ASIC says model portfolios fit with best interest duties
The corporate regulator will consider model portfolios as a suitable investment under best interest duties if they do not adopt mechanistic processes on selecting assets or assessing risk.
ASIC deputy chair Peter Kell said the regulator wanted to see clear evidence that model portfolios matched the client circumstances and fit within their risk profile.
Speaking at the Association of Financial Advisers (AFA) National Conference in Cairns Kell said it was "not the role of regulator to micromanage how model portfolios are constructed rather to provide the environment that ensured they were part of good quality advice".
Kell said ASIC's position on best interest duties for planners were set out in Regulatory Guide 175 and were unlikely to change if the amendments to the Future of Financial Advice legislation are passed.
He said under those regulations advisers were required to make reasonable inquiries into a client's need and this applied to model portfolios as well.
"In formulating a recommendation advisers need to consider the goals and needs of clients. This point is critical. Does the adviser have a clear sense of the goals of the cient. This is the first step, then any consideration of which model portfolio is suitable follows," Kell said.
"The exact portfolio mix should follow from human interaction and ASIC is looking for answers to questions such as ‘Is it clear to the client what they are getting?',
‘Is the portfolio true to label and what does that label mean?', ‘How accurate is the client risk profile and how carefully has it been carried out'."
Kell said risk profiling clients was not a mechanistic task and not straight forward and needed to match the change in perception of risk by the client over time or due to life circumstances.
"Advisers can use model portfolios to meet best interest duties when they are used appropriately to manage risk, the quality of risk, more efficient advice and a reduction in the cost of advice. When used inappropriately can create a mismatch or cutie cookie cutter approach," Kell said.
"Consumers who seek financial advice expect their adviser to act in their best interest. We consider it reasonable advice if it means consumers are in better condition after taking advice."
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