FINS5537: Financial Planning Advice & Ethics
Financial Planning Advice & Ethics
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FINS5537: Financial Planning Advice & Ethics
Lecture Nine
The Client Adviser Relationship
Conscious and unconscious Biases
Behavioural Finance
• Thomson Financial Planning Handbook
• Financial Planning in Australia 2019 Essentials Edition, LexisNexis
• Financial Planning 2nd edition, Wiley
• Corporations Act (Chapter 7)
What is advice
Let us get back to basics – think about the following:
• What does the word or the term advice means to you?
• If you were looking for advice from a professional, a friend or a family
member, what would you expect from the person providing you the advice?
• i.e. listen, understand you, empathise with you, understand what advice
you are seeking and why, etc.
• In one or two words what would expect the advice to be?
• Tailored, personal, unbiased, not conflicted
• Would it be fair and reasonable to expect the above and for the advice to
be in your best interest?
What is advice – Some Dictionary definitions
• An opinion that someone offers you about what you should do or
how you should act in a particular situation
Cambridge English Dictionary
• Guidance or recommendations offered with regard to prudent future
action.
Dictionary Google
Synonyms: guidance, advising, counselling, counsel, help, direction,
instruction, information, enlightenment, etc
What is a statement of Advice?
Do you consider the SOA an advice document or a disclosure document?
The Statement of Advice (SoA)
An advice document striving to ensure the following:
• Acknowledging client's circumstances, needs, concerns goals and
objectives.
• Formulating a strategy consistent with the client's circumstances, needs,
concerns goals and objectives.
• Clearly and unambiguously sets out the advice (including its scope and
basis) and the reasoning that underpinned it.
• Meeting Best interest duty in spirit and in form
• Obtain clients acknowledgement and understanding of the advice
presented, and, if satisfied the authority to proceed.
• Compliant with the law and professionally presented.
The Statement of Advice (SoA)
Substance over form
The Spirit of the legislation should always be the aim.
Although the form is important and there a clear need to comply
with, the spirit is the key.
Best practice, compliance with the law, evidence and record
The Statement of Advice (SoA)
What is the reality on the ground?
ASIC Reports, PJC and senate
enquiries, FSI and Royal Commission,
The Current Regulatory Framework
The current disclosure regime produces
complex and lengthy documents that often
do not enhance consumer understanding of
financial products and services, and impose
significant costs on industry participants.
The Financial System Inquiry – Final Report
The Current Regulatory Framework
The Wallis Inquiry’s approach to consumer regulation was based
primarily on disclosure. It did not restrict either the design of financial
products or the type of financial products that could be marketed to
retail clients. The focus of consumer protection was on regulating
disclosure rather than products themselves. The disclosure regime was
implemented as a principles-based approach to allow maximum
flexibility for product issuers. However, it has subsequently been driven
by an industry culture of legal compliance, rather than a focus on how
best to inform consumers. This has resulted in lengthy and complex
documents, rather than short, targeted documents that highlight
product features, risks and rewards.
The Financial System Inquiry – Final Report
ASIC view of the SOA- Clear, concise and effective presentation
• RG 175.203 Clear, concise and effective presentation of SOAs
promotes understanding of advice by retail investors. We consider
that the presentation requirements are as important as the content
requirements in preparing an SOA.
• Regulatory Guide 90 Example Statement of Advice: Scaled advice for a
new client (RG 90).
• RG 244 also contains some examples of SOAs illustrating our
interpretation of clear, concise and effective disclosure.
ASIC view of the SOA- Clear, concise and effective presentation
RG 175.204 An SOA should:
(a) contain all key information in the body of the document instead of
relegating some key information to an appendix;
(b) be tailored to the client and not contain any irrelevant information such
as generic research or educational materials that are not relevant to the
SOA (this information can be made separately available to retail investors
on request); and
(c) avoid unnecessary repetition of content where it would not enhance
consumer understanding.
Note: Some consumers may not read the example SOA from cover to cover. Therefore, some repetition of
content may be used to ensure that important sections of the SOA can be read on their own without referring to
other sections.
ASIC view of the SOA- Clear, concise and effective presentation
. RG 175.205 Useful presentation tools include: (a) headings, irrespective of
the length of the document; (b) a table of contents; (c) a description of the
purpose of the document; (d) an executive summary to highlight the most
important information; (e) logical sequencing of information and grouping of
related information; and (f) tables and graphs that are clearly explained.
RG 175.206 Language should be used accurately and consistently throughout
the SOA
ASIC view of the SOA- Clear, concise and effective presentation
. RG 175.207 In particular, when preparing an SOA, providing entities should keep the following in mind:
(a)the existing SOA provisions are very flexible, and providing entities should take a flexible approach to
their SOAs (e.g. we expect providing entities to generally provide a short and simple SOA for short and
simple advice);
(b)extraneous information (i.e. information that the law does not actually require to be included in the
SOA, such as detailed research) should not be included if it results in the SOA not being clear, concise and
effective. If extraneous information is included, it should be clearly distinguishable from the mandatory
information;
(c)the clear, concise and effective obligation does not mean that information required by the SOA
provisions can be left out. Rather, the clear, concise and effective obligation affects the way that a
providing entity presents the required information. This includes trying to present the information in as
brief a manner as reasonably possible, without compromising its accuracy;
(d)the most important information in an SOA should be highlighted—for example, in an executive
summary that summarises the key information and indicates where more detail can be obtained. This is
especially important where the SOA is long (e.g. more than 10 pages);
ASIC view of the SOA- Clear, concise and effective presentation
(e)the longer the SOA, the more important it will be to include navigational aids such as a table of
contents;
(f)legal, industry or technical jargon should be avoided where possible, especially where advice is
provided to relatively unsophisticated clients;
(g)where the use of legal, industry or technical terms is unavoidable, the meaning of these terms should
be explained in simple, plain English; and
(h)there is no one ‘correct’ or ‘ideal’ format for an SOA—the law provides flexibility in tailoring the format
and presentation to the particular information needs of retail investors. Consumer testing can help a
providing entity to assess the effectiveness of various disclosure formats.
Note: When an SOA is required, it must be provided in printed or electronic form to the client. See RG 221
for information on how an SOA can be delivered digitally.
Providing the SoA
• The SoA must be provided at the same time, or as soon as practicable
after, personal advice is provided to a retail client. In any event, it
must be provided before any financial service related to the advice
is provided. For example, any request to transact or to implement the
adviser's recommendation – such as arranging for a financial product
to be issued – cannot be effected unless a SoA has been prepared and
presented to the client. As the SoA is the adviser's consideration of
clients' relevant circumstances and the adviser's recommendation
tailored to the client's needs and objectives, it is critical that clients
read and understand the advice before they decide to act on it.
Providing the SoA
• It is prudent, and a best practice encouraged by ASIC, for advisers to provide their clients with an adequate opportunity to
consider their advice before they are required to act upon it.
• The law does allow advisers to provide additional services, without first providing a SoA, in “time critical” cases where:
• the client has expressly instructed the adviser to act immediately or by a specified time; and
• it is not reasonably practicable to provide a SoA before acting in accordance with the client's express instructions.
• Advisers must provide clients with a SoA as soon as practicable after executing the client's instructions and within 5 days
of performing the service: see s 946C of the Corporations Act 2001.
• Advisers do not need to provide a SoA:
• if the client they are advising is not a retail client;
• If the advice relates to basic deposit products, non-cash payment products related to basic deposit products or
traveller's cheques;
• for products able to be traded on a licensed market, where the client has consented not to receive a SoA for
“further market-related advice”: s 946B. However, this exclusion requires that the client was previously provided
with a SoA (the initial advice) and further presumes that neither their relevant personal circumstances nor the
basis of the advice have significantly changed since the initial advice was provided. →Incorporate by reference
Types of SOAs
• Financial planning advice can generally be classified into three main
types:
• Issue specific or scaled advice.
• Comprehensive or holistic financial advice.
• Ongoing advice.
• Scaled advice is personal advice that is limited in scope.
• The Australian Government’s Future of Financial Advice (FoFA)
legislation aims to remove affordability barriers related to financial
advice.
Types of SOAs
• Issue specific or scaled advice:
• Addresses particular aspects of a client’s personal finances.
• Comprehensive or holistic financial advice:
• Developing a comprehensive financial plan to help meet a client’s overall
financial needs and goals.
• Ongoing advice:
• provided to ensure that financial strategies remain in line with objectives,
new strategies are developed to meet changing circumstances or to take
advantage of new opportunities.
The importance of effective communication in an SOA
• An SOA should provide:
• detailed strategies and projected outcomes for each of the recommendations
raised
• and how these will meet the client’s stated objectives.
• The SOA should be written in plain English and prepared with the
client’s level of financial sophistication in mind.
• Should also serve as an educative tool.
• Should not be used as a compliance tool or a mechanism to protect the
planner against liability.
The importance of effective communication in an SOA
• Regulatory Guide 168 Disclosure: Product Disclosure Statements (and
other disclosure obligations) contains ASIC’s Good Disclosure
Principles.
• Help product issuers and financial planners comply with the
disclosure requirements.
• Also promotes good disclosure outcomes for consumers.
The importance of effective communication in an SOA
• The Good Disclosure Principles (RG 168.2) consist of the following:
a) Disclosure should be timely.
b) Disclosure should be relevant and complete.
c) Disclosure should promote product understanding.
d) Disclosure should promote product comparison.
e) Disclosure should highlight important information.
f) Disclosure should have regard to consumers’ needs.
The importance of the planner-client relationship
• Technical knowledge and a comprehensive knowledge of financial
products will not be sufficient on its own.
• A planner needs to exhibit:
• excellent communication skills in order to develop a thorough understanding
and appreciation of the client’s personal, financial and emotional situation.
• competence in communicating strategies and concepts in terms that are
understood by the client and in a way that encourages the client to appreciate
the importance of acting upon the advice.
The importance of the planner-client relationship
• A significant body of research has looked into some of the more
important factors that determine an effective client–professional
relationship.
• Three types of trust are important:
• Trust in technical competence and knowhow.
• Trust in ethical conduct and character.
• Trust in empathic skills and maturity.
The importance of the planner-client relationship
• Obligations at the initial client meeting:
• Prior to engaging the services of a financial planner, an introductory meeting
takes place.
• Provides the means by which a financial planner and client are able to
ascertain the extent to which they have the confidence and trust to work
constructively together.
• If either party does not feel comfortable with the relationship, the financial
planning process should not continue.