Not detailing the better expected investment returns in a new product

When an adviser recommends replacing an existing investment product with a new one, the new investment product must be expected to generate a superior return, at least in the longer term. If not, then there is no good reason to make the switch.

Despite that, one of the most common mistakes we see is where an adviser recommends a new investment product but does not address whether and how the new product is expected to perform better than the one it is replacing. The SOA must address this issue. If it does not, it will not meet the requirements of ASIC RG 175.

If an adviser is a particular fan of a particular type of investment – for example, passively-managed index funds as against more actively-managed equity funds – then it pays to develop a simple yet comprehensive way to describe the specific advantages of that type of investment. This description can then be used to introduce the product comparison in each SOA in which it is relevant. Something like the following can be useful:

Index funds are known as a ‘passive’ form of equity investment. The nature of index funds means that they are automatically highly diversified. The passive nature of the investment means that less of the investment is lost in management fees. The passive management also leads to lower transaction costs, including taxation.

Remember, though, that this is a just a starting point. The rules on switching mean that you need to go on from here and compare the specific features of the existing product with the specific features of the new product being recommended. You must also detail any costs or lost benefits that are incurred due to the switch. This is most easily done in a table form.

The Dover Group