Switching advice needs to leave the client in a better financial position, and it must take into account, and be appropriate to, their individual situation and objectives.
Every year, the Australian Securities and Investments Commission (ASIC) completes a large number of advice file reviews, looking at the quality of financial advice that is being provided to consumers.
One common type of advice is a recommendation that the client replace their existing financial products with new ones (switching advice). But all too often, ASIC finds that the file doesn’t demonstrate why this is appropriate advice.
ASIC has worked on a range of projects looking at quality of advice in the last few years, and many of the results have not been encouraging. Drawing examples from some of our biggest reviews and surveillances, the recent vertical integration and conflict of interest report (REP 562) found that 75 per cent of the advice did not demonstrate compliance.
ASIC’s advice compliance report (REP 515) has, thus far, led to more than $50 million in compensation, and 45 people have been banned from providing financial advice through our Wealth Management Project.
ASIC is working hard to assist the industry to improve the quality of advice that consumers are receiving, and switching advice is an area that the financial advice industry can easily improve on.
Switching advice needs to leave the client in a better financial position, and it must take into account, and be appropriate to, their individual situation and objectives.
If an adviser provides a client with switching advice, they must clearly articulate and provide genuine reasons why moving to the recommended product will leave the client in a better position, taking into account the existing product’s characteristics and costs.
The following four areas are key to keep-in-mind when providing switching advice.
1. Improves the financial situation
ASIC frequently sees advice that recommends a new product which does not improve the client’s overall position — keeping in mind that switching advice must improve, and not simply maintain, the client’s position. Any switching advice you provide should be able to demonstrate that the client will be in a better position overall, and that any higher fees will be offset by improved benefits that the client requires.
2. Relevant to circumstances
ASIC sees a surprising number of files where an adviser has appropriately investigated the client’s existing product, but has not then used this information in developing the advice. We also see a large number of files where switching advice is provided based on the theoretical benefits of a new product, such as a broader choice of investments, but the client’s specific circumstances do not indicate that this benefit is required or appropriate.
Your advice must take into account the client’s particular situation and objectives, and product comparisons must include this information, not simply the product description.
3. Individualised
Every person’s advice should be specific and tailored to their personal situation and objectives. Situations where an adviser’s client list are all receiving the same advice or are invested in the same product would raise red flags with ASIC. Make sure that your advice is individualised, tailored and specific to the client.
4. Record-keeping
A large number of advice files are assessed as being non-compliant due to poor record-keeping. If your record-keeping is so minimal that a file reviewer or ASIC can’t tell whether you are meeting your obligations, then you are de facto not meeting them.
Comprehensive records protect you, protect your clients and are the hallmark of professional advice. Not only should the advice you give be logical, justified and appropriate to the circumstances, but you should be able to simply and easily demonstrate why.
