Keeping it simple

Lucille Bennetto

Over the past 18 months, I have been engaged in providing some external compliance services to groups of advisers holding their own Australian Financial Services licences. This naturally provided me with the opportunity to gain a broader perspective on some of the issues on the advice side of the financial services industry.

One aspect that appears consistently is the misunderstanding regarding the content of the Statement of Advice (SOA) provided to a client.

It is not overstating the case to say that a misapprehension prevails that a SOA is difficult to construct if one is to ensure that all compliance requirements are to be met.

Perhaps because of that misapprehension, many financial planners are disengaged from, or cynical, regarding the real value of the document. The common response is that most clients don’t read them because the document itself has become too convoluted.

I have to admit to a certain empathy, particularly in the context of the mixed messages given by those who are meant to be supporting the industry.

For example, while the Financial Planning Association (FPA) October 2006 ‘Guide to the development of effective Statements of Advice’ is a proactive step towards assisting FPA members, it suffers from the same flaw that I constantly see in advice to clients — a failure to understand the target audience.

The guide is 40 or so pages long, and requires focused concentration to absorb in any practical way. Time is a luxury that any professional servicing the general public cannot afford to squander.

The SOA is simply another name for what was previously provided to the client as a financial plan. All the Corporations Act does is set out some basic requirements for information to be included.

What goes in is up to you, provided some basic mandatory inclusions are made. Indeed, even if the Corporations Act did not require these, commonsense would dictate that you include them anyway. You should do so in order to manage your legal risk.

So, for example, any disclosure about remuneration or benefits should be in dollar terms so the client has the opportunity to grasp the actual effect of what you are saying. The test here is not to be too technically correct; if the correct and accurate disclosure is too detailed the client may have no hope of understanding it, nor of evaluating the effective cost of the services to be provided.

What is important is that you keep in the forefront of your mind that clients are unfamiliar with the fee structures connecting the players at various levels within the financial services industry.

When it comes to remuneration arrangements, what the client realistically wants to understand are three things:

~ what he or she will have to pay you directly from his or her own resources, and what such payment covers;

~What someone else might pass on to you because of the service(s) you provide to the client, and whether that is an indirect cost that the client effectively funds; and

~if you receive ongoing commission, why you are receiving it, whether the client is indirectly funding it, and whether its payment entitles the client to any ongoing services from you.

Similarly, as to the actual advice you give to a client, the Corporations Act only requires that you set out the advice itself, and the basis upon which it is given. Nothing too hard in that really.

Logically, all you have to do is ensure that what you say has a beginning, middle and an end if you are to express yourself in a form the client is likely to at least want to read, let alone understand.

The construct of the ‘beginning’ is that you set out very briefly the ‘ambit’ of the advice. This is really just about explaining the type of areas upon which the client has sought your services.

The next step is then to briefly re-state what you understood the client objectives were in seeking your services. From your point of view, this helps in containing any legal risk, because you are explaining to the client your understanding of what it is that he or she is expecting from you.

This is no different to what any other professional will do. A lawyer will begin any client advice with a preamble, being a restatement of those facts that have prompted the client to seek the advice. It will then record what outcome the client wants to achieve.

Similarly, if a doctor is writing a referral, or a report on a patient, he or she will begin by explaining the details of initial consultations, what the patient complained of, and how the patient described the effects of those symptoms.

The fact is, any advice from a professional will normally begin by setting out the parameters on the range of professional services that have been sought.

Having painted the background describing what the client wants of you, you are then in a position to touch upon the relevant personal details of the client.

The emphasis here is on the word ‘relevant’. You only need to include that which is relevant to the range of advice the client wants. As long as you endeavoured to understand your client’s needs during preceding meetings, and recorded information gleaned in the client file, then the SOA is not the place to be restating personal and financial details. You only include the factual information pertinent to the subject matter of your advice, because those facts are the foundations for the construction of your recommendations.

You need to ensure that, by giving the client the opportunity to check accuracy, your recommendations are built upon a solid foundation.

So, for example, you would remind the client what particular risk profile or tolerance was determined and agreed to.

After that, you will basically move into the ‘middle’ of the SOA. Here you will work through the process of explaining what your recommendations are.

You will have no trouble either meeting compliance standards, or aligning the advice to your client’s information needs and expectations, if you just move through the expression of your recommendations by simply asking yourself, at each step: is there anything at this point the client might not understand, and I should explain a little more, just to be on the safe side?

A common failing across most written advice I have seen is that there is far too much information, which is often irrelevant or too sophisticated.

For example, one of the things I constantly rail against is the inclusion of broker research material. In most cases it is written at a wholesale level, not for the ultimate client. Its commentary is littered with industry jargon that the average person would not understand.

As an illustration of what I mean, what is wrong with a few lines explaining that you have recommended particular shares because of your analysis of broker research and the sector exposure that each holding will bring?

And the real risks arising from the provision of too much information, or of information unmatched to the actual comprehension level of the particular client, is that you don’t close the gap to ensure that you do in fact have informed consent.

You cannot rely upon client consent to your advice, nor a waiver that the client has read and understood everything, if it is highly unlikely that the average person could have comprehended what you were trying to communicate.

Indeed, the more you keep your explanations simple, the less likely it is that different meanings can be interpreted, and this goes a long way to reducing your legal risk.

The ‘end’ of the advice is then really all about setting out the consequences of following your advice. This includes the real cost of changing products, if switching or redemption/cancellation of a financial product is your recommendation.

It also includes the details of what costs the client will incur, directly or indirectly, through product pricing and payment of commissions as a result of the advice. If one of the consequences of the client adopting your advice is that you will receive some form of benefit or payment from someone, then you need to bring that to the client’s attention too.

All of this makes logical sense if you want to rely upon your client giving you that informed consent to which I referred, and implicitly demonstrates the degree of personal integrity and trust that you want to impart as a professional.

Lucille Bennetto is head of compliance at Lonsdale FinancialGroup .