SOA Myths and Mistakes

It should be such an easy thing to do – after all, it’s what financial advisers get paid to do. i.e. provide their advice to clients in a written statement (or record) of advice. But year after year, despite the increasing professionalism of the industry, the regulator keeps finding that SOAs, for the most part, still don’t meet regulatory requirements. Remember ASIC’s Report 562 from 2018 (i.e. many years after FOFA was introduced) that found 75% of advice reviewed did not meet regulatory requirements?

Unfortunately, with our staff having reviewed thousands of SOAs/ROAs over the last 20 years, including as Independent Experts, imac legal’s observations are similar to ASIC’s. That is, as a whole SOAs still do not, overall, measure up. Disappointingly, despite numerous regulatory changes over the years, we continue to see many familiar mistakes.

So, how do you make sure your advice documents don’t fall into the 75% of documents ASIC says don’t meet regulatory requirements? Avoiding the mistakes we canvas below will go a long way to helping.

COMMON SOA MISTAKES

And the solution is … always a product

In the post-FOFA world, the laws are written so that financial products are only one of the options advisers should consider[i]. Products are typically front and centre of most SOAs. Yet, when you read many SOAs as an independent third party, the facts can scream out at you: why didn’t you consider strategic advice; why didn’t you address cashflow issues; why is there no evidence of helping with budgeting when everything about the client’s circumstances tells you it’s a major issue; why not address savings?

The best SOAs identify these needs and objectives and prioritise them where appropriate. Financial products are recommended only if or where it is clear these are the most important priority.

Unfortunately, many SOAs read as if an adviser has reached for their grab-bag of products without seriously or deeply considering a client’s circumstances, needs and objectives. Such SOAs leave you wondering whether the adviser was more motivated in recommending their favourite investment/super-platform because they know they can collect their fees from it than whether it was what the client really needed at that point in time.

As a general observation, some of the best advice we see is where advisers sell the value in their services to their clients and charge their professional fees directly. Such advice may or may not include financial products initially.

Poor justifications/tailoring

Many SOAs/client files do not identify a client’s specific, measurable and attainable personal goals. Objectives are expressed at a high level (e.g. to retire comfortably) and are so generic they could apply to just about anyone.

The best SOAs and advice files demonstrate in-depth questioning and discussions about a client’s specific goals. They are expressed in a way that can be measured and the advice is tailored to helping achieve each of those goals and objectives. The advice will be very clear about how the recommendations (and how any ongoing services if relevant) will help them achieve those specific, measurable goals. Such advice files stand out as being truly bespoke and tailored to the client’s individual circumstances. Not a cookie-cutter insight.

Generic explanations for moving a client from existing platform ‘because the new platform has 160+ investment options compared to 80+ in the current platform’ hold no weight when, for example, the client has simple needs, there was no comparative analysis of the performance of the existing versus recommended products, no basis for any claims that ‘we think the new funds will outperform your existing funds’ and, say, only four or five mainstream managed funds were recommended in any case. Advice reviewers become rightfully suspicious where the recommended product is more expensive and the only material discernible difference between the 2 platforms is that the adviser can be paid their fees from the recommended platform whereas they can’t from the existing platform.

Over-reliance on templated text

Allied to the above issue, too many SOAs rely on mainly templated text and do not show enough evidence of an investigation into and consideration of the client’s specific needs. The resulting advice looks generic and second rate.

While there is clearly some room for templated text (e.g. re prescribed disclosures), the client’s circumstances, needs and objectives and the adviser’s advice and recommendations on how to achieve those outcomes should be clearly tailored to the individual.

The best SOAs focus on the ‘why’. That is, they clearly show the rationale for their recommendations and demonstrate how their recommendations will help the clients achieve their clearly defined goals.

Ongoing fee assumption

Many clients have uncomplicated arrangements and simple needs. Some do not have much wealth. Yet, there is a cohort of advisers who seemingly have ‘ongoing fee arrangements’ as a standard go-to offering regardless of whether the client’s circumstances suggest such arrangements are really necessary for the client.

The best SOAs summarise the client’s situation and needs and offer service accordingly. Sometimes this means ongoing fee arrangements are appropriate. Other times, one-off advice is appropriate.

Of course, if you provide point-in-time one-off advice this does not mean you can’t keep in contact with the client and offer/provide reviews and additional advice as required. CRM systems allow for regular communication with clients. Quite often, providing ad hoc advice and service, when needed, will save clients with simple needs money compared with ongoing fee arrangements yet still help ensure they can meet their goals.

File Notes? What file notes?

We get it, advisers know their clients like they know their friends and family. Unfortunately though, unless you can show an external reviewer that you had such and such a discussion with the client or undertook specific research and comparisons than for the purposes of the review, it simply did not take place. So, your complete advice file needs to be up to scratch, not just your SOA. Yet, many advice files still contain only scant file notes.

AFCA has numerous examples of matters where comprehensive, contemporaneous file notes have saved an adviser from adverse findings. Like every professional, every relevant client conversation, meeting, action should be documented on file. For financial advisers, ensuring you can show in-depth consideration of the client’s requirements and the client-focused rationale for your actions is vital.

Also, comprehensive file notes help prove the investigations you made and the steps you took in the advice process. This can not only help you meet the best interests safe harbour requirements but also help you to meet your document retention requirements. It’s a habit that could save you a lot of heartache.

Conflicts need managing, not just disclosure

Some advisers seem to think that if they disclose a conflict they have met their obligations. But disclosure by itself is often not enough.

Look at a classic situation: recommending a higher/lower level of insurance cover than the client currently has. Instead of demonstrating that they have reviewed the client’s existing cover, the adviser recommends a new policy that also happens to pay a higher upfront commission.

While there are many legitimate reasons why a new policy may be better, many regulatory requirements (including best interests obligations, product replacement requirements, and conflicts management) coalesce to require advisers to clearly demonstrate that they:

• considered whether the client’s existing products could also be appropriate;
• undertook a meaningful comparison of products, the client’s circumstances and needs. Using generic explanations such as ‘the new policy has better inclusions and is highly rated’ does not cut the mustard. There should be evidence on file about what those inclusions, why they are relevant to the client and how and why that outweighs the inconvenience and risks associated with applying for new insurance;
• considered the impact and risks on the client if they have to undergo underwriting; and
• demonstrably based their recommendations on the client’s circumstances.

Scope it, scope it good

Scoping remains a big issue. It appears many advisers don’t know how to scope properly. E.g. scope is never a product, e.g. ‘superannuation’. The scope will be what the client wants you to do with their superannuation. E.g. ‘review current superannuation arrangements to ensure they can maximise the chances of meeting your retirement goals [which should be well-articulated and understood] and make any recommendations necessary.’

Similarly, a scope should never include the recommendation. E.g. the scope should never say something like ‘consolidate your super into Sooper Dooper super fund that is on my APL (and coincidentally allows me to collect my fees from it). The recommendation may well be to consolidate the client’s super but what the client is asking for is a review of their current arrangements to identify if they are appropriate or if there is a better solution for them.

The other common scoping issue we find is where the scope doesn’t align with the content. It is always worthwhile reviewing the scope before you provide the SOA to a client.

The Disclaimer Will Save Me*

Some advisers seem to think disclaimers will cover them if they haven’t made all reasonable inquiries or efforts or otherwise not met their legal obligations. But this is not the case. Courts very rarely allow disclaimers to disclaim negligent conduct. And trying to rely on a disclaimer in lieu of meeting your regulatory obligations never works.

The most common example we see of this is the misuse of the ‘incomplete or inaccurate information’ warning required by sec 961H where advisers use it as a bit of a catch-all disclaimer. But this section requires incomplete or inaccurate information warning to be used only where it is ‘reasonably apparent’ that information related to the client’s objectives, financial situation or needs is incomplete or inaccurate. And remember, the best interests safe harbour, at sec 961B(2)(c), requires an adviser to make reasonable inquiries to obtain complete and accurate information “where it was reasonably apparent that information relating to the client’s relevant circumstances was incomplete or inaccurate.” So, the incomplete or inaccurate information warning cannot be used as a disclaimer to excuse a lack of investigation or inquiry by an adviser.

* No it won’t!

Of course, it is possible that your licensee has specific requirements that go beyond the legal requirements with any of the above issues. Where this is the case, you must follow your licensee’s directions and requirements. But our experience is there will always be something that can be improved.

CONCLUSION

Yes, there is an art to effective SOA writing. They are not the easiest thing to draft. But they are also an adviser’s most effective business card. They can showcase your professionalism, your care and your understanding as much as they can be a roadmap for a client’s future. Taking pride in your SOAs and not just treating them as ‘something compliance makes me do’ can pay dividends for advisers and clients alike.

By Ian McDermott, Financial Services Lawyer and Compliance Consultant

imac legal is a law firm specialising in financial services. imac legal also provides compliance services via its complifit® brand.

[i] See sec 961B(2)(e) of the best interests safe harbour. This provides that “if, in considering the subject matter of the advice sought, it would be reasonable to recommend a financial product” … then you are required to investigate and assess financial products that may achieve the client’s needs and objectives. This makes it clear that solutions other than financial products may be relevant to clients’ needs and objectives.