Module 2
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FINANCIAL PLAN &
PROVIDING ADVICE
McKeown (2021) chapter 2,12
ASIC RG175
FOFA - ASIC guidance
LEARNING OUTCOMES
• Explain the advice process and assess its regulatory compliance
• Explain the best interest duty and safe harbour
• Explain and perform steps to know the clients
• Apply the life cycle theory to anticipate and assess goals and needs
• Evaluate life and financial goals
• Conduct financial literacy and risk profile assessments
• Prepare and interpret a household financial statement and budget
• Identify inconsistency in client goals and financial plan and suggest
solutions
• Explain the structure of a statement of advice and assess its quality
and regulatory compliance
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. . .
.MODULE 2.1
OVERVIEW OF ADVICE
CONDUCT AND
DISCLOSURE REQUIREMENTS
THE CORPORATIONS ACT AND REGULATORY GUIDELINES 175
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• Financial product advice regulation is under Part 7 of the
Corporations Act
 Key amendments due to FOFA, which became effective on 1 Jul 2013
• ASIC clarifies the implementation of the law via various Regulatory
Guidelines
 RG121 Doing financial services business in Australia
• Setting up a business Australian Financial Service license
 RG175 Licensing: Financial product advisers - Conduct and
disclosure
• Conducting the financial advice business
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RG 121 RETAIL VERSUS WHOLESALES CLIENTS
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• A person may fall within the definition of a wholesale client if, among
other things, they are:
 a person purchasing a financial product where the value of the
product is above $500,000
 a person with certified net assets of at least $2.5 million or a person
who had a gross income for each of the past two financial years of at
least $250,000; or
 a ‘professional investor.’ This category includes AFS licensees, listed
entities, banks and friendly societies, and other entities that may be
presumed to have the expertise or access to professional advice to
justify their being treated as wholesale.
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RG175 DEFINES DIFFERENT TYPES OF FINANCIAL PRODUCT ADVICE
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• ASICs keeps a register of Australian Financial Service Licensee (AFSL) and
their authorized representatives/financial advisers
• Financial planners may give
 General advice
 Personal advice
• Default is comprehensive advice
• Scaled advice
• Attention when giving
o Switching advice
o Tax (financial) advice
• Requires Tax Practitioners Board’s (TPB) approved training
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KEY COMPLIANCE REQUIREMENTS POST-FOFA
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• Conduct and Disclosure: RG 175 (July 2021)
 Record keeping
 Pre-engagement
• Financial Services Guide (FSG) and customer identity verification
 General advice warning
 Personal advice
• Best Interest Duty
• Statement of Advice (SOA) requirements
• Remuneration Disclosure and Format
• Product disclosure statements (PDS): RG168
• Annual Fee Disclosure Statement (FDS): RG 245
• Conflicted Remuneration Ban: RG 246
• Opt-In Letter: FOFA (annual since 2021)
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FIGURE 1: OVERVIEW OF CONDUCT & DISCLOSURE OBLIGATIONS
8
THE SIX-STEP FINANCIAL PLANNING PROCESS
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1. Collect and assess the financial data of the client
2. Determine the objectives and goals of the client
3. Identify any financial problems that may exist
4. Prepare a written plan which contains alternatives and
recommendations
5. Implement the agreed written plan
6. Review the plan
Note: RG146 skills requirements mirror this list
There are 1-3 that are slightly different from the order for the Fin Plan Std Boards.
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BEST INTEREST DUTY
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• A reasonable advice provider would believe that the client is
likely to be in a better position if the client acts on the advice
 Does not impose a ‘perfect advice’ standard
 Assessed objectively on facts existing at the time advice is
provided
• Client objectives, situations, and needs
• Understanding and confidence
• Risk realignment and product features
RECORD KEEPING, COMPLIANCE RISK MANAGEMENT
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• Information gathering and record keeping by the licensee
 The Corporations Act and Anti-Money Laundering and Counter-
Terrorism Financing Act 2006 specify seven years.
 Must also strictly adhere to the guidelines of the Privacy Act 1988
 Subject to compliance audit
• Use standardised, reliable, and valid risk tolerance assessment
• Use simple, appropriate, goal-based strategies
• Full disclosure and informed consent
 Avoid “misleading and deceptive conduct,” i.e., avoid omission
NON-COMPLIANCE PENALTIES
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• ASIC’s Penalties
 Fines
 Enforceable undertaking
 Remove or limit the license
 Bans an adviser
.STEP 1 & 2 –
KNOW THE CLIENT
Module 2.2
WHAT SHOULD A FINANCIAL ADVISOR
HAVE DONE BY THIS TIME?
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. . .
FINANCIAL SERVICES GUIDE (RG175 SECTION C)
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• Financial advisors provide their clients with the FSG as soon as practicable
• Anti-Money Laundering and Counter-Terrorism Finance Act 2006 requires
advisers to verify client identity and report suspicious activity
• RG 175.108 specifies, among others,
 Identity of AFS Licensee and authorised representative status
 Kinds of financial services
 Fee structure
 Dispute Resolution Processes
FEE STRUCTURE DISCLOSURE
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• Permissible fee structure
 Plan fee
 By the hour
• Conflicted remuneration is banned
 Product commissions: investment products
 Product fee: split from platform management fee, investment
management fee, and volume-based fees
 Soft-dollar incentives: product provider-sponsored events, trips,
facilitate, etc.
DISCLOSURE OF LACK OF INDEPENDENCE
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• Implementation of a Royal Commission recommendation is reflected in the 2021
Jun version of RG175
• Restricted use of terms like “independent.”
 Can’t use it when the adviser OR dealer OR other advisers have conflicted
remuneration
• Mandatory prominent disclosure of lack of independence in the FSG
 The ASIC Corporations (Disclosure of Lack of Independence) Instrument 2021/125
sets out the requirements for the lack of independence disclosure statement.
 (a) must appear on the first substantive page of the FSG
 (b) must appear within a box and under a bold heading that includes the phrase ‘Not
Independent’ or ‘Lack of Independence,’ or another phrase of similar meaning
KNOW THE CLIENT: STEP 1 - COLLECT CLIENT DATA
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• Usually a combination
 Chats
 Questionnaire instrument (the “Factfind”)
 Interview
QUALITATIVE DATA
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• Employment
• Family relationships
• Lifestyle and habits
• Life goals and objectives
• Issues and concerns
• Client’s needs in retirement
• Clarify and verify a common understanding
ASSESSED DATA
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• Financial Literacy Assessment
• Risk Tolerance Assessment
• Longevity Risk Assessment
RISK TOLERANCE ASSESSMENT
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• A complete discussion of
 the client’s risk tolerance
 what benchmark asset allocation will the client need to accept to
achieve their goals
• For joint investment recommendations, discussion of how
individual risk tolerance assessments can be aggregated
LONGEVITY RISK ASSESSMENT
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• Longevity risk of an individual is the risk of outliving the savings
after retirement. Half of the people live past the expected age!
• ABS life expectancy at birth is the average number of years a
newborn is expected to live.
• Life expectancy at current age www.mylongevity.com.au
Age Now Disability-free years
Years with
some
disability
Dependent
years Totals
65 8 7 4 19
75 4 5 3 12
85 1 2 3 6
QUANTITATIVE DATA
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• Financial resources (household financial statement)
 Income and expenditure statement
 Balance sheet
• Financial objectives
 Timing and level of future income required
STEP 2: CLIENT’S OBJECTIVES AND GOALS
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• Determine client goals for the
 Short Term usually < 12 months
 Medium Term usually 1–5 years
 Long Term usually > 5 years
• Horizon, dollar value, and other
constraints
• Prioritise goals and determine
trade-offs
EXPLORATION TOOL: LIFECYCLE THEORY
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Each life stage presents its issues
1. Savings versus consumption phase
2. Early family formation
3. Wealth accumulation phase
4. Approaching retirement
5. Post-retirement
.STEP 3 - BUDGET,
ASSESS
AND TROUBLE SHOOT
Module 2.3
BUDGETING AND SAVING
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• No saving, no sure path to wealth!
• https://www.moneysmart.gov.au/
• Estimating income
• Estimating expenditure
• Preparation of a cash budget
 Comparison of actual to budget
CONSTRUCTING BUDGET FROM SCRATCH
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• Home, safe, and computer
• Bank account and credit card statements
• Loan, mortgage, and land title documents
• Investment holding and distribution statements
• Various salaries and bills
• Tax returns and assessments
SAVINGS TIPS
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• Budget is one way
 Plan for fun
 Allow for lifecycle differences
• Pay Yourself First is another
 Utilize direct deposits and automatic transfers
• Remind the client of the life goals in saving and investing
COMMON LIFESTYLE FINE-TUNING SOLUTIONS
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• Save more and spend less
• Work longer
 Spouse back to work
 Postpone planned retirement
• Accept a lower income in retirement
• Accept a higher level of investment risk and seek higher returns
 With caution and warning
ASSESSING FINANCIAL POSITION
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• Use of financial ratios to assess financial position and habits
 Solvency (Net worth) ratio = Total net worth/ total asset
 Liquidity ratio = Liquid asset / current debt
 Savings ratio = cash surplus/income after tax
 Debt service ratio = total monthly loan payment / monthly gross
income
AN EXAMPLE: THE O'BRIEN'S
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• John (computer analyst) and Irene (sales rep) O’Brien, in their
mid-20s, have been married for 4 yrs.
• Savings
 $15,000 equity in their home and other assets.
 $10,000 in saving accounts and stocks.
• Family income > expense; therefore, did not do a financial plan
• Irene has just learned that she is two months pregnant
ASSETS AND LIABILITIES
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INCOME AND EXPENDITURE STATEMENT
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INCOME AMOUNT
John $38,350
Irene $26,000
Total Income $64,350
INCOME AND EXPENDITURE STATEMENT
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EXPENSES AMOUNT EXPENSES AMOUNT
Mortgage payments $8,000 Homeowner’s insurance premiums $400
Gas, electric, water & rates $3,390 Auto insurance premiums $800
Phone $640 Income taxes paid $16,940
Cable TV $480 Vacation (trip to Europe) $5,000
Food $4,200 Recreation and entertainment $4,000
Auto loan payments $2,150 Credit card loan payments $2,210
Transportation expenses $2,800 Purchase of shares $7,500
Medical expenses -
unreimbursed
$600 Addition to money market account – Cash
Fund
$500
Clothing expenses $2,300
Total Expenses $61,910
CASH SURPLUS (DEFICIT) $2,440
KEY RATIOS
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• Solvency (Net worth) = $28,745/$104,070 = 27.6%
• Liquidity = $3,070/$2,675 = 1.15%
• Savings = $2,440/(64,350–$16,940) = 5.1%
• Debt Service
 Debt service = $8,000 + $2,150 + $2,210 = $12,360
 Gross income = $64,350 (two income) => 19.2%
= $38,350 (one income) => 32%
WHAT PROBLEMS COULD BE EXPECTED
FOR THE O'BRIEN'S IN FUTURE?
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. . .
.STEP 4 –
WRITE THE PLAN
Module 2.4
ACTIONS AND TEAMWORK
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• Document all prior data collection and disclosure
• Paraplanners are used in larger firms
• Technical (e.g., tax, superannuation, legal) advisors may be
consulted
RG 175 SECTION D ON STATEMENT OF ADVICE (SOA)
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• The obligation to prepare and provide an SOA applies to
personal advice given to retail clients
• Does not apply to general advice and non-retail clients
• Specifies what must be included in an SOA
• Specifies how to present Clearly, Concisely, and Effectively
TYPES OF STATEMENT OF ADVICE
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• Comprehensive advice (default) SOA
• Scaled (limited) SOA
• No-advice SOA
 Disclaimer document in which the client confirms that no advice was
sought
• Record of Advice (ROA)
 <$15k to be invested
 Free advice, or
 Further advice (subject to conditions)
SOA MUST HAVE:
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• The title ‘Statement of Advice’ on the cover
• Name, contact, and AFSL of the providing entity/licensee
• The advice and The basis of advice
• The remuneration, commission, and other benefits
• Incomplete or inaccurate information warning
• Additional information for switching advice
RG175 REQUIREMENTS OF “THE ADVICE”
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• Clear, Concise, and Effective Presentation
 All critical information in the body and not an appendix
 Tailored to the client
 Avoid unnecessary repetition of content
 Language should be used accurately and consistently throughout
the SOA
 Clearly and unambiguously set out the providing entity’s advice
THE COMPONENTS OF AN SOA
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• Cover and Contents page
 A description of the purpose of the document
• An Executive Summary to highlight the most critical information
• Scope of Advice
• Important information about the client
• Client goals
• The advice to the client
 Logical sequencing of information and grouping of related information
 Tables and graphs that are clearly explained
• See M (2021) p. 466-479.
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(s961B(2) and RG175 Section E)
BEST INTEREST DUTY ‘SAFE HARBOUR’ SUMMARY
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1. Identify the objectives, financial situation, and needs of the
client
2. Identify the subject matter of the advice sought
3. Identify the client’s relevant circumstances and make
reasonable inquiries to obtain complete and accurate
information
4. Decline to provide advice if lacking expertise
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(s961B(2) and RG175 Section E) (CONT.)
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6. If recommending a financial product, investigate financial
products and assess the results
7. Base all judgments on the client’s relevant circumstances
8. Take any other steps in the client’s best interests
EXECUTIVE SUMMARY
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• No more than two pages in length and bullet point form.
• Sets out the vital personal details of the client
• Summarises the client’s goals and objectives
• States each main recommendation
• The expected outcomes
• Confirm likely goal achievement
• Warning about projections
THE BODY OF A TYPICAL SOA
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• The basis for advice
• The advice
• An implementation schedule
• Disclosures and disclaimers
• Authority to Proceed
• Appendix
RG175 REQUIREMENTS OF “THE BASIS FOR THE ADVICE”
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• The subject matter of the advice that the client has sought
• The scope of the advice
• The client’s relevant circumstances
• The range of financial products or strategies considered and
investigated
• Why were the advice and recommendation considered
appropriate?
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• How the advice provider has acted in the client’s best interests
 a reasonable advice provider would believe that the advice is
likely to leave the client in a better position
• Disclose if a providing entity’s recommendations are restricted
to products from an approved product list
• Tax considerations
• Significant risks that the client will bear about acquiring any
recommended:
 financial product specifically; and
 class of products generally
THE BASIS FOR ADVICE
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• A clear and concise restatement of all the pertinent client
information
• Current and future cash flow and saving estimates
• A chart/table of the client’s assets and liabilities
• An analysis of the client’s current investments
• A complete discussion of the client’s risk tolerance
• A discussion of the client’s concerns and issues that may
impede goal achievement
• A list/discussion of all personal and financial assumptions
ASSUMPTIONS
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• The SOA needs to state the assumptions
 Personal, Environmental, Returns
• The financial advisor must ensure that the client understands
 the need for these assumptions and
 how will they impact the advice being given
• These assumptions will need to be tested at each annual review
INVESTMENT ADVICE (DETAILS IN LATER MODULES)
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• Strategy
 Investment vehicle (tax and asset protection driven)
 Asset class (return and risk tolerance driven)
• Implementation
 Securities, deposits, fund selection
OTHER ADVICE (DETAILS IN LATER MODULES)
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• Superannuation
• Retirement Planning
• Social Security
• Risk management and asset protection
 Insurance
 Estate planning
TAXATION
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• Tax advice should be consistent with the client’s ability to accept
the legislative risk
• Wherever a discussion of taxation occurs, the financial advisor
must inform the client whether they are also a tax
(financial) advisor
• Since July 1st, 2014, financial advisors may complete Tax
Practitioner’s Board-approved courses to become registered as
a tax advisor.
• New rules apply from Jan 2022. More information
OTHER COMPONENTS OF A SOA
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• Monitor and Review Processes
• Implementation Schedule
• Disclosure of Capacity and Disclaimers
• Authority to Proceed
• Appendices
.STEP 5 & 6 -
IMPLEMENTATION,
REVIEW &
ON-GOING SERVICE
Module 2.5
STEP 5: IMPLEMENT THE AGREED PLAN
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. .
• The implementation of the recommendations can make or
break the relationship with the client.
• It is the financial advisor’s responsibility to monitor the
implementation process, ensuring that each step is completed
promptly and accurately.
STEP 6: REVIEW THE PLAN
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. .
• Essential to allow for the changing
 nature of the client’s circumstances
 external environment
 financial markets
• the same items as that of the initial client review, but the focus
is on changes
• Review of strategy, investment portfolio performance and
insurance, etc
FEE DISCLOSURE STATEMENT (S962C & RG245)
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. .
• AFSL or their representative who enters into the ongoing fee
arrangement with a client must provide a FDS within 60 days
of the arrangement anniversary that
 is consumer friendly, concise, and easy to read
 contains information from the previous 12-month period about:
• the amount (in Australian dollars) of each ongoing fee paid in the
previous year
• information about the services that the client was entitled to
receive AND received
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OPT-IN OBLIGATION
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. .
• Advice providers to renew their clients' agreement to ongoing
fees every two years since 2013 and every year since Jul 2021
• The opt-in letter on every anniversary is a forward-looking fee
arrangement for ongoing service
• Advisers need to stop charging fees if a client declines the fee
arrangement or does not accept it within 60 days
• No need to sell position, but clients will be in DIY status
SUMMARY
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. .
• The 6-step financial planning process and RG175
 Retail client, FSG, SOA, PDS, lack of independence disclosure, best interest
duty, safe harbour, record keeping, and penalties for non-compliance
• Steps 1-3 Know the clients
 Apply the life cycle theory to anticipate and assess goals and needs
 Evaluate life and financial goals
 Conduct financial literacy and risk profile assessments
 Prepare and interpret a household financial statement and budget
 Identify inconsistency in client goals and financial plan and suggest
solutions
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• Step 4 Providing advice
 The structure of a statement of advice SOA
 Assess the quality and regulatory compliance
• Safe-harbour provisions
• Step 5-6 Implementation and On-going Review
 FDS and Opt-In requirements
• What’s new since Jun 2021