Originally published | 25th January 2018
We’ve recently seen a lot of action from the Regulator in regards to financial planners not meeting their best interest duty. This action has seen enforceable undertakings, additional licence conditions and in some cases, banning orders.
It led an adviser I know to recently say to me that “The Best Interest Duty can never be 100% fulfilled because for every goal or problem there are many solutions possible and no one right approach. And hindsight will always be a factor. And ASIC seems to focus only on fees and so we are doomed if we offer any solution where the fees are higher no matter how good the advice or product is”.
This seems to be a current reaction to any media in regards to this subject.
What was my answer to this adviser?
Best Interest Duty is like a jigsaw puzzle and the missing pieces are generally notes about your process and investigations.
When you look at a jigsaw puzzle, you only see the picture twice, once on the box, and the second when you have put all of the pieces together.
But even though you might see most of the picture, is it complete if you are still missing pieces?
I think we can all answer that question and say no, and this is ASIC’s view as well. So why do we (yes the royal we) think that we have met the best interest duty if we have missing pieces of the puzzle?
For example, some of the action by ASIC has been because the adviser didn’t consider the alternatives to the strategy they recommended.
This piece of the puzzle is covered under step 7 of the safe harbour, which is to conduct a reasonable investigation into the financial products that might meet the needs and objectives of the client.
If you document your research and analysis and maintain this on the client’s file, it is more difficult for someone, be it ASIC or AFCA for that matter, to say you haven’t met that component.
Two other key areas that seem to be missed in the safe harbour are the investigation into goals and objectives and determining scope.
Here are my helpful tips on these, using my clients Bill and Ted:
- I was discussing Bill and Ted’s goals and they could only tell me that they wanted to go on an Excellent Adventure. The more we discussed, the more I found out that they wanted to do some world travel over the next two years and see some historic sites, such as travelling the route of Genghis Khan during his Mongol Empire and travelling to Greece to see where Socrates first iterated his philosophical views. it wouldn’t be good enough for me to go from a fact find with Bill and Ted want to go on an excellent adventure, to a SoA that says they want to travel the world, so I need to have a file note to fill in the gaps. For example, it would read “Bill, Ted and I discussed their goals and they stated they were to go on an excellent adventure. When we discussed further, it was discovered that they wanted to do two specific overseas trips in the next 2 years, one to follow the route of Genghis Khan, which will cost $25,000 and one to travel to Greece as they had always been interested in Socrates and his philosophical views. The trip to Greece is the one they want to do first at a cost of $15,000 as they need to do more research on Genghis Khan’s travels.”
- When we discussed the Scope of Advice they wanted me to cover, Bill and Ted said that as they had saved for the trips, they only wanted to ensure they had enough personal insurance in case something happened. During my analysis of their personal circumstances, I note that we should look at their superannuation as well as they had existing cover inside their super. My file note should then say “Bill and Ted only wanted to discuss their insurance needs, however, on analysis of their personal and financial situation, I found that we need to review their superannuation as well, as there are components of their super that are intrinsically linked to their insurance needs”.
The last point is in regard to selecting products and ensuring that if you are switching products, that the recommended meet the client’s needs. ASIC quite rightly will use cost as an assessment if there is a lack of actual benefit to the client. So in these situations, a file note outlining your research into both existing and recommended products, which includes notes about how the recommended products meet the client’s actual needs, will help evidence and therefore give you another piece to the puzzle.
Finally, please don’t think for a moment that I am saying my file notes are foolproof, but what is, is that if you document your advice process, including the analysis you undertake, it is more difficult for questions to be raised about your advice.
Make your jigsaw puzzle a 500 piece, not a 4 piece, because that will show how experienced you are.