How financial planners can save time and money

financial advice financial adviser enforceable undertaking financial planning FOFA amp ASIC financial planners financial ombudsman service australian securities and investments commission global financial crisis ANZ life insurance

26 April 2012
| By Staff |
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Paul Derham and Sonnie Bailey share a few mistakes they’ve seen financial planners make over the years and outline tips for saving time and money.

We’ve collected plenty of interesting stories in our role as “preventative law” or “compliance law” lawyers.

We’ve reviewed thousands of personal advice files and assisted with enforceable undertakings, matters concerning the Financial Ombudsman Service (FOS), breach reports and disputes that end up in litigation.

What can go wrong?

The Australian Securities and Investments Commission (ASIC) announces its regulatory action against individual financial advisers and licensees on a fairly regular basis.

Regulatory action can include enforceable undertakings, imposed licence conditions, civil penalties, licence cancellations and banning orders (to name a few).

With the introduction of Future of Financial Advice, ASIC’s powers to ban advisers will be enhanced. In the past, ASIC has needed to have reasons to believe an adviser will not comply with the financial services law to take action of this nature.

Going forward, the bar is lowered slightly by requiring ASIC to believe a financial adviser is likely to contravene a financial services law.

Furthermore, breaches of the best interests obligations under FOFA can give rise to civil penalty action against both the licensee and the representative.

And of course, many financial advisers are subject to disputes with their clients. Many of these disputes go to external dispute resolution schemes such as FOS, or worse still, result in litigation.

We want to help you avoid these things. But if they do occur, there are steps you can take to mitigate their effect.

1. Avoid the sausage factory and tailor your financial advice to the client

Some years ago, we were conducting a training session on the financial advice process.

During the session, one life insurance adviser proudly announced that he always recommended his clients purchase $350,000 of term life because “everyone’s needs are the same”.

That adviser was on the “350 bus” and we suppose that what he was really saying was that $350,000 was typically affordable to his clients and covered key debts.

There’s an obvious problem with this approach – it suggests a solution before it considers the client’s objectives.

What happens when the widow calls the adviser to ask about why the insurance payout is only half the size of her home loan?

Of course you wouldn’t do anything like that. Before reaching that conclusion, look at the recommendations in your last four statements of advice (SOAs).

Are they the same? Recently, we were reviewing a number of client files prepared by one financial adviser, and every single file included a recommendation that the client borrow money against their home to invest in high-risk financial products.

This included clients who, for all appearances, would have had “prudent” or “conservative” risk profiles.

There was no evidence in the SOA or in the file to substantiate a reasonable basis of the financial advice. Little wonder that his advising practices were subject to review by the regulator.

You will also remember the AMP “super switching” enforceable undertaking, in which ASIC said that 93 per cent of all new investment or superannuation business resulting from the advice of AMP planners was invested into AMP platforms or products.

According to ASIC, this was in part because of the use of template SOAs and related guidelines.

Sausage factory recommendations are flags that there may not be a reasonable basis for the advice.

So the first lesson is clear – tailored advice is best. Tailored advice establishes the client’s needs and objectives first, and then clearly links each need and objective to an appropriate recommendation.

It’s the first line of defence in both a client dispute, or when dealing with ASIC.

2. Know what the scope is

The scope sets the boundaries of your contract with your client. It sets out what you are going to do for them.

It sets the agenda for your financial advice. It is essentially the contract between you and your client and will define the parameters of the enquiries that must be made, the needs analysis and recommendations.

Accordingly, it is worth spending time to ensure that an agreed scope has been reached and that the client’s expectations of what you are going to do for them is aligned to your understanding of the task.

Where the agreed scope is a narrow one, industry has tended to label this as “limited advice”. ASIC sometimes refers to this as “scalable advice”. We tend to think of it as “full advice on a limited scope”.

With the coming of FOFA and best interests obligations, there is going to be a lot more said about scope and scalability, so watch this space.

3. The file needs to tell the whole story

Often when we review a personal advice file, it’s not clear from the file how the advice addresses the client’s objectives and needs.

Then, we sit down with the adviser who provided the advice, and they explain clearly the basis for their advice and win us over – there was a reasonable basis, after all!

Unfortunately, in a dispute, the file needs to tell the whole story. The file is going to be the enduring evidence of the financial advice you have provided.

Recently, we assisted an adviser who convinced their client back in 2008 to take a less aggressive approach to investing. The client was new to investing, cashed up, and asking to gear heavily in Australian shares.

After lengthy discussions and consideration of the client’s needs and circumstances, the financial adviser prudently recommended a more conservative portfolio, with no gearing.

Then, along came the global financial crisis, and the client made a complaint against the adviser because one of the funds in the recommended portfolio failed.

When looking through the file, we noted that the financial adviser had taken meticulous file notes with one omission. The discussion about adopting a more conservative investment strategy and not gearing was not clearly documented.

This will make it harder for the financial adviser to substantiate their role should the matter end up in court.

Another reason why the file needs to tell the story is because a dispute often occurs years after the advice is given. In the meantime, you may have had thousands of conversations with clients.

Your aggrieved client may have only had one or two such conversations.

A court or ombudsman is likely to give more weight to the client’s story, unless you have file notes to support yours simply because the client’s recollection of that particular conversation is likely to be better.

As well as protecting you, keeping good quality file notes can also be valuable when it comes time to sell your practice or client book.

If a potential purchaser can make sense of your files, they are more likely to be comfortable with what they are buying.

4. In the event of a dispute

So far we have focused on ways to avoid a dispute. But disputes can happen even to the most diligent, skilful adviser.

In the event of a dispute, it is often better to be proactive in dealing with the client’s complaint. Hard as it might be, it is usually better to be commercial than to take a stand on a matter of principle.

We have often heard clients say “it’s a matter of principle” at the outset of a dispute. Then, as the costs are explained to them or start to mount, they change their view.

Settling a dispute is often an appropriate option. Disputes suck up time, money and peace of mind.

Also, every step in the dispute resolution process will cost you or your licensee money. For example, clients tell us that following a complaint through FOS can cost up to $12,000 – just in FOS fees.

You should be focusing on other things, like providing your clients with valuable services and building your business.

Remember also that an ombudsman plays by different rules. The FOS terms of reference, for example, specifically state that FOS is not bound by legal rules of evidence.

Nor is FOS restricted to legal principles alone when coming to decisions.

In fact, FOS’s terms of reference state that it will do what is in its opinion fair in all the circumstances, having regard to factors such as applicable industry codes or guidance as to practice, and what it considers to be good industry practice.

Often, settling quickly is a big time, money and stress saver.

5. Address compliance issues proactively

A sure way to turn a compliance molehill into a mountain is to do nothing about it.

In the media release for the 2009 ANZ and Opes Prime Enforceable Undertaking, ASIC criticised ANZ for having “a poor compliance culture, meaning that deficiencies in processes were not identified, escalated or remedied in an appropriate or timely manner.”

Similar phrasing is used in the March 2011 UBS Wealth Enforceable Undertaking.

The benefits of being proactive in addressing compliance issues can best be explained by comparing the following two examples:

  • One of the first advisers to be prosecuted by ASIC under the FSR laws in 2005 was prosecuted for failing to provide SOAs on four occasions.
  • Around the same time, we reviewed an adviser who failed to provide 19 SOAs. We notified the licensee immediately who in turn promptly assessed the breaches for significance and lodged a report with ASIC, together with numerous remedial steps. ASIC took no action. 

Conclusion

Prevention is better than a cure. If you avoid sausage factory advice, know what the scope of your engagement is, and can proudly demonstrate a reasonable basis from the file alone, you’re most of the way there.

If you are commercial in the way you handle disputes, and ensure that you remedy compliance issues proactively, you will be saving time and money in the long run.

Paul Derham is a partner and Sonnie Bailey is a lawyer at Holley Nethercote Commercial Lawyers.

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