How to avoid common mistakes when tailoring Statements of Advice

Frank Smith explains the importance of financial advisers tailoring Statements of Advice and how to avoid common mistakes.

In my experience of coaching financial advisers in compliance matters, I have come across a number of concerning, yet unintentionally funny, Statements of Advice (SoAs). My concerns often flow from the inappropriate use of templates.

Many advisers and dealer groups are aware of my views when it comes to the use of template wordings in SoAs. That is, they are generally prepared by people who don’t see clients let alone give advice.

I’d like to share some unintended consequences of the use of templates in SoAs that I have looked at for a range of financial planning licensees and suggest ways to avoid such outcomes.

Scope of advice

The reason for the scope of the advice is to clearly and concisely set out the task being set for the adviser; it is the foundation of the advice process and all that follows is dependent on it.

While many advisers have achieved conciseness, the dependency on templates often means the outcome isn’t checked and is used again and again.

A scope I reviewed recently stated: ‘Based upon our previous discussions and our financial requirements, this Statement of Advice is limited to a summary of your needs.’

And further: ‘The strategy is designed to help you achieve your goals and, what’s more, it also meets our financial needs.’

Notwithstanding that this may in fact be the case, the simple omission of the letter ‘Y’ in both cases changes the whole meaning of the statement. More importantly, it weakens the validity of the document and the credibility of the adviser should a dispute arise down the track.

Whose goals and objectives?

Having made a mess of the scope, we turn our attention to helping the client clearly articulate their goals and objectives, having made reasonable enquiries into their relevant circumstances. I noted this particular client goal in a recent file review.

‘To invest your financial assets in a manor that will increase your wealth.’

I could have been forgiven for my first impression that direct property is not a financial product under the Corporations Act and certainly not a stately English home.

This sentence had been used in several SoAs. I understand that many clients in a particular age group often have similar goals and objectives, but using templated goals make the SoAs look the same (mistakes and all) and makes the adviser’s business look like a sausage factory, especially where the recommended products are often the same.

Incidentally, there is nothing wrong with investing in a manor provided the solution recommended meets clearly identified client needs.

Another example of a concise but, nevertheless, very poorly worded client goal I have seen is: ‘You want to roll over your XYZ Industry Fund into the ABC Managed Fund.’

Assuming the client did not arrive at the adviser’s office with this instruction in mind, setting it out as a goal gives the impression that the solution and the financial product were both determined at the outset.

In other words, we are in the realm of selling product.

If it is in fact a client instruction and not the result of an adviser recommendation, no advice has been given and a SoA is not required. A letter from the adviser confirming the client’s instruction and the transaction necessary should be sufficient.

Needs analysis

Now it is time to identify client needs based on current circumstances and the client’s identified goals and objectives. It is the adviser who must perform the needs analysis because that is where their skills and knowledge reside.

This is also the part of the process where the adviser applies their specialist skills and knowledge to consider the various strategies available to meet the needs of the client.

An effective SoA should touch briefly on the alternatives considered, outlining the alternatives and the reasons they were rejected, together with the offer to discuss them in more detail should the client require it, in two or three sentences only.

It is best to avoid statements such as: ‘Should the advice recommendations not be appropriate to your needs then there are a range of other alternatives we can offer you.’

This poses the question: who is the expert — the client or the adviser?

Financial advice recommendations

In order to get this important area of the SoA hopelessly wrong, we need to adopt a good deal of templated industry jargon that no one but an experienced financial adviser is likely to understand.

That way, should a dispute arise later, the adviser can lose even more credibility while being accused of deliberately confusing the client.

To get this right, it is important that the recommendations are summarised clearly and concisely and written so that the client is likely to understand them.

The client’s level of education and understanding of financial matters need to be kept in mind.

There is a very strong argument that a client who is not well educated in these matters should be provided with a more concise SoA than, say, a person involved in the financial services industry.

The SoA should speak to the client at all times, which is a very difficult if not impossible task when too much templated wording is used.

The SoA should remind the client of the salient points that were discussed and the recommendations made.

A good approach might be to use statements such as: ‘I am recommending what is referred to in the financial services industry as an administration platform. Please see page x for more details and read the Product Disclosure Statement I have given you in respect of the particular platform I am recommending.’

Details of the particular product should always come later. Indeed, there is far too much focus on individual products in SoAs.

Product replacement

This is my ‘favourite’ SoA minefield. Section 947D(2) of the Corporations Act 2001 requires additional disclosures whenever the replacement of an existing financial product is being recommended. These disclosures can be summarised as follows:

• exit fees;
• entry fees;
• benefits lost both now and in the future; and
• significant consequences of acting on the advice.

If there are no significant consequences, the adviser should state this, which provides clear evidence that the issue has been considered.

The primary reason that any product should be replaced is that the client’s identified needs cannot be met under the existing arrangements.

Statements such as ‘XXX Company is very well known and respected and is part of the world wide YYY Group’, or ‘The recommended product has 160 investment options while your existing product has only 159’ are irrelevant unless the client has specifically asked for them to be considered, in which case they should be expressed as client goals.

Comparisons of the products being replaced against the recommended product are unnecessary — especially when made in a page-long table.

This sort of information can, of course, be placed in the client file as evidence that the adviser made the necessary enquiries into both the ‘from’ and ‘to’ product.

Always remember that it is not about the best product (there isn’t one) but rather a product that is appropriate to the needs of the client.

Finally, to make absolutely sure that the client is confused, cut and paste in templated lists of potential consequences that may or may not apply.

This will ensure that any significant consequences are lost in the detail. It is wise to avoid common statements such as: ‘If your existing superannuation fund has life insurance benefits included then these may be lost.’

These and many others like them are what I call ‘quasi’ warnings and they are as ineffective as any other disclaimer. It is the adviser’s responsibility to know whether there is any life insurance involved and give consideration to this when giving the advice. Why then include the warning?

Disclosing potential conflicts of interest

I understand the desire by dealer groups to get this section of the SoA absolutely right. Unfortunately, the weight and complexity of the information it usually contains is well beyond the capacity of most clients to understand.

As well as complexity, I often see that there is a desire to ‘over comply’.

For example, I have seen SoAs that add the initial and ongoing commissions together and then project these out over a number of years.

This makes it necessary to add pages of assumptions used and disclaimers, ensuring the client has absolutely no hope of understanding any of it other than to perhaps gain the impression that the adviser is grossly overpaid. Advisers often tell me that their clients aren’t interested in what they earn.

This may be because they can’t make head nor tail of all the disclosures forced upon them.

I have seen SoAs that disclose irrelevant information such as the volume trail commissions the licensee receives from a product manufacturer on investment products when only risk advice is being provided. Again, this results from the blind use of templates.

Summary

I have met advisers who take several days to produce SoAs in the knowledge that when they are presented to the client only a few important aspects of the advice will be discussed.

A SoA should be a concise and clear summary of what took place between the adviser and client, perhaps over several meetings. As a summary, it should be logical in its flow, starting at the beginning and moving through the advice process as follows:

1. What am I being asked to do? (The scope.)
2. The client’s current situation. (Where are they now?)
3. Goals and objectives. (Where do they want to go?)
4. Needs analysis and recommendations. (How do I think they can get there?)

Producing a complying SoA is not rocket science but rather a simple task made more effective by using the adviser’s and the client’s own words wherever possible. If templates must be used, advisers should read the SoA with the above thoughts in mind each and every time.

Frank Smith is compliance consultant at Compact — Compliance & Corporate Training.