When reason rules

The adviser’s best interest duty leaves a question mark hanging over what constitutes “reasonable” advice, Merton Miles writes.  

When assessing whether an advice provider has complied with the best interest duty, the Australian Securities and Investments Commission (ASIC) will consider whether a “reasonable” advice provider would believe that the client is likely to be in a better position if the client follows the advice provided (RG175.230). 

Guidance to meet the best interest duty is provided through “Safe Harbour Provisions” which include: 

• Identify client’s objectives/needs that would be “reasonably” relevant to the advice sought. 
• Where client information is incomplete or inaccurate take “reasonable” steps to ensure information is complete. 
• Consider if it is “reasonable” to recommend a financial product, if so, conduct a “reasonable” investigation into the product. 
• Take any other steps that would “reasonably” be regarded as being in the best interest of the client. 

Whilst the requirement and the notes on guidance to meet them sound “reasonable”, I sometimes wonder just what is “reasonable” and does it differ in relation to different clients and is the judgment of “reasonable” advice providers consistent across the industry. 

Consider what may be reasonable advice to a client who is retiring with only a modest level of funds. Their primary concerns are having a predictable income and preserving this level of capital. Is a primary focus on providing income and a secondary focus on achieving capital growth through market linked funds more reasonable than focusing on capital growth over the client’s life expectancy and accepting the income this may provide? Is a strategy which provides a certainty or high predictability over a shorter term than life expectancy more reasonable than a long term plan in retirement? I expect there is a wide variation of opinion amongst financial planners as to which strategy is 'reasonable’. 

I also wonder what definition of “reasonable” applies in judging the quality of advice. 

Reasonable is a word and like any other word it is only a symbol, a label which we use to stand for some meaning.  A word in itself has no true meaning - no real meaning, no intrinsic meaning - no natural meaning. 

Seeking clarification, I consulted my Macquarie Dictionary which defines reasonable as: 

 Able to reason or listen to reason; rationale; not expensive; moderate and fair.  

Some definitions seem to apply to advice but in progressing to my Macquarie Thesaurus I found that “reasonable” is nominated as appropriate in twenty nine ways which include equitable, fair, fit, just, rational, suitable, well founded - all of which could be a basis for judging the quality of advice. However “reasonable” is also noted as meaning, cheap, inexpensive, low priced. 

I shudder to think that advice given by a provider could meet the best interest duty merely because it was cheap, inexpensive or low priced. A provider sharing this view of best interest could hardly be considered a reasonable provider. 

To meet the ASIC requirement to comply with the client’s best interests a number of steps need to be followed. Five principles of providing personal advice which help to meet the requirement are: 

• Determine the clients personal circumstance - objectives, financial situation and needs; 
• Make reasonable enquiries; 
• Consider and investigate the information; 
• Provide appropriate advice; 
• Warn the client if the advice is based on incomplete or inaccurate information. 

In applying each step, advice providers need to consider which definition of “reasonable” would apply to their advice.  Another provider may have different understanding of reasonable and may not agree.  What is reasonable should always provide the opportunity to meet the client’s requirements and the likelihood of placing the client in a better position. We must always have a sound basis for the advice we provide. 

Judgements by courts in financial advice related matters have been handed down on a basis of what is the case being heard and was the advice reasonable. This often depends of the view of a 'reasonable advice’ provider. No doubt other judgements of what is reasonable will emerge in the future. 

A comment on what is reasonable, which I have always enjoyed, relates to income. 

If you ask “What is a reasonable salary” the response will depend on whether the enquiry is to someone who is paying it or someone who is receiving it. 

This could well apply to financial advice and perhaps our judgement must meet the client’s definition. 

Merton Miles is a senior financial planner at Fiducian Financial Services.