive Summary that provides the client with a general
understanding of the actions recommended and a summary of
expected outcomes
• a table of contents that clearly outlines the structure of the SOA.
• The covering letter should
• be written on letterhead with contact information (address,
telephone number, email, etc.).
• include the name of the licensee and its licence number and ABN .
• be signed by the financial adviser, stating that he or she is an
Authorised Representative (or Representative) of the Licensed
Dealer.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Cover page
• All SOAs require a cover page that provides the
following information:
• that it is a Statement of Advice
• the name of the recipient
• the date the SOA becomes effective
• the name and contact details of the financial adviser who
provided the SOA
• the name and contact details of the licensee who authorised
the SOA
• a statement that the SOA is private and confidential.
length and in bullet point form.
• Table of Contents
• This page clearly outlines the structure of the plan and can be used
in future to locate specific sections of the plan.
• All pages should be numbered, even those in appendices.
• Use major headings so that the plan does not seem to be overly
complex.
• The body of the SOA usually has six distinct parts:
• The basis for advice
• The recommendations
• An implementation schedule
• Fee disclosures and disclaimers
• Client sign-off with authority to proceed
• Appendices including product disclosure statements.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Executive summary
• The Executive Summary should be no more than two pages in
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Cash flow and balance sheet
• Risk tolerance assessment
• Assumptions
• Concerns and issues.
• The recommendations statement of strategy
• The client needs to see a clear statement of the strategy
behind the recommendations.
• The strategy must be flexible enough to deal with the likely
changes of circumstances.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Risk Management should include strategies for coping
with:
• the death of the client(s) and loss of financial stability for
their dependants
• accidents causing permanent and total disablement to the
client(s) or a dependant
• loss of the ability to earn an income due to illness or accident
• the costs associated with a traumatic illness
• the need for private hospital cover.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• It is important to discuss strategies for risk
management, such as:
• avoidance or elimination of the risk
• often not possible.
• management and control
• to some extent possible
• can lower insurance premiums.
• self-insurance
• transfer of the risk.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Estate planning
• Most clients are uncomfortable discussing death, Wills
and disposal of their wealth.
• However, it is important to point out to clients the
importance of having a written structure (a Will) to
back up their wishes on the transference of their
wealth.
• In this section, there is tendency to include generic
information (i.e related to wills and POA). Avoid using
large volume of generic information and try at all time
to relate information to the clients specific
circumstances.
• While the adviser is not a legal practitioner, it is the adviser’s
responsibility to discuss these matters with the client and
prepare the client for a visit to an appropriate legal professional.
• Such discussion should revolve around issues such as Wills,
beneficiaries, trust mechanisms to preserve assets, insurances and
other taxation structures, as well as powers of attorney.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Taxation
• While no strategy should be recommended simply for
tax reduction purposes, a financial adviser must
thoroughly understand the tax implications of the
recommended strategy and product selected.
• Wherever a discussion of taxation occurs, the financial
adviser must clearly inform the client that he or she is
not a tax adviser.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Investment recommendations
• Investment recommendations first need to be generic
and should move from the most tax-effective (usually
superannuation) to the least tax effective (usually
managed funds).
• Each recommendation must be referenced to the
client’s risk tolerance asset allocation or the asset
allocation agreed to by the client.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Within the investment strategy, it is important to
consider the most appropriate investment vehicles (tax
structures). For example:
• holding assets personally (direct investments)
• unit trusts
• insurance bonds
• superannuation-based investments
• retirement and non-retirement income streams.
• For most clients, investment recommendations will be a
mix of all of the above.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Superannuation, retirement planning and social
security issues
• In relation to retirement planning, there are both financial
and emotional considerations.
• It is the role of the adviser to look at the client holistically and
view retirement first as a lifestyle choice.
• Specific product recommendations
• After the generic discussion on strategies, specific products
must be recommended.
• It is necessary to clearly identify the characteristics of each
product, the product provider and how the product matches
the client’s risk profile and financial needs.
• Each and every product should be fully justified.
• Post-implementation cash flow
• The client must be able to see that they can afford to
implement the recommendations.
• A post-implementation cash flow will show the client that
he or she still has enough money to manage daily living requirements, even
after implementing the recommendations.
Fees and commissions
• The regulatory environment and best practice require that a
financial adviser disclose all fees and commissions to the
client in dollar and percentage terms.
• Disclosure of capacity
• The financial adviser reminds the client what areas of
financial advice he or she may provide and the types of
products and services he or she can offer.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Disclaimers
• act as a warning as to how the information provided in the
plan can be used and that it is specific to the client and not
for general use.
• point out to the client upon what the client can rely.
• are used to avoid possible legal action by making the client
aware of the scope of the advice.
• Monitor and review process
• This needs to be personalised for the specific client.
• The client needs to know what the annual review process will
be, what will be discussed, and the cost.
Constructing a Statement of Advice
Step 4: The preparation of a written plan
• Implementation schedule
• This schedule is a detailed statement of all actions, including
the completion of forms, the drawing of cheques and the
making of appointments that the client and the financial
adviser need to undertake, in order to implement the plan.
Constructing a Statement of Advice
Step 4:The preparation of a written plan
• Authority to proceed
• The Authority to Proceed is a formal business letter provided by
the financial adviser for the client to sign. It asks the client to
confirm that he or she has received and read the Financial
Services Guide, agrees with the risk tolerance assessment, has
received and read the Privacy Statement, and so on.
• The client(s) to sign and date the document.
• Appendices
• Appendices should be strictly limited.
• They should contain the financial worksheets that back up
the recommendations in the SOA and summary graphs.
The Client-Adviser Relationship
Step 4: Structuring the Statement of Advice (SOA)
• Step 4 Written SOA
• Test scenarios, then document conclusions and
recommendations about
– insurance and estate planning
– adequacy of retirement savings program
– asset allocation (consistent with risk profile)
– investment vehicles
– investment products.
• The Statement of Advice is a comprehensive
document with explicit recommendations to meet
client goals.
Constructing a Statement of Advice
Step 5: Recommendations and implementation
• Step 5 Implementation
• Authority to Proceed - informed concent
• Critically important phase
• Cements future relationship with client
• Implementation schedule designed and
documented
• Client service agreement signed
• Summary of client–adviser agreement
– confirms actions as specified in written SOA.
Constructing a Statement of Advice
Step 5: Recommendations and implementation
• Step 5 Implementation → Implement the agreed plan
• Authority to Proceed - informed concent
• Critically important phase
• Cements future relationship with client
• Implementation schedule designed and
documented
• Client service agreement signed
• Summary of client–adviser agreement
– confirms actions as specified in written SOA.
• The implementation of the recommendations can make or break
the relationship with the client.
Constructing a Statement of Advice
Step 6: Review and monitor
• Scheduled reviews are essential to allow for the changing
nature of the client’s circumstances and that of the external
environment (legislative, market, economic, other, etc).
• The adequacy of the client’s insurance cover and or investment
should be reviewed.
• Where additional actions need to be taken by the client
and or the client’s circumstances have significantely
changed , a new SOA needs to be issued.
Constructing a Statement of
Advice Step 6: Review and monitor
• Step 6 Monitor and Review
• Agreement about the terms of the ongoing
relationship with the client
• Necessary to ensure currency and
appropriateness of plan for client needs
• Completes the planning process
• Frequency of review depends on many factors
– e.g. how often, size of portfolio, market changes.
• Generally annual reviews are recommended.
Appendix
Constructing a Statement of Advice
Critical elements
• The SOA provides details of:
• the basis for the advice
• the rationale behind the advice
• a restatement of the advice, its benefits and drawbacks
• benchmarks that the client can use to measure progress
towards goal achievement
• the cost of implementation of the plan and any other
benefits the financial adviser may receive
• a detailed implementation plan.
Remember ! - Disclosure documents required in respect of the provision of financial products
• Statement of advice (SOA):
• An SOA must include:
• the name of the party providing the advice
• a statement setting out the advice
• the reasoning or basis that led to that advice
• the remuneration and other benefits received by the provider of the advice
• all conflicts of interest that may affect the advice.
Remember ! - The legal obligations relating to the provision of financial advice
• Pt 7.7 of the Act. Part 7.7A deals with the ‘best interest’ duty.
• Arose out of the FoFA reforms introduced in 2012.
• On 13 December 2012 ASIC released guidance on the best interests
duty in an update to RG 175 Licensing: Financial product advisers —
conduct and disclosure.
• Regulatory guide was updated in October 2013.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• The best interest duty mean that a planner has 4 separate duties – a duty to:
• act in the client’s best interests
• provide advice that is appropriate
• provide an advice warning
• prioritise the client’s interests in the event of a conflict.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Act in the client’s best interests:
• Provide advice to a client that would leave them in a better position.
• This process should involve identifying and assessing the:
• client’s relevant circumstances and disclosing this through instructions.
Remember ! – The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Act in the client’s best interests:
• This process should involve identifying and assessing the:
• subject matter of the advice sought by the client.
• scope of the advice required.
• expertise of the advice provider.
• financial products that can be recommended.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Provide APPROPRIATE advice :
• Advice must only be provided if it would be reasonable to conclude that the advice is
appropriate to the client.
• Advice and recommendation meets the clients GENUINE goals and objectives
• Client in a better position
• Better position DOES NOT have equate perfect position
• Address the client special circumstances
• Address the risks associated with the advice and how they can be mitigated
• BEST PRCATICE highlight alternatives
• Provide an advice warning:
• Determining whether the client has provided all relevant information needed to enable
the adviser to provide advice that is in the best interests of the client.
Remember ! - The legal obligations relating to the provision of financial advice
• Best interest duty and safe harbour provisions:
• Prioritise the client’s interests in the event of a conflict:
• Advice provider must prioritise the interests of the client if the advice provider knows
that there is a conflict between the interests of the client and the interests of the adviser.
Remember ! - Ethical and legal compliance issues
• Disclosure of remuneration:
• The disclosure of fees and has become an important and contentious issue within the
financial planning profession.
• Ethical and legal obligation to disclose all fees, commissions and any material interests that
may result from their recommendations.
• Refer to RG 175 and 182.
• Refer to sections 947B, 947C, 947D, 1013D and 1017D of the Act.
• Remuneration models vary within the financial planning industry and includes:
• commissions
• fee-for-service
• hourly rate.
• The FoFA package of reforms released in 2010 ban conflicted remuneration structures,
including commissions and volume-based payments effective from 1 July 2013.
• The ban currently excludes insurance products held outside of a member’s superannuation
accounts
Summary
• Key components of an SOA:
• covering letter
• contents page
• cover page
• executive summary
• scope of advice
• important information about the client
• what the client wants to achieve
• the advice to the client.
• Other disclosure requirements:
• The cost of the advice and how the planner is paid.
• Specific disclaimers.
• How to proceed.
• Appendices
• Consider the reason and the purpose of every section
• Consider compliance including BID, substance over form, professionalism and ethics
