Delivering Replacement Product Advice in the Client’s Best Interests

In order to satisfy their compliance obligations, advisers giving replacement product advice to clients should clearly document the reason why the existing solution does not deliver on the client’s objectives, the Financial Planning Association (FPA) has advised.

Dante De Gori, FPA General Manager Policy and Conduct

Dante De Gori, FPA General Manager Policy and Conduct

This is one of the tips included in the FPA’s recently released best practice guide, Taking Other Steps – Best Interest Advice in a Strategic World, which provides advisers with practical tools, guidance and real advice examples on how to apply the best interests duty.

The FPA said it recognised that, in the wake of the Government’s Future of Financial Advice (FoFA) amendments regulations being disallowed, advisers were concerned about how to comply with the ‘taking any other steps’ element of the best interests duty safe harbour provisions, particularly when it came to replacement product advice.

‘You are required to consider the provision of a strategy (rather than a standalone product recommendation) as a key proof point that you have ‘taken other steps’ to ensure your advice is in your client’s best interests,’ the Association said in its guide.

‘If your advice includes a product recommendation, it is the provision of related strategic recommendations that benefit your client that is a key measure in complying with clause g.’

While there is no minimum number of strategies or alternative products an adviser must propose to comply with the best interests test, FPA Manager General Manager Policy and Conduct, Dante De Gori, said at a minimum advisers should offer clients three options, including retaining their existing product:

  1. Current strategy/product (ie: change nothing)
  2. The new, and recommended, strategy/product
  3. An alternative but not recommended strategy/product

The Association offers the following approach in its guide:

Aligning products with client needs, goals and advice strategy

  • When researching products, always start with the client’s needs and goals with
  • Consider the client’s short, medium and long term goals
  • Ensure any product you consider fits with your stated advice strategy

Review the existing product first

  • Analyse whether the existing product will enable the client to meet their short, medium and long term goals
  • Consider whether the existing product fits with your stated advice strategy
  • Identify any risks, disadvantages of retaining the existing product
  • Document your analysis of the client’s existing product and why it does/doesn’t meet the client’s objectives

Recommending a replacement product

  • Clearly document how the new product meets the needs and objectives of the client
  • Discuss with your client the risks, features, benefits, disadvantages and costs of replacing their existing product and ensure they truly understand the consequences of a switch
  • Compare the benefits, disadvantages, risk and costs of the existing product against alternative solutions
  • Explain to your client any alternative products that you reviewed but did not recommend and the reasons why
  • Thommo

    Hey Dante, there’s enough crap in SoAs without including an inferior alternative product for comparative purposes. Surely if I’m advising under Best Interest Squared then I stand and fall on my advice. I also include alternative strategies that I consider just BS for most of my clients. Why am I telling a surgeon that the alternative to income protection is to rely on savings or social security? Am I dealing with a knuckle dragging moron or someone whose IQ is way ahead of mine? As far as strategy goes, Product should be Strategy. For example I can offer a young Chiropractor or Physiotherapist who plays amateur football an income protection policy of high quality at standard rates (no premium loadings or extended waiting periods). Most alternatives don’t offer those terms. Another example of Product being Strategy: there are 3 standard definitions for Heart Attack used by retail insurers. I have asked 2 cardiologists to rate them. Two are good and the 3rd requires a higher degree of severity to claim the full benefit payment. Surely the product is strategy; do you want a policy which makes it easier or more difficult to claim the full sum insured? Err derr!

    • Lou Stergio

      ASIC Rep 413 clarifies strategic advice and alternatives i.e. levels of cover, waiting & benefit periods, IP/TPD/Trauma definitions, exclusions, stepped V level premium, indemnity V agreed value.

  • ken

    The magic words are “fudicary duty” How hard is it to understand. Do the wrong thing and look out !