June 29, 2015
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.
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:
- Current strategy/product (ie: change nothing)
- The new, and recommended, strategy/product
- 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