Many new entrants to the financial advice sector, particularly accountants (who are now required to obtain a licence in order to provide advice on self-managed super funds (SMSFs) from 1 July 2016), have told us that they would like to take greater advantage of our depth of knowledge in the investments and advice space. FOS’s expertise has been further enhanced with the recent appointment of Dr June Smith as Lead Ombudsman (Investments and Advice).
When providing personal financial advice to retail clients, there are a few things to keep in mind to ensure you can avoid disputes. It might sound like common sense, however, best practice is to always act in the interests of clients, prioritise the client’s interests and provide appropriate advice.
Here are FOS’s top 10 tips for financial advisors:
1. Take detailed file notes
FOS relies on evidence provided by the parties to a dispute. Documents created at the same time as the activity or advice in question are usually given more weight than later recollections of what was said or done.
This means contemporaneous file notes of conversations and actions are solid gold when a dispute comes to us.
Whenever possible, confirm verbal instructions from a client in writing (eg send them an email after a telephone conversation confirming what was said). Statement of Advice and file notes should detail how any conflicts between goals, available resources and willingness to take risk are resolved.
2. Clear goals and strategy
We do not consider client objectives and instructions written in industry terms that few clients would understand to be a reliable record.
Write down a client’s objectives in the words the client has used in answering your questions about their objectives and how to quantify those objectives. This demonstrates that you have heard and understood the client’s goals in seeking advice – eg 'to retire at age 65 with an income of $50,000 per year'. Detail how the strategy you are recommending will achieve the client’s goals.
3. Turn clients away when appropriate
If your services are not suited to a particular client (eg they are seeking advice about direct shares and you don't provide that service), you must tell them so and send them away. Don't try to shape the client to your offering.
If a client is seeking a return which does not match their risk profile and you can’t convince them to change their expectations, either send them away or see tip 4.
4. Explain the risks to clients who choose to act against your advice
You must be very clear in explaining the risks and documenting that the course of action is against your advice. Explain the risks in language the client understands make a contemporaneous file note and have the client sign it.
5. Explain what types of service you are providing
Clients don't know the difference between information, general advice, personal advice and execution-only services.
If you don't give the appropriate explanations and warnings or you are unclear, then you could be found liable for advice or activities that you had not intended to provide.
6. Use template forms and documents carefully
Make sure template forms and documents about strategies, products and risks are appropriate to the client you are advising.
It is very difficult to convince us that you have selected the right strategies and financial products for a client if the documents contain errors, are missing information or contain copious amounts of irrelevant material.
You will also have some trouble convincing us that the client understood your documents if they contain pro-forma jargon or complex concepts.
Tailor documents to your client’s financial literacy. Statements of Advice must be clear, concise and effective.
7. Use risk profiling tools carefully
Make sure that the strategy and asset allocation you recommend to a client is consistent with risk profile generated by the risk profiling tool you use. If there are inconsistencies, you must clearly explain them.
Remember, risk profiling tools are only tools. They all have inherent flaws that must be recognised and addressed by the adviser.
8. Don't give cookie cutter advice
This is really a reiteration of tips 6 and 7.
You should not put all or most of your clients into the same strategy and products, especially not gearing strategies. For example, we saw a Statement of Advice for a client with taxable income of $42,000 that stated: 'Your reasonable level of surplus income and high tax rate should make gearing an appropriate option for you'.
The best interest’s duty requires that advice be reasonably likely to achieve the client’s goals and that alternatives have been considered.
9. Understand and explain the products
Understand any products you are recommending. Don’t advise on products you don't understand.
Don't just hand over a Product Disclosure Statement (PDS) – you must explain the
PDS to your client and record your discussion in the Statement of Advice (SOA).
Don't cut and paste PDS disclosures into your SOAs. Show you understand the products by using the same words you use to verbally explain the products to your clients!
10. Be clear about the advice relationship with clients you know
If you are giving advice to a friend, relative, colleague or employee, it is critical to formalise and document the process as you would for any other client.
In addition; declare any conflicts of interest as you would for any other client.
And for accountants who are planning to apply for a limited AFSL, here’s an update and some tips from ASIC:
As of 21 July 2015, the ASIC Licensing team has received 154 applications for a limited AFS licence. 63 applications have been approved and 12 are currently under assessment. 79 applications have been withdrawn or returned to the applicant and the application fee refunded or held in credit pending resubmission. The main reason is the failure to lodge the required material documentation and information. One application has had an offer withdrawn after matters which were not disclosed to ASIC came to their attention.
Some thematic observations with the reason why applications have been withdrawn or rejected include:
- Inadequate, aged, incomplete or lodged without evidence of RG 146 training course completion for some or all of the financial products applied for.
- Inadequate professional indemnity insurance or not covering the relevant financial service. That is, insurance coverage for accountancy, taxation or audit related services is not adequate.
- A misunderstanding of the restricted scope of the ‘class’ of product advice authorisation. This ‘class’ of product authorisation means a limited licensee can provide financial product advice about, for example, ASX securities generally, but is not authorised to provide financial product advice recommending specific ASX securities (e.g. BHP shares, etc.).
- Financial statements provided in support of the financial requirements for a licence relate to a person other than the applicant e.g. the financial statement relates to a trading trust rather than the applicant’s own financial position. This will not be adequate for ASIC’s licence assessment procedures as we are required to assess the financial standing of the applicant themselves.
Warren Day, ASIC Senior Executive Leader – Assessment & Intelligence and Regional Commissioner - Victoria wants to make it clear that the application process is not complex or rocket science.
“ASIC believes applicants can apply without the need to involve advisers. We only ask that you carefully read the requirements and provide complete information about what is requested”, he said.
ASIC has published Information Sheet 179 Applying for a limited AFS licence. This provides specific guidance on the relevant steps you need to follow when applying for a limited AFS licence, as well as explaining how other ASIC guidance is relevant.
ASIC has tailored its online AFS Licence Application Form to make applying for a limited licence easier. It has also removed certain other procedures including the requirement to provide two business referees.
To find out more, contact Frank Fichera, Manager, Licensing at ASIC at firstname.lastname@example.org or (03) 9280-3473.
Information about the benefits of FOS membership
To learn more about FOS's membership offer for accountants, click here.