Article first published in IFA – Independent Financial Advisor in May 2017 as “A finer grain approach to financial advice”
A cornerstone of the Future of Financial Advice (FOFA) reforms is the “best interests duty”. In April, we saw the first reports of advisers being banned with charges including not acting in accordance with these FoFA reforms.
What does the “best interests duty” require of an adviser?
In part, it requires:
- Identifying the objectives, financial situation and needs of the client that were identified through instructions;
- Identifying the objectives, financial situation and needs of the client that would reasonably be considered relevant to the advice sought on that subject matter;
- If it is reasonably apparent that information relating to the client’s relevant circumstances is incomplete or inaccurate, making reasonable inquiries to obtain complete and accurate information;
- Basing all judgments on the client’s relevant circumstances; and
- Taking steps, at time of advice, that is reasonably regarded as “in the best interests of the client”, given the client’s relevant circumstances.
With the duty to prioritise the client’s interests in the event of a conflict, the Australian Securities and Investments Commission (ASIC) has further clarified in RG 175:
- The recommendation of the product of a related party must be supported by extra benefits for the client; and
- If your APL contains only products of a related party, you must not recommend one over a competitor’s product unless a reasonable adviser would be satisfied it was in the client’s interests to recommend that product over a rival product with similar features and costs.
A financial adviser’s overall approach to these new duties should be informed by ASIC’s view that
a reasonable adviser should believe that the client is likely to be in a better position if the client follows the advice
Financial Planners not addressing client cash flows may be set for a fall
There are a number of points within the “Safe Harbour” guidelines that strike me as remarkable.
Strong emphasis on understanding client’s financial position
From experience, while the client Fact Find process is often done well in relation to the client net position – assets and liabilities, the same may not be true for understanding a client’s cashflow and budget.
Often, this information is the client estimates of their budget. At worst the budget section of the fact find may not be completed at all. The overriding assumption here is that a client with surplus and good income is in control of their day-to-day financial management. Either way, we argue the adviser’s ability to truly understand the client’s ability to pursue any strategy involving ongoing financial contribution is quite possibly compromised starting from this basis.
Relevant circumstances of a client
Outside of the fact find data, point 8 is extremely interesting. An adviser should take “any other steps that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”.
Given the fiduciary basis of the adviser/client relationship, this would seem very wide ranging requirement for an adviser to fill and in many cases would see an adviser needing to provide recommendations and advice around many areas of a client’s financial situation that have not been traditional areas of advice for financial planners… debt management, budgeting and cashflow.
The Future of Financial Planning Advice
At a minimum there is a need for:
- More detailed fact finds;
- Supporting documentation for why the advice provided to a client is in the “best interests” of the client; and
- Evidence of products and services provided improve the client outcomes (especially when replacing existing products).
At a deeper level, there is a need to provide continued support for how your advice has improved (and continues to improve) your client’s financial life.
Taking a finer grain approach to financial advice, where the adviser gets in deep with the client is where the Future of Planning Advice lies.
With regular coaching and management of client’s financial strategy via cash flow management, it is possible for an Advisor to truly demonstrate they know their client, in addition, they will find it easy to both demonstrate benefits of the strategies recommended and take timely corrective advice action if a client hits life event hurdles. We would argue that it not only meets this regulatory requirement but Australians as a whole would benefit significantly with more assistance in this area of their lives.
Mortgage brokers should also be watching the current ASIC review of their industry with interest as I would suggest that many of the FOFA reforms will transfer easily into their world.
How Bill Butler assists Financial Planners to make the leap
Bill Butler’s Managed Cashflow service is uniquely designed to work with Financial Planners and assist them to scale a cash flow management service. It has been developed to simplify the ability for Financial Adviser’s to comply with the FoFA requirements by helping advisers to:
- Identify the true financial situation and needs of the client and provide the tools to collaborate with the client on this;
- Confirm that information relating to the client’s relevant circumstances is accurate and up to date;
- Understand and manage the client’s relevant circumstances, including their future cash flows and impacts of financial strategies;
- Provide advisers with accurate and up-to-date details that ensure their advice is aligned with the clients relevant circumstances, not only at the time the advice is given, but at all stages of the advice process.
So now there is a simple outsourced service that will allow a licensee or individual adviser to further enhance their compliance regime and minimise the likelihood of any breach of the FoFA reforms. A service that provides ongoing and up to date access on clients day to day finances and future cash flows which enhances client engagement by maximising client financial outcomes.