How financial planners will engage with clients in a post-FOFA world

The Government's FOFA legislation will undoubtedly change some of the relationships which exist between planners and their clients but, as Sonnie Bailey writes, underlying client engagement will remain crucial.

No kind of advice – personal, financial, legal, or otherwise – is a silver bullet.

Even if you’ve provided a client with the best financial advice you’ve ever given, it will not remain forever relevant and prevent them from ever needing advice again.

People’s circumstances change. Their needs change. Their objectives change. These changes necessitate new advice.

Because of this, an important part of your relationship with your client is how you engage with them, enabling you to provide them with the advice they need as their circumstances, needs, and objectives change.

Engaging with your clients on an ongoing basis is important to your client. It’s also important to your business.

The proposed Future of Financial Advice (FOFA) reforms haven’t changed this. Of course, some of the rules of the game may change, but at its heart client engagement will be the same in the future as it is now.

At the time of writing this article, the first and second tranches of draft FOFA legislation have been released. Two big-ticket items for financial advisers are the best interest obligations and the ongoing fee arrangement provisions, which include a requirement for clients to renew an arrangement of this nature every two years (an “opt-in” requirement). 

What we cover in this article relates to financial advisers if the first tranche of the legislation is implemented exactly as published on 29 August 2011, particularly in relation to ongoing fee arrangements.

This article also provides guidance that is relevant now and for the foreseeable future, whether or not FOFA is implemented.

The importance of setting clear, manageable terms of engagement

It is vital that you and your client are on the same page in relation to the services that you are providing. This is especially the case when you have an ongoing relationship.

A fundamental distinction relates to how you frame your ongoing obligations with your client. For example, there is a huge difference between agreeing that you will review their affairs on a continuous basis, compared to agreeing that you will review their affairs at regular intervals.

If you are receiving ongoing fees, a client is likely to assume that you’re providing ongoing financial advice. 

When you conduct an annual review of your client’s affairs and you don’t think they need to make any changes, you’re still giving financial advice.

After all, a recommendation to do nothing is still a recommendation. It is financial product advice under the Corporations Act 2001. So you will need to prepare a SOA or ROA on at least an annual basis. 

The nature of the service being provided is often communicated clearly by financial advisers. Ask yourself if you are making it clear what the nature of your service is going to be. Do your clients understand this? 

This is especially relevant during times of volatility and economic uncertainty. The terms of your engagement should be set out clearly in writing. This will help you if there is ever a dispute. There are plenty of FOS adjudications and determinations which demonstrate the importance of this.

On this note, the draft FOFA legislation says that an financial adviser ‘must act in the best interests of the client when giving the financial advice’.

While it is easy to focus on the first part of that statement, the second part is equally important. The proposed best interests duty applies only when the financial advice is given. It is not an ongoing duty that requires an financial adviser to continue checking the appropriateness of advice.

The word ‘the’ prompts the question: what is the advice? The answer to this question should be able to be answered by reference to the scope.

Setting out the scope of your financial advice 

As well as being clear about the nature of your relationship, it is important to set out what you are doing in relation to a specific task.

Any given task has a scope. This is true whether it is to conduct a comprehensive review of the client’s financial situation, whether it relates only to providing financial advice about the level of life insurance and a product suitable to their needs and objectives, or whether it relates to how to invest an inheritance windfall without regard to any of their other circumstances. 

Of course, the scope of financial advice is relevant where you are providing one-off advice, but it is also important when undertaking tasks as part of an ongoing relationship. 

Going beyond the scope leads to over-servicing, which can lead to unnecessary cost to the client or to you spending more time on a task than is necessary. It may also introduce confusion about what the client asked you to do.

Failing to meet the scope of a task is where things can go awry. If there is a dispute and the scope of your task is unclear, it will be difficult to say that you performed a task as agreed with a client. In most forums, whether it is through an external dispute resolution scheme or a court, the benefit of the doubt will be given to the client.

Set out the scope of your task clearly to help manage this type of risk. In setting out the scope, you can ensure you and your client are on the same wavelength about the services they are receiving. 

ASIC’s recent Consultation Paper 164 Additional guidance on how to scale financial advice is also relevant here.

Ongoing fee arrangements – beyond “opt-in”

It is easy, when looking at the draft legislation, to focus on the “opt-in” requirement. However, the “opt-in” requirement is only part of the broader framework of having an ongoing fee arrangement.

An ongoing fee arrangement will apply to almost any ongoing client relationship. It will relate as much to a set fee arrangement (such as quarterly or annual fees, invoiced to the client and paid directly to you) as it will to asset-based fees. 

It seems almost certain that if you have an ongoing relationship with a client you will be charging ongoing fees. Accordingly, we would argue that it would be more accurate to refer to this as just one element that is part of an ongoing client arrangement. 

If you have an ongoing client relationship, you need to provide a ‘fee disclosure statement’ to the client at least once a year. 

In this document, you will need to showcase the services to which the client has been entitled, the services you have provided to them and the fees they have paid for the past 12 months.

You will also need to outline the services to which they will be entitled in the next 12 months, as well as the services you expect to provide and the fees you expect they will pay.

Every second year the client needs to notify you in writing that they wish to renew the arrangement, in response to a ‘renewal notice’ that you provide to them, usually at the same time as the fee disclosure statement.

Apart from needing to be in writing, the manner in which your client renews your ongoing arrangement is not prescribed by the draft legislation. 

Fee disclosure statements and renewal notices will be able to built into, or accompanied by, existing documents you provide to the client. They will need to trigger some kind of written response from the client. 

For example, a Terms of Engagement document that you have your client sign every year or second year may include this information. Alternatively, an acknowledgement or authority to proceed in an annual review Record of Advice (ROA) or Statement of Advice (SOA) which you provide to the client may include this information.

Alternatively, you could prepare an email or an internet form, providing the relevant information, which they can respond to (where necessary) by typing a (short) response, or accessing a form on the internet and responding appropriately in writing.

If you are providing ongoing services and your client is not signing or acknowledging anything you are doing in writing, then FOFA or not, we suggest that you should be doing so.

At the very least you should be doing this to manage your risks. We think that involving your client is a wise practice in terms of engaging with them as part of an ongoing relationship.

The draft legislation prescribes some of what you will need to disclose, and the timing with which you need to make your disclosures and get a response. We suggest this should only require slight amendment to what is already best practice. 

Setting fees or minimum fees

One element of the draft legislation is that if a client terminates an ongoing agreement (which they will be able to do at any time, under proposed section 962B(1)), you can still claim funds owing by them as long as the funds are clearly owed under the terms of the agreement.

For example, you may agree upon a fixed fee of $4,000 for your services at the start of the year. This will be paid quarterly as a percentage of funds under advice.

If your client terminates the ongoing agreement in the middle of the year, when you have only received $2,000 from the funds under advice, you will be entitled to require the client to pay the remaining $2,000 directly to you.

However, you will only be entitled to this if it is a condition of the agreement, for example, as part of a Terms of Engagement document.

Of interest, the draft legislation does not prohibit you from establishing an arrangement where a client has to pay $4,000 or asset-based fees for the year at a set percentage, whichever is higher. To the extent that some might argue this is not in the client’s best interests or is a conflict of interest, this arrangement does not relate directly to the financial advice given.

The proposed conflict of interest provisions such as 961K and 961L and the best interests requirement set out in 961C only relate to when the advice is being given. This is a fee arrangement that you’re negotiating with your client.

Conclusion

If FOFA comes into effect as currently proposed, the healthy thing to do is put a positive spin on it. By requiring you to make these disclosures, you will be required, by law, to showcase to clients the services you are providing to them.

There may be a cost involved, but many savvy advisers will probably consider this not as a compliance cost, but an investment in marketing.

Sonnie Bailey is a lawyer with Holley Nethercote commercial lawyers.