Upcoming e-book: 101 Common Mistakes in Statements of Advice

[ November 13, 2015 ]

Warren Buffett and Charlie Munger use to tell a version of a joke that is even older than they are:

Q: If you had a choice between knowing when you are going to die and knowing where you are going to die, which would you pick?

A: The second one. And then I would make sure I never went there.

In recent weeks we have been working on a similar idea. We are now putting the finishing touches on a new e-book “101 Common Mistakes in Statements of Advice.” The idea is that, by seeing these common mistakes, advisers can apply the same logic and ‘make sure they never go there.’ By early next week, the e-book will be available on our website in a way that is searchable and grouped into categories.

For now, please follow this link to download a PDF of the document as a whole.

The mistakes are ones that we identify when running all of our adviser’s SOAs through our compliance checks. These compliance checks are a really worthwhile activity and advisers typically appreciate the feedback that we provide. One of the things we observe, however, is that we provide the same feedback to different advisers who make the same or similar mistakes. Hence this document: it is our way to try to provide feedback more broadly in the hope that we can save our advisers time by avoiding these mistakes in the first place. It is our way of telling our advisers where their advices are likely to die, so that they can make sure they never go there.

Some of the mistakes are light-hearted; some less so. At this stage they are not grouped in any logical order – that will be different when the book is published on the website.

As you read through the e-book, which we will continue to add to (it started as ‘The Ten Common Mistakes’ and just kept growing), you will notice one consistent theme, especially in the more substantive mistakes. This is that the SOAs do not meet the essential standard for all financial advice: that the SOA must make clear that the advice is in the client’s best interests. This requirement, laid out in s 961B of the Corporations Act, lies at the heart of appropriate and compliant advice. Everything extends from this one provision.

Our observation is that, when it comes to the client’s best interests, SOAs fall short in one of two ways. The first is that the advice is in the client’s best interests, but this is not made clear in the SOA. This might be the case where an adviser recommends a change of product, for example. When we contact the adviser to discuss, it turns out that there are genuinely good reasons for the change. In those cases, we simply ask that the SOA make these reasons clear. The idea is that the client reading the SOA can see exactly why the new product is better suited to their situation. Problem solved.

The second is where the advice is not in the client’s best interests. The ‘client’s best interests’ is a broad concept and includes things that are sometimes overlooked, such as the affordability of any product that has been recommended (if a product is too expensive for the client to buy, the advice to purchase it cannot be in the client’s best interests); or the specific circumstances of a given client (one size does not fit all when it comes to financial planning).

The first kind of error is relatively easy to fix. The second can take a bit longer, but when the penny drops about the priority of the client’s best interests, we enjoy watching the exponential improvement in the quality of advice that follows.

As ever, please let us know your thoughts about this new e-book – for better or for worse; your feedback is always valued.

The Dover Group