Not stating EXACTLY why a switch is being recommended

It is quite common for us to see a section in an SOA dedicated to switching that says little more than:

the advantages of the new product may include…” and “the disadvantages of the old product may include…

Unfortunately, these phrases represent a misunderstanding of some of the terminology used in ASIC RG 175, which says with regard to switching:

The SOA should state that the client’s existing product has been considered, and should include information about:

(b) the potential benefits (pecuniary or otherwise) that may be lost.

It is worth spending some time thinking through ASIC’s requirement here, because the word ‘may’ can trick some readers. What RG 175 is actually saying is that the adviser needs to prepare an exhaustive list of every benefit that may be lost. The adviser then needs to specify as precisely as possible the benefit being given up.

The best way to interpret this section of RG 175 is to use a two-step process. Firstly, identify all of the benefits that might possibly be lost by the client following the recommendation to switch. Having done that, the adviser then needs to be very specific about the exact nature of what might be lost in the case of each benefit. Something along the lines of:

Benefit that Might Be Lost Specific Nature of the Loss
Deferred Capital Gains Tax Liability

You may be exposed to a CGT liability if you dispose of your existing product.

Capital Gains Tax Liability

We estimate that the CGT payable upon disposal of the existing product will be approximately $8,500.

In this case, the SOA then needs to explicitly demonstrate why the switch will provide a greater new benefit than the benefit lost from the old product. That is the basic rule with switching: advisers should only recommend it when the new product is clearly better than the existing or previous one.

Basically, when it comes to switching, think like a lawyer. Or, better yet, think like someone who wrote an SOA that has been read by a lawyer and who is now being cross-examined by that lawyer. Your SOA needs to set out precisely why your client will be better off switching from their existing product to the new one or ones you are recommending. Anything less than that and you leave yourself wide open to a claim that the switch was unnecessary.

The Dover Group