Financial Planners PDF
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This document discusses financial planning in Australia, including the financial planning industry, changes in the industry, evidence from ASIC surveys, the conclusion, and general and statutory financial planner regulations. It also covers best interest statutory duty and meeting statutory and general law rules.
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Dividends and Capital Gains Financial Planning Industry in Australia Financial Planning Industry ● the financial planning (FP) industry exists due to the need of individuals investors to access expert advice to build ‘portfolios’ tailored to their personal situation. SItuations may dif...
Dividends and Capital Gains Financial Planning Industry in Australia Financial Planning Industry ● the financial planning (FP) industry exists due to the need of individuals investors to access expert advice to build ‘portfolios’ tailored to their personal situation. SItuations may differ due to: ➔ – inadequate financial knowledge in some (many) cases ➔ – differing expectations of earned or investment income, tax situations, family circumstances, investment horizons, etc. ➔ – insufficient or illiquid assets Change in the FP Industry ● the prevalent poor practice in the industry indicates that the fiduciary duty was not being met, so the industry has been subject to substantial reform ● in the past two decades, much data was gathered and analysed by ASIC as a basis for introducing reform by way of stronger legislation ● ASIC ‘shadow shopping’ surveys of 2003, 2006 and 2012 found unequivocally that Financial Planners were not in general working in the best interests of their clients ● they identified numerous cases of consumers who have been given bad advice, but thought it was good advice – i.e. they didn’t know enough to perceive the difference Evidence from ASIC Surveys ● The 2012 survey assessed many examples of advice, finding: ➔ – 39% of the advice was not reasonable given the client’s needs (as required by existing regulation) ➔ – 58% of the advice was ‘adequate’ ➔ – only 3% of advice was considered ‘good’ ➔ – a switch of advisers would have resulted in higher fees in 62% of cases ● In a survey undertaken in cases where ASIC judged that the advice by AFSL* representatives clearly lacked a reasonable basis, 86% of consumers were still satisfied with the advice Conclusion ● Due to the specialised and complex nature of financial planning the conclusion was that people need to be protected much like medical patients ● As a result, there is now a statutory, as well as general law and ethical*, fiduciary duty on financial advisers to act in the best interests of the client ● the legal duty was introduced into the Corporations Law under the Future Of Financial Advice (FOFA) reform program introduced in 2011 eneral and Statue Financial Planner Regulation G Best Interest Statutory Duty ➔ Duty does not apply to wholesale clients who are expected to have some financial prowess e.g. a bank “Best Interest” Fiduciary Duty (general fiduciary duty not specific statutory) ● financial advisers have always been subject to a general law fiduciary duty (also referred to as the ‘best interest’ duty), which requires an adviser to act objectively and solely in their client’s best interest ● the following factors apply to assess whether the adviser has met the duty: ➔ 1. The planner must have acted with a reasonable level of expertise in the subject matter advised on ➔ 2. The planner must have exercised reasonable care ➔ 3. The planner must have objectively assessed the client’s relevant circumstances ➔ 4. The planner must have regarded any action implemented as being in the client’s best interest in the circumstances Meeting Statutory and General Law Rules ● In order to meet the fiduciary / best interest duty, it is necessary for FPs to: ➔ 1. Perform a detailed investigation of the client and research the client’s needs ➔ 2. Carefully record all relevant aspects of the client ➔ 3. Formulate clear advice for the client ➔ 4. Obtain the client’s decision and implement it ● Two key principles: 1. Know your client (KYC) ❖ The KYC principle requires advisers to be aware of their client’s circumstances to a degree that ensures they have a reasonable basis for their advice. KYC imposes a strong onus on FPs to do sufficient information gathering 2. Know your product ❖ ‘know your product’ is based on similar principles, in that it requires advisers to have an appropriate level of understanding of financial products ❖ the FP is required to be aware of the available products in the areas in which they advise, and have some expertise in their application ❖ In this context, ‘products’ covers investment strategies and assets, insurance policies, superannuation alternatives, estate planning tools, etc. ❖ e.g. if an FP is to recommend a specific equity investment, such as company shares, s/he must understand the company, share market and inherent risks ● The KYC principle requires advisers to be aware of their client’s circumstances to a degree that ensures they have a reasonable basis for their advice. KYC imposes a strong onus on FPs to do sufficient information gathering Asic Regulatory Guides egal Definitions of the Financial Planning INdustry L When is a Financial Service Provided ● An advisor is providing financial service when: ➔ Providing Financial Advice (general and personal advice distinction) ➔ Dealing in a financial product ➔ Making a market in a financial product ➔ Operating a registered scheme ➔ Providing a custodial ro depository service Who is an Advisor ● under the legislation, advisers (to whom the fiduciary duty applies) comprise principals, authorised representatives and ‘paraplanners’ ● when a principal is referred to, it is any one of: ➔ – the holder of a dealer’s or adviser’s licence (AFSL – next slide) ➔ – any person who obtains a licence under FSRA ➔ – a registered life insurance broker – a life insurance company ● Principals employ or appoint both authorised representatives (qualified) and paraplanners (unqualified or partly qualified) Australian Financial Services Licence ● ASFL– it is the licence that covers those who carry on the business of providing financial services. ➔ ‘carrying on a business’ refers to activities that are systematic, continuous and repetitive ➔ Once you have an ASFL you can sell your services as a financial planner ● A s soon as you have an ASFL you need ot abide by several key reporting obligations: ➔ Audit financial statements ➔ Report if you've breached rules/events ➔ Let asic know in changes of your authorised representatives ● who needs to hold an AFSL? ➔ – any person providing financial advisory services ➔ – any person who issues or deals in financial products ➔ – i.e. the principals in a financial services business ● who is exempt from holding an AFSL? ➔ – authorised representatives ➔ – directors and employees of the business ➔ – any other person acting on behalf of the principal ypes of Advice within Financial Planning T General Advice ● When general advice is given to a retail client, the adviser must: ➔ Warn that the advice is not based on knowledge of client circumstances and objectives ➔ Indicate that the client must consider the advice in this light if inclined to act Suggest that a Product Disclosure Statement should be considered (if applicable) before acting ● ASIC has stated that the following warning is sufficient: “This advice is general; it may not be right for you” ● When general advice is given, the aforementioned personal advice legislation does ont apply to you Personal Advice ● Personal advice is subject to the regulations as it does take into account knowledge of client circumstances and objectives ➔ in RG 175, ASIC notes that advice may be regarded as ‘personal’ even when: ❖ it is not given face-to-face ❖ there is no direct contact with the client ❖ it relates to only one product ❖ the client is a body corporate ❖ the adviser (subjectively) did not intend to provide personal advice ● Asic Guidelines on personal advice: ➔ The adviser explicitly offered to provide advice (and, for example, provided appropriate documentation) ➔ The adviser had an existing financial relationship with the client ➔ The client requested personal advice ➔ The adviser requested details about the client’s personal circumstances ➔ Personal circumstances are referenced in a recommendation ➔ The adviser had received or already possessed information about the client’s personal circumstances Quality of Advice ● There are two key elements of quality advice 1. The suitability Rule: ● – again, this is effectively the practical outcome of ‘know your client, know your product’ rules ● – it includes consideration of products alternative to those suggested i.e. clients should not have a product presented as the only available solution ● How to assess Risk Tolerance: ➔ By examination of previous investments made by the client(s) – this is ok if the client has a long history of investment (though in this case, the client probably doesn’t need advice from a FP); and ➔ By use of a questionnaire – many FP firms provide one of these for clients 2. Informed Consent: ● advice to the client must be communicated in a clear and concise manner ● in particular, this requires that the advice is not misleading, deceptive, incomplete or provided in a pressured environment ● if the adviser is responsible for implementation of the plan, a written signed statement to the effect that the client understands the projected course of action and agrees to the adviser’s implementation of it, should be obtained and kept Acting Efficiently, Honestly and Fairly ● Best practice also requires advisers to act efficiently, honestly and fairly ● These terms are not legally defined, but in the context of financial advice, they are: ➔ – ‘efficiency’ in conducting business, e.g. providing a plan and documentation in a timely manner ➔ – ‘honesty’ relates to ethics, conduct and fiduciary principles ➔ – ‘fairly’ requires advisers to treat clients equally, i.e. not discriminate between clients Disclosure to the client Experience, Competency and Training ● principals must ensure their advisers have proper experience and training and keep up to date; there are three types of training: ➔ – training in investment principles, preparation and formulation of suitable personal advice, knowledge of how the business operates ➔ – ongoing learning: keeping up-to-date with economy, financial markets, legislative and regulatory environments and changes ➔ – product training: provided by the principal if the principal is the issuer, otherwise (usually) by the issuer ● Any adviser must be adequately supervised by the principal, who should provide advisers with written directions that they are bound to implement Documentation of Financial Advice ● when providing financial services to a client, an adviser must operate under an AFSL and provide: – a Financial Services Guide (FSG) – a Statement of Advice (SoA) – the financial plan – a Record of Advice (RoA) – Product Disclosure Statements (if applicable) ● in addition, the complaints resolution process must be explained to the client ● a 14-day cooling-off period applies in some circumstances FSG ● a financial services guide discloses the services offered to the client and must be offered to a client at commencement of negotiations ● • contents of FSG (9 points): i. on the cover it must be called: a “Financial Services Guide” but can be referred to as an FSG (note for assignment) and must be dated ii. name and contact details of the adviser; any special instructions (e.g. feel free to email, etc.) iii. similar information about the authorising principals, or each of them iv. the kinds of financial services provided and the financial products to which they relate SG Contents F iv. who the adviser acts for when services are provided v . the remuneration and other benefits that the principal, the adviser or any other associated person will receive for providing the financial services vi. information about any business relationships or associations between principal and issuers of any products vii. details of internal and external complaints resolution mechanisms (one page may be sufficient) viii. a statement that the FSG has been authorised by the principal Statement of Advice (SoA) ● an SoA sets out the advice provided to the client by the adviser • it must be given to a retail client when providing personal advice, prior to any action required to be taken to implement the advice • SoA obligations and example provided by RG 90 ● an SoA must contain: i. the title ‘Statement of Advice’ on the cover ii. the advice iii. the basis on which it was given iv. the adviser’s name and contact details v. the name and details of the authorising principal, stating that the adviser is an authorised representative of the principal vi. information on remuneration and benefits anyone may receive; i.e. fees, charges and how and to whom they are distributed vii. information about any associations which might reasonably by construed as influencing the advice given viii. a warning if the advice is based on inaccurate or insufficient information ix. information on replacing one product with another Presentation of SOA ● ASIC has provided guidance in relation to preparation of an SoA in RG 90, including an example SoA in Appendix 2 – it is only 12 pages long, is written in plain English, makes clear disclosures, and explains the limitations of the advice ● • ASIC’s surveys had found that previously: – SoAs were too lengthy and too complex – key information was often located in an appendix to the advice document – SoAs were not tailored to client’s financial literacy – content was repetitive – there was no cross check with FSG for consistency with the SoA SOA Documentation Requirements ● • the rules (e.g. RG 175) set out specific items that must be included in any SoA, i.e. the type of detail that must be addressed / included i. Information elicited from client – assets, family circumstances, expectations, existing cash flows, projected cash flows, objectives, special needs, investment preferences (and aversions), risk profile and any other relevant information • this information should be recorded, agreed upon and signed by the client(s) • it forms the basis of the resulting financial plan • the adviser should notify the client of this at the outset ● ii. Information on fees – the amount and nature of fees for the service (SoA) should be disclosed in the first meeting with the client, as part of the Financial ervices Guide • fees may, for instance, be divided into progressive parts – S any products in which the adviser has a financial interest (e.g. he/she receives a commission from the fund manager, is employed by CBA to market its products, etc.) must by law be disclosed to the client iii. Recommendations made by the adviser that address client needs in the four main areas, or as limited by agreement When is an SoA not Required ● a SoA need not be provided in some circumstances, e.g. – advice consists solely of an offer to sell a product – client makes it clear that they do not intend to buy – no issue or sale results from the offer – advice relates to a CMT where the client is not retail – a basic deposit product, or traveller’s cheques – where the advice relates to general insurance – advice over the telephone on traded products, subject to client’s approval Product Switching ● when advice includes a recommendation that a client disposes of or reduces interest in one product, and replaces it with another, the SoA must contain additional information, including: – that the client’s existing product has been considered – costs and charges payable on reduction or disposal – benefits the client may lose as a result of disposal or reduction – entry or ongoing fees attaching to the replacement product – any other significant consequences of the switch Record of Advice (RoA) ● • a RoA may be provided rather than an SoA in specific and limited circumstances: – a SoA has previously been provided with client circumstances – the relevant circumstances have not changed significantly – the relevant basis has not changed significantly • note: neither a SoA nor RoA is required when the advice given relates to investments of less than $15,000 Product Disclosure Statements (PDS)] ● a PDS is designed by an issuer of a product to provide clients with sufficient information to make an informed decision about whether or not to buy (invest in) a financial product ● • what must be included? – it must be entitled ‘Product Disclosure Statement’ on the cover, but PDS can be used elsewhere – details of significant risks of the product – fees, expenses, charges and taxation implications – any other information that would influence a client Penalties ● • jail sentences and fines apply when advisers fail to give FSGs, written SoAs, PDSs, or provide defective documents that: – do not comply with Corporations Act – have not been authorised by the principal – have unauthorised alterations, or – have not been prepared by a proper person • efence: the FP provides proof of having taken reasonable steps (e.g. to d ensure a document was compliant) – this emphasises the importance of documenting compliance Consumer Protection ● • there are four elements to consumer protection provisions (Corporations Law, TPA, FSRA, etc.) – misleading and deceptive conduct – restrictive trade practices – Corporations Act 2001 requires advisers to provide services ‘efficiently, honestly, fairly’ – other miscellaneous relevant laws ● • ACCC administers the TPA generally • ASIC administers provisions in relation to financial services Misleading and Deceptive Conduct ● • refers to conduct that either does mislead or is likely to mislead and may involve: – making or writing a statement – doing something, or – failing to say or do something which is needed to prevent someone from being mislead ● note: conduct misleads when it leads someone to believe something that is false ● penalties up to $1.1m for a company and $220,000 for an individual (that was in 2020, now the numbers are $15.65m and $1.565m, respectively) ● • misleading conduct may be either intentional or inadvertent • and … it is not necessary that someone is actually misled • rather, it is only necessary that there is a real chance that they might be – the test is not what you think (as adviser), it is the impression that people get from the advice – it is enough that a gullible, not-so-intelligent or poorly educated person is misled • an accurate statement can be misleading because of context • a disclaimer does not absolve responsibility when the conduct as a whole is misleading Complaints Procedures ● • the FP (principal) should implement a system to allow mistakes to be rectified speedily, practically and without resort to high risk, high cost litigation • ● there is an 8-step process for identifying complaints and resolving disputes: 1. Is there a complaint? If so, assist the client to put it in writing 2. Can the adviser satisfy the client immediately? 3. If the complaint cannot be resolved immediately: i. Internal system: adviser and client state their case ii. Decision by principal 4. Make decision and advise the client 5. If the complaint is justified: amend procedures, apologise in writing, and pay compensation if applicable 6. If client not satisfied with decision. Advise client of external procedures 7. If client not satisfied with external (industry) procedures? Client may need to go to court 8. Court or regulator action ● at all times, the adviser must keep the client fully informed in writing of what is happening, in particular disclosing the likely timetable of activities Financial Ombudsman Service (FOS) ● the FOS is an independent body existing to handle complaints: – in relation to investment advice to a retail client, or insurance contracts; – on handling of a complaint by a member; and – about the operation of managed investment or superannuation schemes sold to retail investors • it also aims to conciliate any dispute between members, but if necessary, can then move to arbitration and adjudication where it has powers to make decisions
