SOAs: does ASIC measure up?

Scot Andrews, technical services manager, Fiducian Portfolio Services.

As promised, the Australian Securities and Investments Commission (ASIC) delivered an example statement of advice (SOA) by the end of August. Admittedly, it covered a simple advice situation, however, the example does provide some clarity as to what the regulator expects from the financial advice industry. Unfortunately, it also leaves some issues unresolved.

A key point for advisers is that this is an example SOA — not a template. This means that it should not be used as a blanket template for creating SOAs for other advice situations. However, we can now examine how certain things were handled, and see if parts can be applied to a standard format.

The example client situation provided by ASIC is for a limited advice situation that deals with a couple in their 40s seeking advice for insurance and investments. Fortunately, ASIC managed to find a couple that have all their money in cash accounts, and have no existing insurances.

The example case therefore handles ‘replacement product’ quite simply, and ‘super switching’ is not covered at all. This is unfortunate, as these areas are still of concern to advisers. Nor does it include a description of the alternative strategies or products considered, as Refinement Proposal 2.2 could remove this from the regulations.

ASIC also states that this is not a best practice SOA. Perhaps this would explain the size 10 font used throughout the SOA and the 22 page guide for financial planners for understanding ASIC’s approach to the 12-page SOA.

Also of interest is that on the one hand ASIC states that the SOA is a “communication tool (and not a mechanism to protect against liability)”, and on the other hand states that the SOA’s “primary purpose is as a disclosure document”.

It is important to note that some of the Financial Planning Association’s (FPA) standard financial plan requirements have not been included in the example SOA. For instance, an implementation schedule. However, the FPA so far seems happy with the direction the regulator is taking.

Remember, there are three layers for SOA compliance. ASIC sets a minimum industry standard, your industry association (such as the FPA) may overlay this with their own standards, and your licensee may provide further best practice guidelines.

Perhaps the description of risk profiles will cause some concern for advisers who are accustomed to providing more detailed descriptions of risk, and may have the client complete some sort of risk profiling questionnaire or tool.

I found the description of a balanced investor quite broad, and the same words could describe a conservative investor or a growth investor (depending on the terminology you like to use).

Interestingly, in the regulator’s dollar disclosure provisions, a balanced investor is described as using 70 per cent growth as a benchmark, while the example SOA uses 60 per cent growth for the recommendation.

Those advisers providing risk advice may take issue with the throwaway line on trauma insurance “being discussed but decided against”. I would not want to defend the insurance claim at the Financial Industry Complaints Service (FICS) if the client had a heart attack.

Lastly, the SOA does not really delve into the adviser’s strategy recommendations. Rather, a product is recommended first, and then a section on why that was appropriate is included.

My guess is that most advisers would generally like to state what the strategy is, then nominate a product that would meet the requirements of the strategy. Does this reflect ASIC’s belief that advisers provide product, not strategic advice?

Putting aside these small grievances, the example SOA does provide clarity on some major issues, and I suspect licensees around the country are already culling their SOA templates.

Most adviser groups would have little concern over the cover page and summary provided in the SOA. Even the summary of the client’s position is quite reasonable, and serves to remind advisers that they only need to document the information that is relevant to the advice being provided, rather than regurgitate the fact-find information.

One thing noticeably missing from the SOA is any sign of marketing hype. There are no statements about the ongoing service that will be provided or the ‘you beaut’ features of products recommended.

Also, there are no attachments to the SOA apart from the reference to the product disclosure statement (PDS). The SOA does not refer to the research notes for each fund recommended. However, the recommendations were retail funds, not a wrap product.

It was also pleasing to notice that the SOA did not contain massive, long-term projections and vast reams of financial statistics about the clients. Clearly, ASIC is not expecting this for specific types of SOAs.

Overall, despite opinions that the regulator may be overstepping its mark by even providing an example SOA, it has done a decent job of clarifying some important issues. Perhaps the most beneficial outcome for the already compliant adviser is that the SOA may now be toned down to a more realistic and shorter level.

Lucille Bennetto, head of compliance, Lonsdale Financial Group .

ASIC has now released an example SOA template. Its message is clear — it is indicative only, and is not to be relied upon. Indeed, the preamble to the release labours the point to the extent that one wonders what the intent of the exercise actually was: “The example SOA has not been designed for use as a template, so it is very unlikely that an adviser could use it without significant modification.”

But perhaps, however, we should look at it as an opportunity for us to assess ASIC’s overall understanding of what is involved in giving financial planning advice.

First, let us look at the overall format itself. No doubt it will remind many of you of the usual format of a government brochure that we see nowadays — with a Q&A section, coupled with a layout of “parcelled” information.

Are we forgetting that the SOA is also the form of communication to the client, and presents an image of the firm that they are dealing with? A personalised format is obviously more appealing when we are trying to present ourselves to clients as an industry of professionals. The template format used by ASIC would, if provided to a client, undermine the impression of the quality of service that is being provided.

The risk profile information that ASIC suggests will suffice as an explanation to the client is a complete surprise. The first two paragraphs are the usual generic statements that you will see in any product disclosure statement. There is nothing said that is personal or relevant to this particular client. Importantly, it then goes on to describe the client’s risk profile as warranting an allocation between “income” assets and “growth” assets, without bothering to explain the difference.

The lack of information for the insurance recommendations also surprised me. Shouldn’t the recommendation set out and explain why the particular level of cover has been selected, and more importantly, what the cost of each cover will be? I would have expected some indication detailing how the client is going to afford to pay for the level of cover recommended. Nor is a planner apparently required to indicate anything more than that the cover has been placed where it will be cheapest. Is no reference is required to policy definitions or claims experience?

I also found it interesting that ASIC does not think that a planner should need to explain why the insurance cover should be held through superannuation rather than by the client personally. Not only is this something that the client should appreciate, but a planner should ensure it is explained in writing in order to protect against any legal action later.

What if there is no consistency between the “any” or “own” occupation definitions of the life and total and permanent disability (TPD) cover and the definition in the trust deed of the fund? We all know that this will effectively prevent the client accessing the funds when a claim has been paid to the trustee.

And again, in order to protect from any possible legal action, shouldn’t the adviser record in writing the importance of ensuring a binding nomination is in place?

In the ASIC example, the wife is advised to take out insurance cover through her super. I was curious as to this assumption, since the wife is on home duties, and so may not actually be able to arrange the cover through the superannuation fund to which she formerly contributed.

The recommendation for the investment into the two balanced funds caused me further consternation. Is ASIC suggesting that all advisers omit any reference, for example, to the product issuer or the performance? Surely, even a line that states “these funds have demonstrated consistent performance in the past, and currently have a good rating”, might have explained more to the client as to why two funds from an extensive universe of managed funds have been selected.

The information regarding the disadvantages left me wondering too. Is no reference to the consequences of holding cover through super required? In respect of the recommendation for early discharge of the mortgage, a reference to the likely three to six months penalty interest charged for early discharge is also not mentioned. Surely ASIC’s interpretation of the s 945A(1)(b) requirements would not be met by simply referring the client to contact the bank to find out these charges.

A generic type of statement appears again in respect of the disadvantages for managed funds: “The value of your investments might not increase as you would like … and their value might fall.” This is a statement that could be made of any type of investment, and does nothing to enhance the client’s understanding of the effects of the particular recommendations.

Finally, the really interesting thing is that ASIC’s template devotes more space to the explanation of fees than to any other aspect. Is the basis of advice less important than the disclosure of cost and other benefits?

There are two important issues that have been overlooked in the production of the ASIC SOA template. The first is that clients want information delivered to them in a personalised manner, and in a way that neither insults their intelligence, nor, alternatively, confuses them with an overload of information, some of which is too technical in nature. The ASIC template does not provide the degree of personalisation that a client is entitled to expect.

Second, the SOA serves a secondary purpose of providing protection for the planner against a client complaint. File notes are one thing, but the SOA forms unequivocal evidence of the information provided to a client. It is possible to provide short SOAs — even when these two issues are addressed. The quality of the advice, and the protection afforded to the adviser, should not be compromised in the way suggested by this example template.

Imagine if these clients complained to FICS and said that the adviser had neither explained the penalty costs involved in discharging the mortgage early, nor the value in both the cost of the insurance, how they were to afford it, and why it should be in superannuation.

On the basis of this template, whom do you really think FICS would find in favour of?