One size fits all

Another common error that we observe is where an adviser’s SOAs all look the same – even when clients have vastly different financial situations. This sort of situation sets off massive alarm bells with regulators, who essentially believe that the same advice is highly unlikely to be in the client’s best interests.

This was first made clear to us even before the best interests dictate became law. Around ten years ago, during a routine compliance meeting with ASIC, one of our advisers was asked the following question: “do you recommend this managed fund to all of your clients?” The advisers answer was a little too nuanced: “yes, we recommend this managed fund for all clients who we think should invest in shares.”

This set off over an hour of discussion in which the adviser sought to reassure ASIC that the proportion of an investment amount that was dedicated to the managed fund varied according to the client’s investment profile: conservative clients might devote only 20% of their investment amount into the equity-based fund, keeping the remaining 80% in one or more cash-type investments. A more growth-oriented client might switch these proportions around, with other clients being spread between the two extremes.

In the end, ASIC could see the point and were reassured. But we are quite sure they looked closely at this adviser from the time forward. It was an early indication of what advice that is too similar can create: an impression that the adviser simply recommends the same thing to each and every client.

You may have a preference for a particular product and find yourself recommending it frequently. That is fine, and in fact it makes a lot of sense: if an adviser believes a product to be the best of its type available, then that adviser should recommend it to all clients who need that kind of product. But, please ensure that the SOA makes it very clear how the product – and especially how the specific amount of that product – relates to the client’s unique circumstances. And remember that each SOA will need to uniquely demonstrate why that product suits the client so well.

And, it should go without saying but we will say it anyway: be very careful about cutting and pasting between SOAs. This can save time, but it can lead to errors. Remember, ASIC have the right to look at all of the SOAs and if those SOAs are the same, then they will keep digging. If it becomes clear that only the names have been changed, then the adviser can expect to need to defend against a claim of negligence.

The Dover Group