Consider your client’s capacity to pay the premium
Advice which ignores the capacity and willingness of the client to pay the premium probably breaches the four separate duties imposed on a financial planner under the Corporations Act.
You can read the Corporations Act provisions creating each of these four statutory duties here:
|Duty||Corporations Act||RG 175|
|The duty to act in your client’s best interests||Section 961B||RG 175.221 to 246|
|The duty to provide advice appropriate to your client||Section 961G||RG 175.340 to 358|
|The duty to warn the client if the advice is based on incomplete or inaccurate information||Section 961H||RG 175.359 to 362|
|The duty to prioritise your client’s interests||Section 961J||RG 175.363 to 386|
You can read ASIC’s views on how to comply with each of these four separate but related duties in Part E of RG 175 as the paragraphs shown in the right hand column of the above table.
ASIC expresses further views on the issue of affordability at paragraph 180 to 182 of Report 413 Review of retail life insurance advice, which read as follows:
Lack of strategic life insurance advice
180 It is the process of identification and prioritisation of needs and objectives that is the most important aspect of financial advice for consumers. It is a key reason why consumers look for financial advice.
181 A recurring theme in this surveillance was the failure of advisers to give strategic risk advice to their clients. Strategic life insurance advice includes advice on the type, level, structure and affordability of life insurance cover based on the client’s cash flow position and which prioritises their insurance needs. Strategic advice can be stand alone or, where appropriate, provide the framework for product advice.
182 For example, we found many files where the adviser failed to add any meaningful value to their clients by:
(a) helping them set an appropriate sum insured, balancing the competing priorities of underinsurance versus affordability;
(b) testing the value of optional extras against the client’s ability to sustain the insurance over time by prioritising the essential and the non-essential; or
(c) helping the client evaluate the merits of stepped versus level premiums relative to the amount of time the client may expect to hold insurance—for example, until debts are repaid, children are adults or the client transitions to retirement.
Further discussion of your duties to your client
We discuss each of these four duties separately in the following pages.