Common sense prevails with Statements of Advice

Sometimes I have to remind my 18-month-old son to step back before he opens a door inwards lest he smack himself in the face.

My advice to financial planners in relation to the preparation of Statements of Advice is much the same — step back.

The recent statement by Australian Securities and Investments Commission (ASIC) executive director financial services regulation Ian Johnston highlights a serious industry concern: “Some industry participants have told us that their lawyers are advising them to produce Statements of Advice (SOAs) running to 80 or 90 pages in order to comply with the requirements of financial services regulation. This is not what we would expect to see under the law, and it is not helpful to consumers. ASIC sees disclosure under the new law as a consumer-centric regime, focusing on the consumer’s information needs…”

After recently reviewing a very lengthy SOA issued to a client by an Australian Financial Services Licensee for the bargain price of just shy of $1 million ($10,000 per page), I am concerned there are participants in the industry who have forgotten about the client in their fervour to cover their rumps.

I am not talking about the nature of the advice and I accept that the majority of financial planners are skilled and experienced in providing financial advice.

I am talking about whether the SOA is understandable by, and appropriate for, the client. Do you know when ASIC will really take an interest in the content of an SOA? When a client complains about it.

I am not suggesting the technical and legislative requirements are not important — clearly they are.

I am, however, suggesting that many in the industry are putting the proverbial tail before the dog.

I consider the most relevant and important of ASIC’s six Good Disclosure Principles to be ‘disclosure should have regard to consumers’ needs’.

So how to turn the dog around? It is simple. You are (or should be) already doing it.

There simply needs to be a greater focus on those things that underpin the preparation of a clear, concise and effective SOA, including the importance of the financial planning process, the duty of the adviser to the client and other legislative obligations that have relevance to the form and content of an SOA.

The key to disclosure of the advice and the basis of the advice is the financial planning process.

When the process is undertaken correctly, and addresses the needs of the client, a client-appropriate SOA will follow — form follows process.

Clearly, there is no universal, codified or mandated process, however, the legislation and accepted industry practice dictate elements that are common to all financial planning experiences.

While the process may vary from adviser to adviser (and in practice the detail involved in each step would vary considerably according to the circumstances of each individual client), the general precepts remain the same.

By a remarkable coincidence, the process is actually reflective of what is required to be included in an SOA and the courts have been particularly scathing of financial advisers who do not follow an appropriate and accepted financial planning process in the formulation of financial plans for clients.

The key to disclosure of information about remuneration, commission and other benefits lies in the duty of an adviser to their client.

It is accepted that the nature of the relationship that clients enjoy with their financial advisers is that of a fiduciary.

A fiduciary obligation exists whenever one person, the client, places special trust and confidence in another person and relies upon that person, the fiduciary, to exercise his discretion or expertise in acting for the client, and the fiduciary knowingly accepts that trust and confidence and thereafter undertakes to act on behalf of the client by exercising his own discretion and expertise.

Fundamental to the concept of the fiduciary duty of a financial adviser is an obligation to act in the best interests of the client.

This presupposes obligations of honesty, integrity, fairness and unselfishness, and those obligations presuppose full disclosure of any matter that has the potential to influence the provision of the advice — including remuneration arrangements. Nothing more than what you should be doing.

Importantly, the CLERP 9 legislation introduced conflicts management obligations that require licensees to consider their remuneration practices as part of ensuring they act efficiently, honestly and fairly, and in particular, PS 181 suggests disclosure would be expected on the extent to which the licensee (or any associated person) is likely to receive financial benefits depending on whether the advice to the client is followed. The policy statement suggests the SOA disclosure in this regard should be sufficient.

Another important aspect of your legislative obligations to your client in the context of the SOA is the presently emerging expanded concept of unconscionability.

This clearly arises under both the Trade Practices Act and the ASIC Act and has come to the fore in the face of the Australian Competition and Consumer Commission (ACCC) test cases on unconscionability in various industry sectors.

Originally, unconscionability was only found where the complaining party was in a fundamentally weaker position as a result of some deficiency arising from their physical or mental personal circumstances. This soon extended to educational weakness and today may include the level of client sophistication.

In particular, it could well be argued that unconscionability should be expanded to include a situation where a party is found to be at a particular disadvantage as a consequence of the information imbalance that is inherent between advisers and their (though educated and wealthy) financially unsophisticated clients.

So how can this information imbalance be avoided? Through the provision of a clear, concise, effective, client-focused SOA. By acting conscientiously in ensuring the client is made aware of all relevant issues associated with the advice provided and in particular the significant risk of capital loss and the existence of other potentially more appropriate investment strategies.

Lisa Chambers is a solicitor with the Financial Services team at The Argyle Partnership Lawyers .