Financial planners must ensure their advice is in their client’s best interests, is appropriate to the client, and prioritises the client’s interests.
We explain the legal basis for these concepts, and how in practice they merge into one simple “best interests duty” to ensure your client is better off as a result of your advice in practice note 7, which can be accessed here: Dover’s Practice Note Number 7 8 January 2017
ASIC, quite correctly, requires you to demonstrate your client is better off as a result of your advice, and this features in its public statements. However, ASIC’s output tends to be negative, ie after the event examples of where advisers got it wrong, rather than positive, ie before the event examples explaining how advisers got it right.
For example, it’s not uncommon for ASIC to publicise an enforceable undertaking from an AFSL where surveillance has detected a breach of the best interests duty, an example of which is here: ASIC accepts enforceable undertaking.
One rule of thumb
In practice note 8 we posit one simple rule of thumb we believe advisers should follow to help show ASIC their risk insurance advice was in their client’s best interests.
This is the rule of thumb: it is probable, but not certain, that risk insurance advice is in a client’s best interests if the premiums are not more than the average premiums applying to a client of the same age and gender and with similar insurance needs.
A table showing normal premiums
Dover has constructed a series of tables and graphs depicting average premiums for normal clients at different ages classified according to gender and smoking status.
You can access a detailed explanation of these tables and graphs here: Dover’s Insurance Premium Tables and Graphs. We suggest you click on this link and spend a minute or two reading it and looking at the tables and graphs contained in it.
This is one of the main graphs:
These tables and graphs are based on information obtained from the AMP. They show the premiums payable on a bunch of income protection, life and TPD insurance policies at a range of ages at different levels of perceived need. (Trauma insurance premiums are not included in these totals.)
The sums insured depend on gender, smoking status and whether the client is classified as having Very Low, Low, Average, High or Very High needs.
Income is used to assess insurance needs. The higher the income the higher the sum insured. For a non-smoking male the position is as follows:
What does this mean?
This means if your risk insurance recommendations have sums insured and premiums in line with the appropriate graph you can be reasonably confident that your advice is in your client’s best interests. This is in the sense that a reasonable financial planner would believe your advice is likely to leave your client better off than otherwise would have been the case, and that the cost of the required insurance cover is reasonable.
Classification as Very Low, Low, Average, High or Very High
You can see the AMP bases its classification on the client’s income. This is a reasonable basis for classifying most normal clients. But it will not suit all clients. Some clients will not be normal. For example, a client with a low income of $70,000 may have a large home loan and a large number of dependants, such that they are more appropriately classified not as low needs but as high needs. Conversely, a client with a high income of $200,000 may have no home loan and no dependants, such that they are more appropriately classified not as high needs but as low needs.
Obviously the classification is subjective. You should only view the tables and diagrams as indicative, and you should ask yourself whether your client should be classified based on their income or whether some other basis more appropriate.
What does this mean for your risk insurance statements of advice (SOA)?
Dover’s SOA Support Team uses these tables and diagrams when they review your SOA before it goes to your client. This means if you base your SOA on these tables and diagrams there is a heightened probability the sums insured and the premiums will be accepted as being in the client’s best interests.
The SOA Support Team will generally accept that a client should have sums insured, and hence premiums, as depicted by these tables and graphs, as determined by age, need, and gender.
The SOA Support Team will consider any request for a lower income client to be treated as having higher needs provided a reasonable case is made in the SOA, with your reasons carefully stated and explained.
The SOA Support Team will determine your client should be treated as having lesser needs if the facts indicate this is appropriate.
What if your client is over age 50?
Special care is needed where a client is over age 50. The reasons should be obvious: there is a higher risk the insured event will occur.
The higher risk of the insured event occurring means there is a higher risk attached to changing insurers. Dover requires all new insurance recommendations for a client over age 50 to be checked in detail by a Responsible Manager before the SOA can be sent to the client.
What is your client’s occupation?
Special care is needed if your client has a higher risk occupation, such as manual laborer, truck driver, rodeo rider or hi-rise window washer. For obvious reasons premiums will be higher and this needs to be considered and explained in your SOA.
Pre-existing health conditions
Special care is needed if your client has a pre-existing health condition. Obviously this will impact the premiums and needs to be specifically explained in your SOA if the condition has a material impact on the premiums.
What is a rule of thumb?
A rule of thumb is a practical guide, not an absolute rule. It reflects common experience more than strict theory. If there is conflict between a rule of thumb and common sense, common sense should win every time.
For most purposes though rules of thumb are very useful and, in particular, reassure the user their underlying theory is correct.
So next time you review your fact finder and your needs analysis to confirm your sum insured recommendations make sense, quickly run this rule of thumb over your computations and make sure your advice is in line with established norms, and carefully document that you have done so.
This gives you confidence that you have done a good job.
But never forget a rule of thumb is not an absolute rule, and does not replace common sense.