FOS Top 10 Tips for Getting Advice Right

When providing personal financial advice to retail clients, there are a few things to keep in mind to ensure you can avoid disputes. It might sound like common sense, however, best practice is to always act in the interests of clients, prioritise the client’s interests and provide appropriate advice. This case study provides the Financial Ombudsman Service’s top 10 tips for financial advisers…

At a glance

Source: Financial Ombudsman Service (FOS)
Topics covered: best interests duty, disputes, best practice

In detail

FOS independently resolves disputes between consumers — including some small businesses — and member financial services providers. The regulator also provides best practice guidance for financial services providers, to address systemic issues, or other complaints or queries that regularly arise from consumers.

This list, taken from the July 2015 edition of the FOS Circular, provides a best practice guide for the provision of financial advice.

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 (eg: 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 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’s 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.

To subscribe to the FOS Circular, click here.

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2 Responses to FOS Top 10 Tips for Getting Advice Right

  1. BillB August 5, 2015 at 2:31 pm #

    And all of this for 60% of the premium, and if the client changes their mind, all subject to a clawback

    I need a sanity check to stay in this industry

    Re point 5 – what a pity ASIC does not care about the misleading behaviour by the floggers of direct products off TV on a GENERAL ADVICE basis. Its not possible not to veer from General Advice to personal advice. An average Australian does not understand the difference. They think its all just buying a policy

    ASIC should put aside their bias towards advisers and write to every purchaser of a life risk product sold under GENERAL ADVICE to ascertain if the clients knows the difference

    • Christo August 5, 2015 at 3:26 pm #

      I agree Bill what a joke. You need to be a Rocket Scientist to work thru all of this with your clients. Why do we have to go thru all of these requirements when Direct Marketers and Union Based Super Funds basically don`t have to provide half as much information as we do.???

      Ie: factfind,Strategy papers,File Notes, SOA`s the list goes on forever. Annual reviews,claims assistance etc.

      I think I will just sell general advice life covers. 20% Upfront, 20% ongoing and no paperwork,!!!

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