Financial Planning

Adding value to financial advice compliance

27 September 2021

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

As director of a leading outsourced compliance company, Nadia Docker of Kinetic Compliance has a deep understanding of the challenges facing financial advice practices and paraplanners. She shares her insights on some key issues impacting the profession at this time, and the critical role paraplanners can play.

Like everyone working in financial planning, Nadia Docker and her Kinetic Compliance team are very aware of just how much change advice professionals are currently dealing with. With the regulatory reforms based on the Hayne Royal Commission recommendations coming into effect, financial planners and paraplanners really have their work cut out for them.

“Particularly in the last 12 months, the compliance needs of AFSLs and planners has increased dramatically,” says Nadia. “It’s just that constant moving feast of legislative updates, new requirements, new information. In October [2021], we’ve got the design and distribution obligations coming in, which is going to affect how products are recommended and selected for clients. That’ll need to be factored in as well as breach reporting. There’s a lot of significant change still to come and I think that’s probably what’s leading to a sense of everyone feeling a bit overwhelmed.”

 Structure and detail in SOAs

Although a number of the changes impacting how financial planners deliver advice will be introduced during the second half of 2021,  many financial planners and paraplanners have been focused for some time on refining the structure and content for Statements of Advice (SOAs) to keep these compliant.

“The level of detail and customisation back to relevant circumstances has become more important,” says Nadia. “In the past we were able to rely more on templated texts. Now you also need to add more on how the advice is appropriate to the client, how it ties back to conversations the planner had with their client and is relevant to the objectives they’re trying to achieve through the advice that’s being given.”

Reliance on templates in producing SOAs can often be a problem for the level of detail required says Nadia. “I take the view, that can be seen as controversial, that there’s no such thing as a compliant template. It’s the advice that goes into the template and how it’s set up and structured. What we consistently see is that there’s the house view, but the house view is not explained, and it’s then not related back to what the client’s looking for.

“You can’t just say, ‘we’ve chosen this,’ and then have a standard statement. It doesn’t stack up for the best interest element of relevant circumstances for the client. Paraplanners read and write so many plans through the year that they can forget to look at these things in detail. So what can end up happening is a lot of irrelevant disclosures are included that actually have nothing to do with the client’s situation and the advice. What you really need is a well-structured SOA template including clear directives on what to add and remove.”

An instance where it can be particularly important for an SOA to ‘show the working out’ is where there is a fee increase as a result of changes in products or services recommended. “Where fee savings are minimal or the fees end up being higher, it’s a problem if they’re not properly explaining why the client actually needs that investment style. They might be genuinely trying to achieve better investment outcomes for their clients, and it just needs further information in the SOA to explain why.”

According to Nadia, this can be less of an issue where a financial advice practice is required to have an investment philosophy, for their Separately Managed Accounts for example. “There are other businesses out there that might be investing in the Dimensional way, for example” she says. “But very rarely have they been explaining why they believe in that model and why the science behind that type of model is appropriate for the client. There just needs to be some explanation that outlines the fact that this has been discussed with the client and the reasons why they’re interested in this model. That can go a really, really long way to supporting a recommendation where the cost saving isn’t obvious.”

Managing fee renewals

While this is an ongoing issue for paraplanners to address and improve on, what’s likely to be taking up a lot of their time just now is the transition to the new fee disclosure regime from 1 July 2021. “There has finally been clarification by the regulator that fixed term agreements can be for periods up to 12 months, so we are seeing a fairly significant shift across the board to these fixed term agreements,” says Nadia. “A lot of the institutions moved to this well over 12 months ago, because that’s how they want to operate the AFSLs within their control. At this stage we’re probably seeing roughly a 50/50 split on financial planners sticking with the ongoing service agreements versus moving to fixed term.”

“Each of these approaches has its own challenges around key dates,” she adds. “It’s important to understand how these are to be managed through changes in the software you’re working with and how you’re going to track those new key dates.”

Nadia also points out the knock-on effect for other aspects of advice delivery and documentation as a result of this change. “A lot of financial planners are taking this opportunity to go back and look at their service offering in light of the 1st July changes,” she says. “If your service offering changes, and you have your service offerings embedded in your SOAs for new clients,  then these foundation SOAs will need to be changed to reflect those updated ongoing service arrangements as well.”

Be prepared to ask

Being across details like the raft of changes to superannuation announced in the May 2021 federal budget is a critical part of the paraplanner role. Paraplanners are also in a position to have a good overview of each piece of advice they work on and review. It’s this perspective that can enable them to see whether there is anything missing or inconsistent in the content of an SOA.

With this in mind Nadia says it’s very important for paraplanners to have the confidence to speak up when they notice something is not as it should be. “This is the top piece of advice I have for paraplanners,” she says. “Whether you’re working within a business or as an external resource, if you’re putting a plan together and it’s not making sense to you, give them feedback that you don’t feel that there is enough information to substantiate a recommendation.”

“That accountability factor is so important,” she adds. “Not only does it protect your own integrity, it also helps protect financial planners that you’re working with. You’re reading their advice with a fresh pair of eyes. It can be really hard for planners to self-assess when they’re so deeply involved with a client. They’ve spent hours talking to them and they’re just filling in the missing information in their head because they remember the conversation. But if that means the SOA is not properly demonstrating how the advice is appropriate or how it relates to relevant circumstances there’s a very high chance if the advice gets picked up for audit, it is going to potentially fail in key areas.”

In Nadia’s experience, sorting out these compliance issues that can create significant problems down the track, is often straightforward and simple. “You’d be surprised how many advice issues can be fixed with just adding a simple sentence or a simple paragraph that just gives a little more background information,” she says. “Many compliance fixes don’t require you to rewrite an SOA or spend another two or three hours researching something. Picking up the phone and having a quick chat to the planner can help you understand their thinking. Then you can add a little more personalisation to that SOA to give the background that’s necessary to pave the way for a recommendation.”

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