12. Giving Advice The advice “cheat sheet” When do you give what to the client? See the diagram below. You communicate with The FSG, SoA, SoAA or PDS may be given to the client by: a retail client email; fax; mail; hand; Have they got the CD; or most up-to-date any other method as agreed FSG? between you and the client, Replacement of which allows you to be sure the client has received it. product: If the advice is to replace one “Advice” means financial No Yes product with another, product advice. This assumes tell the client the that if you’re providing costs, loss of benefits financial product advice, it’ll be and other personal advice. consequences of the Are you giving change Give the client an advice? FSG before you start If you can’t give the FSG before you start, give it Yes No within 5 business days of communicating with the client. If it’s a new client, Make a file note before you start, explain Have you given to them how you’re paid on the spot or the client an soon afterwards SoA in the past? Is the client instructing you to help them buy a Yes No product? Has there been a Give the client an significant No SoA as soon as is Yes change in the practicable client‟s circ‟s or No further action the basis of your If the client wants to necessary advice? implement your advice before you get the SoA or SoAA to them, give Is your advice them the SoA or SoAA to buy a If the client wants to buy Yes No within 5 business days product? the product before of implementing the getting the PDS, give advice them the PDS within 5 business days of them Give the Make a Yes buying the product client an record of No SOA or advice on the SoAA as spot or soon Where the product has a soon as is afterwards No further action PDS, give it to the client practicable necessary before they buy the product Compliance Manual Version 5 – 2009 Page 1 Giving a Product Disclosure Statement (PDS) You must provide a PDS to the client before or at the time of recommending a product. If you are recommending an IDPS or wrap facility, you must provide a PDS for each underlying investment which you are recommending. You must be able to show on the file that you have provided these PDSs. When are you not giving advice? “Financial Product Advice” is a recommendation or statement of opinion that is intended (or could reasonably be regarded as being intended) to influence a person to make a decision about a financial product or class of products. It can be verbal or in writing. To determine whether you are giving “advice” ask yourself: “what actually is the client asking of me, or expecting me to do?” [Alisar suggested adding the contents of a conference slide with scenarios, here] Is the client merely asking for administrative or factual information? Factual Information (or “no advice”) is when: you make no qualitative judgement, and the information which is given is that which can be objectively tested; you don’t provide your opinion about a particular financial product (eg. BHP shares) or class of products (eg. mining shares); you don’t make a recommendation about a particular financial product or class of products; or you don’t “add value to the facts” when talking about financial products. Shares example: A client asks the difference between a DRP and receiving the cash dividend. You explain to the client those factual differences. That‟s not advice. If, however, the client then asks “what do you reckon?”, and you provide your opinion, you would be giving advice to the client. Pension example: You get a query from a client asking how one would qualify for a particular pension. Provided that you only advise on the general requirements, and don‟t proceed to tell the client how he or she should personally structure his or her affairs in order to qualify, then you would not be giving advice. Listed property example: If a client asks how listed property trusts have performed over the past 3 years, and you only provide data demonstrating that performance statistically, then this is not advice. Insurance example: If a client asks you for an income protection quote and TPD quote, then providing those quotes (assuming you don‟t include a recommendation or opinion attached to them) is not advice. If it is only “administrative” or “factual” information which is being given, and there is no expression of opinion or recommendation by you, then it is not advice. 1.1.1 Non-advisory staff You need a documented process (which will include training) to ensure that non- advisory staff do not provide financial product advice. When are you giving only “general” advice? General advice is advice that doesn’t take into account any of the client‟s: needs; or objectives; or financial situation. You need to ask yourself three questions to determine whether you‟re providing general advice or not: 1. “In making my recommendation/opinion about this financial product(s), am I taking into account any of the person‟s needs, objectives or financial situation?” Yes or No? 2. “Will the person assume or think that I have in fact taken into account any of their needs, objectives, or financial situation?” Yes or No? 3. Has the possession of the information about your client influenced your statement? Yes or No? If you answer “no” to all three, then you have probably provided general advice only. If you answer “yes” to even one of the questions, then you have provided personal advice. Compliance Tip: Remember that if you have an existing relationship with the client then you need to be very careful to make sure that you are not giving them personal advice! They might assume, that because they have dealt with you before that you are giving them personal advice. If you are only giving general advice then you do not have to give an SOA, SOAA or ROA. But, you do have to give a general advice warning (GAW). The warning can be incorporated into the substance of the general advice. Standard words for a verbal and written warning are at WORKING DOC 1: Warnings. Click here to access WORKING DOC 1: Warnings. General information can be given to a client even if you have information about the client‟s personal circumstances. The test for whether financial product advice is “personal” or general is not whether you possess information about the client‟s personal circumstances but whether you have taken it into account. You will not necessarily take the information into account merely because you have the information. Compliance Tip: If ASIC notes you are engaging in many GAW situations they will see that as a flag to have a close look at your files. Using the GAW to get around compliance requirements will backfire on you! What types of clients do not have to receive an SOA, SOAA or ROA? Regardless of whether or not a client is retail or wholesale, you must provide them with an FSG. This is part of our policy to manage conflicts of interests. We manage some conflicts by disclosing to clients how we are paid. You must also document your advice in writing. For other purposes, you can determine whether your clients are retail or wholesale using the following guidelines. You are not required by law to give an advice document (SOA, SOAA or ROA) to a “Wholesale client”. 1.1.2 Wholesale clients – when advising or dealing in superannuation and RSA products When you are advising or dealing in superannuation products, a wholesale client is: a trustee of a superannuation fund (or ADF or PST or a public sector super scheme) and the trust/fund/scheme has net assets of at least $10 million; or a person who controls at least $10 million (“control” can include under a trust). All other clients must be treated as retail clients when advising or dealing in superannuation (and so SOAs, SOAAs and ROAs must be used). 1.1.3 Wholesale clients – when superannuation and RSA products are NOT included in your advice or dealing If your advice or dealing does not relate to anything with superannuation or an RSA provider, then a wholesale client, will not have to receive an advice document. This will be: a client who is: (i) receiving advice on an investment (and not a risk) product, and (ii) investing at least $500,000 in a single product – after you have deducted (a) your fees, if your fee is to be deducted from the amount invested, and (b) any part of that sum which has been sourced from the superannuation environment; or a manufacturing business employing over 100 staff; or advice to any other business employing more than 20 staff, or the person gives a certificate from a qualified accountant (prepared in the preceding 2 years) stating that the person has either $2.5 million net assets, or a gross income of $250,000 over the past 2 years. (The accountant may include the net assets or gross income of any trust or company the person controls. Also, any trust or company controlled by a person meeting this definition is also a wholesale client.); or a financial services licensee; or a listed company; or a person overseas which would fit one of these definitions. When giving personal advice to a retail client When you give personal advice to a retail client for the first time, you must give them an SOA at or shortly after you have given the advice (see FURTHER-INFO 4). Keep all advice documents on your client file for at least 7 years. The five pillars of an SOA Regardless of the scope of your advice, there are five pillars which every SOA is required by law to include. 1.1.4 Scope Your SOA must have a clearly defined scope. Without a clear scope, you open yourself up to any number of potential risks, ranging from claims by clients or investigation and punishment by ASIC. Your scope must include a clear statement of what you are being asked to do – now and ongoing, including any restrictions, based on your conversations with the client. Example of good scope: “David, you have asked me to review your current superannuation arrangements and to advise you on a strategy to enhance your retirement benefits. You have declined my recommendation to discuss your life insurance needs because you believe that you have sufficient cover already.” Your scope must not include: A templated, generic statement which does not reflect your actual discussions with the client. (Tip: don‟t mix your recommendations into the scope!) Example of bad scope: “David, you have asked me to roll over all your industry fund account balances into Navigator which will provide you with simplified reporting.” Example of bad scope: “You have asked us to advise you in relation to general financial planning needs.” And you do not advise the client on life insurance, then you could be sued for the full value of a life insurance policy that you never recommended! Compliance Tip: You should ensure the scope is consistent with the terms of engagement and the client‟s objectives. 1.1.5 Reasonable Basis The second pillar is that you must have a reasonable basis for your advice. “Reasonable basis” refers to: (a) providing advice where you: (i) determine the client‟s relevant personal circumstances in relation to giving the advice; and (ii) make reasonable inquiries in relation to those personal circumstances; and (b) having regard to information obtained from the client in relation to those personal circumstances, you have given such consideration to, and conducted such investigation of the subject matter of the advice as is reasonable* in all of the circumstances; and (c) the advice is **appropriate to the client, having regard to that consideration and investigation. *What is “reasonable”? What is “reasonable” varies with the circumstances and is “scalable” depending on things like: Whether you‟ve previously provided advice to the client the potential impact of inappropriate advice the complexity of the advice the financial literacy of the client Note about “scalable” consideration and investigation: Where personal advice is provided for a relatively simple purpose, such as the purchase of car insurance or the opening of a deposit account, less extensive consideration and investigation of the subject matter of the advice is likely to be required than for advice about complex financial products, classes of financial products or strategies (such as tax-related strategies or higher risk strategies such as the use of margin lending in connection with the purchase of a financial product) - RG 175.113 **What is “appropriate”? ASIC says that, in its view, “appropriate” advice, is advice which, if acted upon by the client, would be reasonably likely to satisfy critical aspects of the client‟s relevant personal circumstances” (RG 175.89) This “reasonable basis” definition is taken from section 945A of the Corporations Act. To make sure you have a reasonable basis, ask yourself the following questions: Question Yes/No 1. Is there a sufficient detail of the client’s relevant personal circumstances which were ascertained after making the reasonable inquiries? 2. Have the client‟s goals and objectives been clearly identified? (Eg. to give their children a private school education). 3. Have the client‟s needs been clearly identified? (Eg. a calculation to determine the appropriate level of life insurance cover.) 4. Have reasonable enquiries been conducted to ensure that the information about the client‟s relevant personal circumstances is up to date and complete? 5. Have enquiries been made of the client‟s considerations into environmental, social or ethical matters? 6. Is the detail and complexity of the inquiries, consideration and advice proportionate to the complexity of the client‟s purpose? 7. Is the detail and complexity of the inquiries, consideration and advice proportionate to the potential negative impact on the client if inappropriate advice is acted upon? (More extensive client inquiries and consideration of the subject will be necessary where the potential negative impact is likely to be relatively serious.) 8. Has the client’s financial literacy been taken into account? 9. Is there a generic description of the range of financial products, classes of financial products or strategies considered and investigated in the SOA or somewhere in the file? 10. Is a statement of the advice itself is included? 11. Is there an explanation of the reasons why advice is appropriate to the client, including advantages and disadvantages if the advice is acted upon? 12. Are the main risks of the advice not satisfying critical aspects of the client‟s Question Yes/No relevant personal circumstances set out? 13. If your advice is based on information about the client‟s relevant personal circumstances that you know is incomplete or inaccurate, or you are unsure, have you included the required warning? [Note: the warning is at WORKING-DOC 1] 14. If acted upon, is the advice reasonably likely to satisfy critical aspects of the client‟s relevant personal circumstances (e.g. the client‟s need for regular income)? 15. Have alternative strategies been considered particularly where the advice is complex or the potential impact of an adverse outcome of inappropriate advice is significant to the client? 16. Have reasonable steps been taken to ensure that any external research relied upon is accurate, complete, reliable and up-to-date? 17. Is the advice provided to the client appropriate (suitable) for the client‟s objectives, financial situation and needs? 18. If applicable, does the recommended replacement product have greater overall benefits for the client than the old product? If not, is there justification for the recommendation (e.g. lower cost)? You (or an auditor) should be able to answer the above questions by looking at the complete client file. See our SOA INSTRUCTIONS TEMPLATE which is available from [insert how adviser can access this]. It tells you what must be on the completed client file. 1.1.6 Replacing Products The third pillar is that you must do certain things if you are replacing a product. Replacing a product includes if there is a disposal of or reduction of a level of interest in a financial product and instead an acquisition of or increase of a level of interest in another financial product. To make sure you do the right things, ask yourself the following questions: Questions if replacing a product Yes/No 1. Have you described any charges the client may incur in relation to the disposal or reduction, stated as amounts in dollars*? a. If no, and where you do not know the amount, and cannot reasonably find it, have you included a statement that there may be charges but you do not know what they are? 2. Have you described any charges in relation to acquisition or increase, stated as amounts in dollars*? a. If no, and where you do not know the amount and cannot reasonably find it, have you included a statement that there may be charges but you do not know what they are? Questions if replacing a product Yes/No 3. Have you described any benefits, pecuniary or otherwise, that the client may lose as result of taking action, stated as amounts in dollars*? a. If no, have you included a statement that there may be lost benefits but you do not know what they are? 4. Have you described any other significant consequences of action, stated as amounts in dollars? a. If no, have you included a statement that there may be other consequences but you do not know what they are? *Dollar Disclosure Where you can‟t disclose an amount in dollars because not all factors are known, and cannot reasonably be discovered by you, you may disclose as a percentage instead. If it‟s not possible to disclose the amount as a percentage, explain the method of calculation. In both cases, give worked dollar examples. Where it is a non-monetary benefit or interest, disclose: the nature and extent of the benefit/interest; the circumstances in which the benefit/interest will arise or be provided; and the estimated value of the benefit/interest, where a retail client would reasonably require such an estimated value for the purposes of deciding whether to act on the advice provided. Did you know that advising to move a client‟s money from a Cash Management Trust into another product is a replacement recommendation? Even moving a client‟s funds around within an administration style platform is replacement advice! Remember, replacement of product advice is not confined to replacing one product with another similar type of product. Rebalancing will trigger replacement of product requirements if you advise or deal in relation to the rebalance. It will not trigger the requirements if your client‟s money is invested in a fund which does the rebalancing. Example where replacement of product requirements apply: You recommend that your client, an SMSF trustee, rebalance his fund by using surplus cash reserves to purchase more BHP shares. Example where replacement of product requirements do not apply: You have previously recommend that your client maintain a “balanced” portfolio, and all of her funds are invested in a managed fund, which automatically rebalances the fund quarterly according to that portfolio model. 1.1.7 Disclosure of Benefits The fourth pillar is that you must disclose benefits. This includes monetary and non-monetary benefits paid to you, your business, referrers, the licensee, and any related companies or associates! To make sure you do the right thing, ask yourself the following questions: Question Yes/No 1. Have you disclosed remuneration/benefits to be received by you that might reasonably be expected to be capable of influencing you or your business in Question Yes/No providing the advice – stated as amounts in dollars?* 2. Have you disclosed remuneration/benefits to be received by your employer or your business (eg. the corporate authorised representative) that might reasonably be expected to be capable of influencing you in providing the advice – stated as amounts in dollars?* 3. Have you disclosed remuneration/benefits to be received by us (the licensee) that might reasonably be expected to be capable of influencing you in providing the advice – stated as amounts in dollars?* 4. Have you disclosed remuneration/benefits to be received by a director or employee of us (the licensee) that might reasonably be expected to be capable of influencing you or your business in providing the advice – stated as amounts in dollars?* 5. Have you disclosed remuneration/benefits to be received by an associate** that might reasonably be expected to be capable of influencing you or your business or us in providing the advice – stated as amounts in dollars?* 6. Have you disclosed other interests, whether pecuniary or not and whether direct or indirect, you and your business, us (the licensee) or an associate of any of those that might reasonably be expected to be capable of influencing you or your business in providing the advice – stated as amounts in dollars?* 7. Have you disclosed information about remuneration (including commission) and other benefits that a person receives for referring a client to you, your business or us? In addition to the bare legal requirement, you need to look at your explanation of the fees and commissions disclosure from the perspective of the client. You are familiar with pricing structures and the role of commissions, but clients are not. Make sure for disclosure in the SoA is as simple as possible – this will protect you in the long run. It is very easy for clients to misunderstand, or misinterpret, what your services actually cost and how you are paid. 1.1.8 Clear, Concise and Effective The fifth pillar of a statement of advice is that it must be clear, concise and effective. It must be easy for the client to understand. ASIC and the FPA has provided examples of SOAs which are less than 20 pages long. Our templates will also meet this requirement, if they are used properly. FPA example: [insert link or attach the FPA example SOA] ASIC example: [insert link or attach the ASIC example SOA] Meritum Financial Group templates: [insert link or instructions to access templates] Don’t include complex tables or educational material in your SOA. Focus on the five pillars! If you feel you really need to include some material like this, attach it as an appendix. Do not attach any of these five pillars as an appendix! Do include ranges, rates, comparisons, simple tables and formulas in order to ensure that information is presented in a clear, concise and effective manner. Other requirements for a SOA There are other requirements for an SOA. We have not included them as pillars, even though they are legal obligations. They include: Front Page requirements Does the front page include? Yes/No 1. Is the title “Statement of Advice” on the cover or near front of SOA? 2. Are the name and contact details of you and your business, including authorised representative numbers, included? 3. Is MERITUM‟s full name and licence number included? 4. Is there a statement that you and your business are an authorised representative of that/those licensee(s)? You must also include information about other associations and relationships: Yes/No Disclose any associations or relationships between you, your business, us, (the authorising licensee) or any associate** and any financial product issuers that might reasonably be expected to be capable of influencing you and your business in providing the advice. Compliance Tip: If ASIC picked up your SOA would they be able to say “Yes” to the following three questions: 1. Has the adviser made reasonable inquiries about the client‟s relevant personal circumstances? Yes or No; 2. Has the adviser considered and investigated the products they are recommending? Yes or No; and 3. Is the advice appropriate for the client? Yes or No If you can put your hand on your heart and answer those three questions with a “Yes” then you have probably met the requirements. Full Advice with Limited Scope or incomplete information 1.1.9 Full Advice with Limited Scope There is no such thing as limited advice. Your client will always expect full advice – sometimes with a limited scope. You may decide to give full advice with a limited scope because the client specifies that they only want to receive advice on a particular product or strategy, or advice on particular types or ranges of products, or on a limited subject. In such cases, it is particularly important to clearly set out the precise limits of the task the client requires of you. 1.1.10 What if the client does not give you the full story? It may be the case that: the client will not provide the information which you will need; or the client indicates that the information which has been given to you is only an estimate, and so objectively it should be treated as potentially inaccurate information; or the client can only give you incomplete information at the time that the advice is required. You still have to give that client a Statement of Advice but it must spell out at its beginning that the client has provided limitations on the advice that you can give, because you do not have the full picture. Your SOA must include the warning at WORKING-DOC 1 at its beginning. A Statement of Additional Advice (SOAA) An SOAA is written advice that is given to a client who received an SOA from you in the past. You should use an SOAA if you have previously given an SOA to the client, and: you are providing personal advice; and the basis for your advice or the client‟s personal circumstances have significantly changed. Examples of where there is a “significant change” may include: transitioning to retirement switching super policies receipt of an inheritance recommending a financial product or strategy which falls outside of a client’s existing strategy or risk profile The SOAA can be shorter. But, it may not necessarily be that it takes less time to prepare. . To do a SOAA properly, you should go through each of the five pillars, so that you ensure changes in client details are noted and referred to in the current advice. A checklist for your SOAA is included as WORKING-DOC 5. Record of Advice (ROA) – Further Advice You don‟t need to provide a client with a SOA or SOAA when further advice is given to a client if: the client has previously received an SOA; and there are no “significant changes” in either of the client‟s personal circumstances or the basis of the advice provided in the initial Statement of Advice. Examples of where there are no “significant changes” may include: Rebalancing or switching within a platform or service but remaining consistent with the existing strategy and client‟s risk profile Increase or decrease in income protection cover because of increase in income/salary Increase or decrease in contribution to existing product eg increased contributions to superannuation or a particular managed fund Purchase of direct shares/options where consistent with existing strategy and risk profile Sale of existing share to purchase another share where consistent with existing strategy and risk profile Withdrawing cash to cover short term needs A rollover of a maturing investment eg annuity or term deposit You just need to keep a record of that advice, and be able to provide a copy to the client when requested. You can only give a client a ROA if you have given them a SOA. A ROA cannot be used to add to a SOAA. There are only a limited number of situations in which a ROA can be given. The longer the gap since the original SOA was given (and not a SOAA) the greater the likelihood that the client‟s situation will have changed. If the client‟s situation has changed you can‟t use a ROA. You must be careful if the original SOA contained a limited scope or you received only limited information about the client. In these circumstances, the scope of the later/further advice may be different or the client‟s circumstances will have changed, or you may simply now have more information about their circumstances. If you are in any doubt as to whether the changes are significant or not, you should do another SOA or SOAA. The notes which you keep in the ROA should be as comprehensive as possible, if you are to provide yourself with the best protection. You also need to verbally disclose any remuneration, benefits or associations which could be seen to influence the further advice – do this at the time the advice is given. A template ROA for you to use is included as WORKING-DOC 7. Record of Advice – Small Investment Advice When you provide investment advice to a client where that advice relates to less than $15,000, you don‟t need to provide an SOA. You do, however, need to provide an ROA to the client – even if you‟ve never given them an SOA before. Calculation of advice on shares, debentures and stapled securities need to be calculated to include the total value of all financial investments that would be committed (or disposed of). Calculations of advice on superannuation, managed investment schemes (MIS) or non-derivative instalment warrants need to be calculated to include the total value over 12 months (if investment not finite) and must include other amounts committed by client or reasonably related to the divestment. If you can’t work out the total value, then the advice is deemed to exceed the threshold, you must provide an SOA. The timing for the ROA is the same as for an SOA. Record of Advice – “hold” / “no recommendation” advice If: 1. you provide personal advice, but make no recommendation to acquire or dispose of a particular financial product or products of a specific issuer, or no recommendation to modify the client‟s investment strategy or contribution levels (eg if you make a „hold‟ recommendation); and 2. you, the licensee, or a director or employee of the licensee don’t receive directly any remuneration from the advice; then you don‟t need to provide the client with an SOA. You just need to keep a copy of the ROA on the file. The content requirements of the ROA are the same as the content requirements of the Normal ROA, outlined above. See WORKING-DOC 7 for a template ROA See FURTHER-INFO 4 for an example of how this and other advice documents are used in practice. “No advice” or Execution only instructions If a client requests that you conduct a transaction (ie. deal) and you have not provided any recommendation about that transaction you don‟t have to do a SOA or a SOAA. You must ensure that your client file contains evidence that you did not give any advice in relation to the particular transaction. This can be done through a short email or note to the client, or by obtaining written instructions from the client that show that the client is not requesting advice. Be careful where the client is proposing to invest in something that you think would be risky for them. Even though the client has not asked you for advice, you need to let them know the risk that they are taking on in this particular transaction. It could be alleged that you had a general duty to point out the risks to a client and not to remain silent on the issue. When it is not enough to simply provide a product brochure. You must know and understand any product that you think is appropriate to recommend. It is your responsibility to undertake a review of the products available on the Meritum Financial Group approved product list. Reliance upon external research alone is not sufficient protection for the financial planner. There are a number of products available which use more sophisticated trading techniques, or a range of complex derivative instruments, in order to improve the rate of return. You need to really understand these types of funds so that you can, in simple terms, explain the nature of the risks to the average investor. When assessing the appropriateness of any investment product, you should consider such matters as the inherent risks, including the nature of the underlying investments and assets and any other factors. The investigation undertaken by an adviser should include two aspects: due diligence; and product research. The product research aspect must involve a comparative analysis of the relevant product with similar products. Compliance Tip: The Courts have said that relying on APL is not enough. For example, in relation to Westpoint, it was determined by the National Panel Chair of FOS* that an adviser cannot blindly rely on a product being on their Approved Product List (APL) as being a reasonable basis for recommending that particular investment. They also need to be reasonably familiar with the features and benefits, and risks associated with any recommended products. The determination included the following passage: “The Panel is not satisfied that [the adviser] properly understood the nature of the risks attached to this type of mezzanine investment or the particular risks attached to the Mount Street Mezzanine Pty Limited because of his failure to adequately research the investment prior to it being made. Accordingly, he was not in a position to assess its appropriateness for the complainant‟s needs and objectives or properly advise her in relation to same.” *31 October 2008, number 17338 What you can give electronically You can provide advice in either printed or electronic form. If you provide the document electronically, it must be provided in a tamper proof document, such as a PDF. You must keep a record of having provided it, and some record that the client did receive it.
Pages to are hidden for
"Giving Advice - COMPLIANCE MANUAL"Please download to view full document