Suitability Rule or Reasonable Basis for Advice Rule

Transcription

1 Suitability Rule or Reasonable Basis for Advice Rule An Authorised Representative needs to demonstrate that: Sufficient information about the client's needs and circumstances has been gathered, and That there is a reasonable basis for any personal advice given. That the advice is appropriate to the clients situation It is important that an Authorised Representative determines a client's personal circumstances prior to providing any personal advice. Hence once the Financial Services Guide (FSG) has been provided to the prospective client, the next step is generally to interview the client and fill out a detailed client questionnaire or Financial Fact Find. This Fact Find should possess all the suitable numerical and qualitative data (goals, objectives, medical & personal issues etc) that the financial adviser can utilize to commence the process of providing advice and/or recommendations. The 'suitability rule' - section 945A(1) of the Corporations Act, otherwise known as a 'reasonable basis for advice', states: That an Authorised Representative (AR) can only provide personal advice to a client if the AR: determine the client's personal circumstances relevant to the advice make reasonable enquiries about those personal circumstances, then 1

2 use the information from the client, consider it and do other reasonable investigations relevant to the topic of the advice, and ensure that the advice is appropriate in relation to all of the above. It is important to note that the advice or recommendations need not be the best for the client. Best is a very subjective word and means different things to different people and also could vary for the same individual, depending on changed circumstances. Hence, the word appropriate is used intentionally in this important context. The suitability rule can be met by following the three step approach below: 1. The collection of information by asking appropriate questions of the client or the company that issued the client's current products, then 2. Considering the client's needs and objectives, then 3. Advising the client by providing appropriate and relevant recommendations. Phase 1 Asking Appropriate Questions The question phase of establishing a reasonable basis for advice incorporates the requirement for the AR to make reasonable enquiries to determine the client's relevant circumstances. Good questioning with the client leads to a strong foundation for advice. The fact find process is where the AR asks pointed questions and then listens carefully to the clients responses and also notes the body language etc. If the client tends to get off track, then the AR needs to gently and skilfully re-focus the client to the original question. 2

3 The level of enquiry will depend on what is reasonable. This includes the complexity of the advice and the potential impact of inappropriate advice on the client. It will also depend on the financial literacy of the client and if the client has any impairment. Please note that if is not a valid excuse or defence for an AR to state that a fact find was not adequately completed because the client did not have the time or did not want to complete it. In the latter case, the AR needs to seriously consider if they wish to proceed with accepting this individual as a client and in all cases detailed notes must also be entered on the file note section of the adviser s records and also on the fact find. Where a client does not wish to complete a particular section of the fact find, then the adviser should cross out this section and get the client to sign the page and note that the client does not wish to complete it. The Statement of Advice should also record this in the Disclaimer and/or other sections such as Limitations to Financial Advice Ask appropriatequestions: The AR needs to test and use probing questions to verify the information from the client. This will ensure the AR can rely upon it as properly reflecting the client's circumstances, including their goals and objectives. 3

4 It may be necessary to ask the client to explain in their own words the recommendations that may be proposed. In particular the AR must understand the following critical areas in detail: 1. What is important to the client? For example: meaningful goals and objectives that are specific and time bound the client's expectations of a financial planner why the client is seeking advice. 2. Factual information about the client. For example: current personal and financial position resources available current products including superannuation, investments and risk product features, the balances, asset allocations and amounts and or types of cover their attitude towards risk. Other questions such as possible inheritances or future expenses (private school or university fees for children etc) ASIC has highlighted personal circumstances that are normally relevant for provision of advice. These include the client's: regular income needs capital growth needs desire to minimise fees and charges tolerance for investment risk tolerance for risk of capital loss need for liquidity family and personal commitments employment security expected retirement age social security entitlements tax position 4

5 existing investment and risk portfolio capacity to service loans This list is not exhaustive. The AR needs to establish with the client whether there are any other circumstances that may be relevant. The AR needs to ensure the advice will be appropriate for them. The AR needs to make enquiries into the current features, benefits and costs of any existing products the client owns. This may involve enquiries being made of the product issuer or reviewing the relevant PDS and product statements. The information will enable the AR to understand what part, if any, these existing products may play in the advice. Points to consider when making enquiries: Relevant factors Effect on client enquiries requirement Potential impact of inappropriate advice on the client More extensive client enquiries are likely to be necessary where the potential negative impact on the client is likely to be relatively serious if the advice is inappropriate (and the client acts on the advice). Complexity of the advice Less extensive client enquiries are likely to be necessary where the advice is for a relatively simple purpose, rather than 5

6 where the advice involves complex financial products, classes of financial product or strategies (including tax-related strategies). The client enquiries requirement will involve attempting to resolve and clarify the client's objectives where the client: Financial literacy of the client (a) has limited financial understanding or knowledge (b) has conflicting objectives, or (c) is confused about their objectives (or has difficulty articulating them). ASIC Regulatory Guide Documenting the answers To enable a reasonable basis for advice to be established the AR must not only ask meaningful questions of the client. They must also be documented appropriately in the fact find. 6

7 The extent to which a Fact Find is completed will depend on the level and complexity of the advice being given. There must be sufficient information collected to demonstrate that recommendations were based on an adequate knowledge of the client's circumstances. Phase 2 - Considering the client's needs and objectives Once the AR has collected the relevant information and client details, the AR needs to consider an appropriate strategy for the client to be able to reach their stated goals or objectives. This consideration of the needs of the client is sometimes known as 'Strategic Analysis'. Analysing strategies and options When considering appropriate advice for clients, in the majority of cases the AR will need to consider different strategies. Two main strategy streams are usually related to wealth creation and wealth protection. However, there are numerous substrategies within these two main streams. Questions to consider if Wealth Creation could be an appropriate strategy for the client: Is the more appropriate environment for saving for the future within the super environment or outside of super? What are the tax implications? Could the client benefit from co-contribution for example within super? Is liquidity an issue in the medium to long term? 7

8 Should you consider a combination of super and non-super strategies? What non-superannuation strategies should be considered? These could relate to investing in shares, managed funds or property via gearing. Alternatively they could be related to paying off the home loan or a combination of some or all of these. Again, if both the super and non-super environments are equally appropriate, what factors will determine the final recommendation to be made to the client? If several strategies are identified, then what are these to be implemented (i.e. in several phase over a period of months/years etc) Questions to consider if Wealth Protection could be an appropriate strategy for the client: What type of insurance is relevant? Is further insurance needed? Should an insurance recommendation be within super or outside of super? What are the advantages and disadvantages of each approach? If the super environment is more appropriate, is there an existing fund that may be an appropriate product solution for all or part of the insurance? Does the client have health issues that may affect any new insurance application? Is there another super vehicle that is more appropriate for these insurances to attach or fund these insurances? If both the super and non-super environment are equally appropriate, what factors will determine the final recommendation to be made to the client? The strategies and product solutions identified should align with the client's goals and objectives. 8

9 Considering product solutions If the AR is considering particular product solutions for the client, it is important to ensure that any product replacement recommendation has a reasonable basis. The AR must only recommend the replacement of a product when the current product(s) are less suitable for meeting goals, overall, than the recommended product(s). This phase involves investigating all existing products held by the client. It is a critical element when establishing a reasonable basis for advice. The AR must make enquiries into the features, benefits and costs of any existing products your customer owns. This will help the AR to understand what part, if any, these existing products may play in the advice. Product comparison checklist and SoA product comparison tables The use of a Product comparison checklist (PCC) will help the AR to collect information about the client's products, and record your consideration of the information. Completion of the PCC will shows that the AR has considered the client's current product(s) before getting to the point of recommending a new product. If, after completing the PCC, there is a clear and positive basis for recommending the new product, the AR will have established a reasonable basis for your advice. This basis must be connected to the client's goals or objectives that you have discovered in the 'Question' stage of the process. The PCC allows the AR to investigate and record the following details: 9

10 Clients goals and objectives For example Analyse the product features and benefits product costs fund features insurance benefits asset allocation disposal costs entry costs management and other ongoing costs supporting information eg Research fact sheets from independent research houses such as Lonsec, Van Eyck, Mercer etc. Determine the product's appropriateness by ascertaining: Determine a reasonable basis for the product recommendation How does the financial strategy link back to the client's goals and objectives? How does the product recommendation link back to the recommended financial strategy and the client's goals and objectives? Why and How is the client better off following your recommended strategy? Why and How is the client better off following your product recommendations (particularly if they have an existing product and you are recommending the 10

11 client move out of it)? Where possible, you must provide numerical examples for instance,... the recommended superannuation would provide a higher final balance of $325,000, assuming a return of 8% after tax per annum and zero ongoing contribution fees... Phase 3 - Advising the client by providing appropriate and relevant recommendations. Refusing to provide advice There may be circumstances where the AR may not be able to provide appropriate advice to a client either because: the products are not suitable for the client the client has not been able or willing to provide sufficient information on which to safely advise, or the financial strategies will not meet their objectives. The AR can refuse to provide the advice in such circumstances. You must be able to demonstrate that your advice will help the client meet their needs and objectives better than their current circumstances. You also need to be able to show that the overall increase in the benefit to the client outweighs any increase in costs or decrease of benefits for the client. This includes the cost of 11

12 transferring from their current arrangements to the recommended arrangements and products. It must be in the client's interest to proceed with your recommendation. In the context of switching advice, it is not appropriate to advise the client (and you must refuse to do so) to replace their existing product with another if there will be a decrease in the overall benefit to the client following the switch. In addition to your reasonable basis for advice obligation, you must also comply with your disclosure, record-keeping and other regulatory obligations relating to the provision of personal advice, as well as your licensee requirements. The advise phase is about documenting and communicating your advice. Effective communication is a key requirement for successful financial planning. The client needs to understand the risks and benefits associated with your recommendations and why you believe they would be better off in following these recommendations. 12