When providing personal financial advice to retail clients, there are a few things new entrants to the advice sector should keep in mind to ensure they avoid disputes.
Here are the Financial Ombudsman Service’s (FOS') top 10 tips for financial advisers:
1. Take detailed file notes
FOS relies on evidence provided by the parties to a dispute. Documents created at the same time as the activity or advice in question are usually given more weight than later recollections of what was said or done.
This means contemporaneous file notes of conversations and actions are solid gold when a dispute comes to us.
Whenever possible, confirm verbal instructions from a client in writing (e.g. send them an email after a telephone conversation confirming what was said). Statement of Advice and file notes should detail how any conflicts between goals, available resources and willingness to take risk are resolved.
2. Clear goals and strategy
We do not consider client objectives and instructions written in industry terms that few clients would understand to be a reliable record.
Write down a client’s objectives in the words the client has used in answering your questions about their objectives and how to quantify those objectives. This demonstrates that you have heard and understood the client’s goals in seeking advice – eg 'to retire at age 65 with an income of $50,000 per year'. Detail how the strategy you are recommending will achieve the client’s goals.
3. Turn clients away when appropriate
If your services are not suited to a particular client (eg they are seeking advice about direct shares and you don't provide that service), you must tell them so and send them away. Don't try to shape the client to your offering.
If a client is seeking a return which does not match their risk profile and you can’t convince them to change their expectations, either send them away or see tip 4.
4. Explain the risks to clients who choose to act against your advice
You must be very clear in explaining the risks and documenting that the course of action is against your advice. Explain the risks in language the client understands, make a contemporaneous file note and have the client sign it.
5. Explain what types of service you are providing
Clients don't know the difference between information, general advice, personal advice and execution-only services.
If you don't give the appropriate explanations and warnings or you are unclear, then you could be found liable for advice or activities that you had not intended to provide.
6. Use template forms and documents carefully
Make sure template forms and documents about strategies, products and risks are appropriate to the client you are advising.
It is very difficult to convince us that you have selected the right strategies and financial products for a client if the documents contain errors, are missing information or contain copious amounts of irrelevant material.
You will also have some trouble convincing us that the client understood your documents if they contain pro forma jargon or complex concepts.
Tailor documents to your client’s financial literacy. Statements of advice must be clear, concise and effective.
7. Use risk profiling tools carefully
Make sure that the strategy and asset allocation you recommend to a client is consistent with the risk profile generated by the risk profiling tool you use. If there are inconsistencies, you must clearly explain them.
Remember, risk profiling tools are only tools. They all have inherent flaws that must be recognised and addressed by the adviser.
8. Don't give cookie cutter advice
This is really a reiteration of tips 6 and 7.
You should not put all or most of your clients into the same strategy and products, especially not gearing strategies. For example, we saw a Statement of Advice for a client with taxable income of $42,000 that stated: 'Your reasonable level of surplus income and high tax rate should make gearing an appropriate option for you'.
The best interest duty requires that advice be reasonably likely to achieve the client’s goals and that alternatives have been considered.
9. Understand and explain the products
Understand any products you are recommending. Don’t advise on products you don't understand.
Don't just hand over a Product Disclosure Statement (PDS) – you must explain the PDS to your client and record your discussion in the Statement of Advice (SOA).
Don't cut and paste PDS disclosures into your SOAs. Show you understand the products by using the same words you use to verbally explain the products to your clients!
10. Be clear about the advice relationship with clients you know
If you are giving advice to a friend, relative, colleague or employee, it is critical to formalise and document the process as you would for any other client.
In addition, declare any conflicts of interest as you would for any other client.
Alison Maynard, ombudsman, investments and advice, Financial Ombudsman Service Australia
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