After scanning through thousands of Statements of Advice, Katherine Marchant runs through the common mistakes planners make that jeopardise best practice.
Financial advisers are required to provide Statements of Advice (SOAs) that are "clear, concise and effective". But what does this actually mean in practice? We share some tips and identify some common mistakes based on our reviews of hundreds, if not thousands, of SOAs.
First, consider the SOA's primary purpose. SOAs are usually drafted with compliance obligations in mind. A financial adviser's compliance obligations are, of course, very important. However, an SOA is not simply a compliance tool. An SOA's primary purpose is to provide your client with enough information for them to make an informed decision about whether to act on your advice. An SOA should be drafted with this primary purpose in mind. Templates are valuable documents and certainly have a role to play in the advice process. However, it's important that you don't rely too heavily on a template. We can't stress this enough; we regularly see SOAs that are heavily templated and have not been tailored to suit either the advice or the client.
As with any type of writing, it's important that you consider your audience. Remember that your audience is not your compliance team; it is the client that has engaged you to provide advice. Consider what investment experience your client has? What are your client's literacy and numeracy skills like? Is your client likely to understand technical terms and industry jargon or will your client require more detailed explanation? Taking the time to consider your audience will help you to tailor the language you use to suit your client and prepare an SOA that your client is more likely to understand.
Having considered your audience, the next step is to think carefully about the scope of the advice. What exactly has the client asked you to do? Has the client limited the advice in any way? Our view is that determining the scope of the advice is a crucial first step in the financial advice process. It is no coincidence that following receipt of the initial information from the client, the next safe harbour step requires the adviser to identify the subject matter (the scope) of the advice.
Once you've identified the scope of the advice, you must then ensure that this scope is clearly set out in the SOA. This is critical, as it will form the basis of the entire SOA. When setting out the scope in your SOA, use the client's own words and don't rely on template wording. Be careful not to confuse the scope with the client's goals and objectives or with your advice. We frequently review SOAs that set out the scope of the advice in very general terms and fail to reflect the task that has been agreed upon with the client.
The next step is to set out the client's goals and objectives early in the SOA. Again, use the client's own words and don't rely too heavily on template wording. We have seen many SOAs that set out a client's goals and objectives in language that a client would be very unlikely to use. The client's goals and objectives should also, where possible, be specific and measurable. For example, "your goal is to retire at age 65 with an after tax income of $60,000". If care is taken when setting out the client's goals and objectives in the SOA, this simplifies the advice process as you can then ensure that your recommendations are linked back to the client's goals and objectives.
When setting out your specific recommendations, make sure that you include all important aspects of the advice. Not only is this good practice, it's also a legal requirement that you set out the advice in "the level of detail ¬ a person would reasonably require for the purpose of deciding whether to act on the advice". For example, if you are recommending income protection cover, you need to specify the amount of cover, the waiting period, the benefit period and of course, the policy and insurer that has been recommended. You also need to specify whether you have recommended cover on an agreed or indemnity value basis and with level or stepped premiums.
Similarly, it is also a legal requirement that you explain "the basis on which the advice is or was given", again, in "the level of detail ¬ a person would reasonably require for the purpose of deciding whether to act on the advice". Using the same income protection example, it is not enough to simply explain why you have recommended income protection cover. You also need to explain the basis of all important aspects of your advice; why you have recommended the amount of cover, the waiting period, the benefit period, as well as the particular policy and insurer. You also need to explain why you have recommended cover on an agreed or indemnity value basis and with level or stepped premiums.
You should ensure that your SOA sets out the recommendations you give your client, and is not a record of your client's decisions in relation to the advice. In practice, this means that if, for example, your needs analysis identifies that a client requires life cover of $1,000,000, you should recommend life cover of $1,000,000 in the SOA, even if you are certain that the client will only proceed with obtaining a lower amount of cover. A client can make whatever decision they want – the SOA should demonstrate that, whatever decision the client makes, it was informed by sound advice.
An SOA must also clearly explain any risks associated with the advice, using language that your client will understand. We regularly see SOAs that contain inadequate risk disclosure; either because important risks of the advice have not been included in the SOA, or because the risk disclosure has not been tailored to the advice or the client. No doubt, you will have also had discussions with your client regarding the risks of the advice. In addition to keeping detailed file notes of these discussions, you should also refer to what was discussed with your client in the SOA. This is an important risk management strategy. In the event of a dispute about risk disclosure, it will be easier to demonstrate that you adequately disclosed the risks to your client.
Finally, it is good practice to explain in the SOA why your advice is in your client's best interests and why your client is likely to be "better off" as a result of your advice. If you have followed our tips above, this should be a relatively simple task.
Katherine Marchant is a lawyer with Holley Nethercote Commercial and Financial Services Lawyers.
