Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations •
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.
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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.
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations •
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
Potential impact of
inappropriate advice
on the client
Complexity of the
advice
Effect on client enquiries requirement
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).
Less extensive client enquiries are likely to be necessary
where the advice is for a relatively simple purpose, rather than
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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 175.85
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.
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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?
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations •
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.
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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:
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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:
•
How does the financial strategy link back to the
client's goals and objectives?
Determine a reasonable
•
How does the product recommendation link back to
basis for the product
the recommended financial strategy and the client's
recommendation
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
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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
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Diploma of Financial Planning: FNSFPL501A - Comply with financial planning practice
ethical and operational guidelines and regulations 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.
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