Not demonstrating that the new product has been adequately researched

Once again, the ASIC RG 175 rules here are quite clear: advisers may only recommend that a new product be used to replace an old one when the new product clearly better meets the client’s needs. And, of course, an adviser can only know this to be the case when he or she has adequately researched both the existing and the replacement product. Unfortunately, we come across many SOAs that simply fail to make clear that the adviser has researched both of the products.

The mistakes here are one of two types. Firstly, the adviser has done the research, but has not made that obvious in the SOA. The best way to demonstrate the research is to lay out the features of each product and compare the two, which will automatically demonstrate why you have selected the new option.

The second type of mistake is more worrying: we do come across some SOAs that suggest that the adviser has not actually researched the new product that they are recommending. This is an adviser heading into trouble, because, as we say, the law is quite clear. ASIC repeatedly state it and the Courts agree: whenever a switch is recommended, the adviser needs to be able to demonstrate why the new product is clearly preferable to the one being replaced. This simply cannot be done without thoroughly researching both products. Having done the research, tell your client that this is the case. And then prove it by linking the features of the new product with the needs of your client. Something like the following:

As discussed with you and revealed by your fact finder, you are unlikely to need to make use of your investment assets for at least the next ten years. You will continue to earn employment income for at least that long. Accordingly, you are suited to a more growth-focussed investment than your current cash-based strategy. The XYZ product invests at least 80% of investment monies into Australian equities, keeping no more than 20% of its funds under management in cash or cash equivalents. This is in contrast to your existing product, which is 100% in cash and cash equivalents. Over a ten year-plus timeframe, the move to the XYZ product should result in enhanced returns and will make your goal of retirement at age 60 more achievable.

These paragraphs make clear that you understand both the product being replaced and the replacement product itself. They also clearly link the recommendation to the client’s situation and goals. Included within a comprehensive SOA, these paragraphs will make clear to any informed reader that you had a good basis for the recommended switch.

The Dover Group