Dover compliance update

[ February 27, 2015 ]

It’s almost the end of February, and summer, and I thought it is a good idea to touch base, let you know that I am here, and up-date you on what Dover is doing so far in 2015.

Dover is in in the top twenty AFSLs by size

Some figures provided to us this week show we are about 16th biggest, as measured by adviser numbers. That’s great, but I am not that concerned. I am more interested in being the best compliance AFSL in Australia, and that’s what we are really on about at Dover. Dover does not want to appear in press releases like this one: ASIC press release on deficient advice in complex products (not that such products can be recommended: they are not on our APL and are not allowed by our licence). Dover is assuming it will be audited by ASIC some time this year. It’s what happens if you get bigger. And we are determined to pass with flying colors.

Recent review of SOAs

I spent a lot of time this week reviewing SOAs and I was generally happy with what I read. There is some good stuff going out to clients. You probably know what I will say next: there is too much emphasis on managed funds and not enough emphasis on direct investing, who owns the investments, managing debt, and general life advice. We prefer to see SOAs that involve you as the adviser in providing the on-going services, not a financial institution, and we strongly encourage you to do this. For example, we believe more advisers should recommend SMSFs and direct (blue chip) share portfolios, supported by regular (six monthly?) meetings and reviews. You cannot get sued for recommending CBA, NAB, BHP et al. Direct shares are well within most advisers’ skill base, and recommending them is a great way to maintain client relations and build up an interesting practice. By way of another example, an adviser has a well paid young FIFO boiler maker client, making about $130,000 a year. The problem is the lifestyle is not sustainable, and non-FIFO work is fast disappearing. He needs to re-train and re-skill, and that’s what the advice should have said. We have encouraged the adviser to get back to the client for a bit of a chat about what he needs to do next skill wise to maintain his long term employability (and his marriage). Trust me. This is what clients really want to talk about, and it’s what is really worrying him. And her.

Change to SOA review process

Dover’s business is compliance, and making sure every SOA is in the client’s best interests and appropriate to the client is the most critical part of our compliance. We are focusing on improving our SOA review processes and, to this end, are considering:broadening the definition of “non-contentious SOA” and narrowing the definition of “contentious SOA” by:

  1. allowing up to 40% international, provided the extra risk connected to exchange rates (or extra costs connected to exchange rate hedges) and the absence of franking credits is noted in the SOA (we will provide a model paragraph);
  2. increasing the materiality limit by $100,000 to increase it from $400,000 to $500,000;
  3. moving “moderate”, “balanced” and similar risk profiles from “contentious” to non-contentious; and
  4. certifying that every SOA has been checked by solicitors and is confirmed as being in the client’s best interests and appropriate to the client.

The solicitor’s certificate merits special comment. It’s unique. No other AFSL does it, and I feel that it will add a further gravitas and authority to your SOAs. Every SOA will be certified by our legal team, and contentious SOAs will be certified by me or Mina as being in the client’s best interests and appropriate to the client. We believe this certification will engender greater acceptance of recommendations by clients, and help position your practice as a provider of compliant and responsible advice. Your thoughts and suggestions will be appreciated. Don’t assume I don’t like contentious advices. I like them, and feel there should be more of them. Virtually every SOA I prepare personally is well inside the definition of contentious, and I think that is where financial planners add the most value to their clients’ lives.

This week’s compliance feedback

We like to share our compliance experiences with you. This way everyone becomes more experienced and better at it. Things which happened this week include:

  1. an adviser self-reported that he did not send in an SOA for review. His own system slipped up (not ours though: the Vietnam team picked up that something was amiss, as they can). Our response was, “that’s OK and thanks for letting us know”. It was an honest error and we all make them. It helped that the advice was high quality and would have been waved through by our compliance team anyway. But it’s appropriate to remind everyone that every SOA has to be sent in for review, and only non-contentious SOAs can be sent to the client before they are reviewed. Every contentious SOA has to be reviewed before it can be presented to the client;
  2. an adviser being surprised we approved of a SMSF having $1,000,000 invested in just one investment, being Westfarmers shares. I was quite happy with the advice, in fact I thought it was very good advice. Pertinent points included:
    1. the client was a 25 year WES veteran, and had been a very senior HR executive across its various business groups;
    2. the client is smart (masters degree) and understands that share prices can fall
    3. WES is a conglomerate, and is quite diversified
    4. WES is deep blue amongst the blue chips
    5. its almost fully franked
    6. the client had another $500,000 in a Westfarmers ‘corporate fund, $1,200,000 of home in bayside Melbourne and expected an inheritance of about $800,000 in the next few years
    7. the client is about 58, and is working part time as a HR consultant, and is still adding to his stock of capital every year;
  3. an adviser being surprised we did not approve of two 69 year old clients being classified as balanced and being heavily exposed to international share markets. They were of modest means, on a part pension, with a home and a relatively small share portfolio. There are many schools of thought, but the one we pay most attention to is the FOS school of thought. The FOS school of thought would, if the market fell, say a reasonable financial planner would have treated the clients as conservative, and order damages against the adviser equal to the fall in the market. Believe me, FOS is a consumer obsessed organization that actually makes up complaints for the client, then hears the complaint, then award damages. Prosecutor, judge and jury. So 69 year old pensioners have to be treated as conservative. Don’t risk your financial future by concluding otherwise;
  4. Lydon and Mina have been out and about and auditing advisers. One issue has come up: the need to keep all client e-mails on the client file, and to make sure all authorities to proceed and similar documents are properly signed and dated and remain on file. Seems obvious but you would be surprised how often it’s not done right. The main theme of Dover’s compliance program (or, as I like to think of it, compliance obsession) is the client’s best interests duty and the appropriateness of the advice, but the housekeeping stuff has to be done right as well;
  5. an SOA merely asserted that the client had said he was an aggressive investor. Big deal. So what? Who cares? It’s not what the clients says that matters to FOS. It’s what a reasonable financial planner would say that rules the day. Yes, the client has to want to invest aggressively, or as I prefer to say, be high growth orientated. But this can only happen if a reasonable financial planner would agree that he should. And your SOA has to say this, and has to say why a reasonable financial planner would agree having regard to age, income (ie height, stability and longevity), wealth, health, occupation, training, education and prior investment experience, and the reasons have to be set out in the SOA, so it speaks for itself and your client can make an informed decision;
  6. you will notice that (v) does not refer to risk analysis questionnaires. These questionnaires are discouraged, and are certainly not substitutes for clear, reasoned, fact based conclusions set out in a sensible way in your statement of advice, ready to be read by your client and a record of your advice to your client;
  7. inappropriate use of templates and standard paragraphs. Templates have to be altered every time they are used so they reflect the particular client’s particular circumstances, and just because Dover created the template paragraph does not mean we will accept its use where the client’s circumstances are different. Make sure what is written makes sense and is relevant to the client;
  8. the mandatory disclosure materials are there for very good reasons including:
    1. the Corporations Act says they have to be there and
    2. they limit your liability by setting out:
    1. what the client is responsible for
    2. what you are not responsible for and
    3. minimum holding periods (ie ten years for equities and twenty years for property) during which time certain complaints cannot be made.

    and that is why they are mandatory. No exceptions. These paragraphs/links must be in every Dover SOA and

  9. figures are not being cross checked. Every figure should be double ticked before the SOA is sent to the client. It’s so easy to make a mistake. It’s a great idea to get someone to double tick them for you. Sloppy figures can wreck an otherwise great SOA.

One new adviser to whom we said no

We teleconferenced with an interstate adviser specializing in direct equities and, in summary, in the end, declined to take him on as a Dover AR. Why? Simple: he was only providing direct equity advice, and when we dug in we could see he was really trying to create a virtual stock broking practice, with clients ringing in buy orders and sell orders, him operating their E-trade account and keeping the barest of documents: basically an “after the event” ROFA recording what happened. I think there is a lot of this about. Dover does not want to be involved. Shadow stock brokers are an accident waiting to happen. The share market is rising, which means there are no complaints. But the share market will one day start falling and then the complaints will come from everywhere. Clients will engage solicitors who will identify that the after the event ROFA breaches the Corporations Act and that he adviser failed to exercise due skill and judgment, ie was negligent, and has to compensate the clients for the inevitable losses. If you are advising on direct shares (and we hope you are) don’t buy and sell shares frequently, only handle blue chips, take a ten year view, do not chop and change, make sure your SOAs are perfect, and any ROFAs are exceptions, not the norm, and are created before the transaction is implemented, not after. Make sure you advise on everything, not just the shares, and that your advise is always in the clients best interests and appropriate to the client. That’s what clients want. We would also prefer the client to operate the E-Trade account, not you or your staff. But that’s another matter.

A reminder on marketing stuff

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The Dover Group