Dover’s practice notes are intended to help advisers understand what comprises good advice.

Sometimes the best way to understand what comprises good advice is to look at an example of poor advice, and consider what should have been done if the advice was to be truly in the client’s best interests.

To be in the client’s best interests, in the sense of being likely to leave the client better off than otherwise, advisers have to go beyond trite ditch and switch strategies. It’s simply not good enough to just say roll your super into my preferred super fund and get new risk insurances with my preferred insurer, with rote reasons for doing so.

This is particularly the case with clients who are vulnerable, in the sense that they are not able to critically analyze your SOA to decide whether they should act on your advice. These clients deserve extra care and attention.

Clients may be vulnerable for a variety of reasons. A non-exhaustive list of reasons includes:

  • aged clients, and the older the client the more likely the client will be vulnerable
  • emotionally distressed clients, for example, a recently widowed 60-year old woman, but realize lesser life events can create emotional distress too. A common example is a retrenched worker with low prospects of finding another job. This is not a good time to make irreversible decisions
  • less intelligent clients, and remember exactly half the population have below average intelligence
  • less experienced clients, particular clients who do not have an immediate support group.

You have to use your common sense. Your experience and expertise should have you on constant alert for vulnerable clients, and mindful of the need to adapt your advice to suits your client’s circumstances.

Three tips:

  • keep your SOA very simple, and only change course if absolutely necessary
  • avoid irreversible decisions
  • involve another person in your advice, such as an adult child or other relative, or an unrelated accountant or solicitor, who can help your client make a decision whether to accept your advice.

A real life example of what is expected when dealing with a vulnerable client

To help you understand what is expected, our SOA review team recently looked at an SOA for a recently bereaved 59-year old woman. The SOA recommended she rollout of her industry super fund to a retail fund, and install a new suite of risk insurances with a total cost of about $14,000 a year, and rising.

The client had no dependents, and a net worth of about $900,000.

Dover refused to approve the draft SOA and you can read a slightly edited version of our reasons here:

Dear Name of Adviser

This draft SOA is not in the client’s best interests and cannot go to the client.

I suggest you go back to the drawing board, with these thoughts in mind:

  1. you can be found responsible for obvious failures/omissions, such as failing to recommend she use her lower interest cash deposits to pay off her higher interest property loan. It does not matter how you scope the advice if it’s an obvious omission/failure
  2. your client is a vulnerable client, and is not able to critically analyze your advice, so you need to be particularly careful and patient. You should insist on one or more of her adult children, or some other appropriate person such as her accountant or solicitor, being involved in the advice so there is absolutely no doubt she understood it and was not making an emotional and irrational decision. This also protects you if she later claims she did not understand your advice
  3. you need to read Report 413 closely and understand that ASIC disciplined every AFSL involved in this report. Some advisers were banned for life. Your advice is uncomfortably close to many of ASIC’s case studies on what comprises bad advice
  4. affordability is the key issue. A 59-year old client paying premiums equal to about one quarter of her take home pay, and growing every year, is fundamentally inappropriate
  5. changing insurers at age 59 should be avoided at all possible. You need incredibly strong reasons to do so, and there are none here
  6. your advice has many minor flaws. For example:
    1. you say your client wants to work another 16 years, and you then say her investment time frame is ten years…. Her investment time frame is actually nearly thirty years, being her expected remaining lifespan, plus a bit extra. So she should not be conservatively invested. She should be well exposed to growth and
    2. agreed values have no extra benefit for your client because she can easily prove her income if and when a claim is made. They just increase her premiums for no reason/benefit
  7. a reasonable financial planner’s advice to your client would be very simple, would minimize changes and would look something like this:
    1. keep working for economic reasons and personal reasons, as long as you can
    2. don’t make any irreversible decisions unless you really have to
    3. involve your adult children in your decisions, and speak to your accountant or solicitor as well before you decide to accept my advice and act on my recommendations
    4. keep your home and keep your investment property
    5. use your cash reserves (or at least a lot of them) to pay off part of your investment loan
    6. salary sacrifice to super, as much as you can, with an eye on using the extra contributions and earnings to help pay off your investment loan once you can draw the monies out tax free     
    7. stay with First State Super
    8. roll your SMSF monies into FSS, to keep things particularly simple
    9. choose high growth mode because you have a long way to go and must be exposed to growth assets. Your time frame for investing is about 30 years
    10. you do not really need any extra life cover, but if you want it then the easiest and simplest way is by acquiring extra units in FSS’s life insurance arrangements
    11. at your age income protection is too expensive and only covers you for two years and is not worth it, particularly if you are in good health
    12. at our next meeting we should look at long term strategies designed to maximize your old age pension entitlements if for any reason you cannot keep working past say age 65. This is where I can really help you.
  8. at a helicopter view, your advice reads like a sales pitch to ditch and switch products, and generate a commission. It does not read like true advice. And FOS, and I presume the CIO as our new EDR, would smash you if your client decided to complain about your advice. ASIC would be pretty upset too.

Please understand none of this is negotiable. Your advice has to be as per item 7, and has to involve another appropriate person as per my comments at item 2.

To help you get a handle on what the advice should look like the Simple Para-planning team can prepare the SOA for you at nil fee.

Kind Regards,

Terry McMaster | Director