Best Interests Licensee Standards

Transcription

1 Best Interests Licensee Standards 22 October 2018 Best Interests Licensee Standards The Best Interests Licensee Standards are: Seven Safe Harbour Steps; Product Research and Replacement; Prioritising Clients Interests; Appropriate Advice; and Record Keeping. These Licensee Standards reflect the best interests duty and related obligations under the Corporations Act that you as an individual must meet when providing personal advice. Compliance with the Best Interests Licensee Standards is mandatory and will be assessed through regular and targeted audits. A significant, or repetitive, failure to comply with the Best Interests Licensee Standards can potentially result in ASIC penalties for you personally. Audience Reasonable Adviser Standard The Best Interests Licensee Standards apply to everyone who: provides personal advice to retail clients (whether you are an employee or authorised representative); or supports the provision of personal advice to retail clients. Your obligations under the Best Interests Licensee Standards are assessed against the actions of a qualified adviser, with a reasonable level of expertise in the subject matter of the advice, who is exercising skill and care and who has no conflict of interest (Reasonable Adviser). A conflict of interest means a conflict between your client s interest and your own interests or the interests of any of your related parties (e.g. related product providers, licensee related businesses, your related businesses). Whenever the word reasonable is used in the Best Interests Licensee Standards, you will be assessed against the standard of the Reasonable Adviser. You need to ask yourself what a Reasonable Adviser would do at each stage of the advice process, including: What a Reasonable Adviser would do in completing the Seven Safe Harbour Steps? What advice would a Reasonable Adviser give to the client, in particular whether it would be reasonable to recommend a financial product? What enquiries a Reasonable Adviser would make to identify a potential conflict of interest? How a Reasonable Adviser would prioritise the client s interests? Page 1

2 In addition, it is mandatory to have clear and comprehensive records so that the safe harbour defence can be relied on and so that you can prove you have met your obligations. You therefore need to thoroughly document interactions with clients and any actions taken and keep a reliable and comprehensive record of those actions and all supporting documents. Financial Planning software Client s Relevant Circumstances The licensee approved Financial Planning Software is XPLAN. Note: the licensee acknowledges that some advisers are using COIN until December A reference to XPLAN in the Best Interests Licensee Standards is a reference to XPLAN or other licensee approved software. A reference to your Client s Relevant Circumstances in the Best Interests Licensee Standards is a reference to the objectives, financial situation and needs of your client that a Reasonable Adviser would identify as relevant to the subject matter of the advice sought by your client. Page 2

3 Seven Safe Harbour Steps Licensee Standard Seven Safe Harbour Steps As an adviser, you must act in the best interests of your clients. In order to comply with this duty when giving personal advice to retail clients, you are required to complete (and evidence in XPLAN) the Seven Safe Harbour Steps listed below: Identify your client s objectives, financial situation and needs Identify the subject matter of advice sought by your client and identify your Client's Relevant Circumstances If it is apparent that the information given by your client is incomplete or inaccurate, ask for additional information Assess whether you have the expertise to advise on the subject matter of the advice If you are recommending a financial product, ensure that this is reasonable, and investigate and compare your client's existing & requested financial products against any products you may recommend Base all judgements in the advice process and your final advice on your Client s Relevant Circumstances Take any other step that is in your client's interests given your Client's Relevant Circumstances Must Dos Importantly, not all the Steps are sequential and as a Reasonable Adviser, you are required to use your judgement as to when to circle back to an earlier Step and gather more information, educate your client or gain client instructions. As the adviser, you are required to complete each of the Seven Safe Harbour Steps and demonstrate that you have completed them through the documents and information stored on the client file in XPLAN. You are required to comply with the Record Keeping Licensee Standard, which provides further guidance on the type of information and documentation that must be stored on the client file in XPLAN.! Warning If your client file in XPLAN does not show how you have completed the Seven Safe Harbour Steps to the standard of a Reasonable Adviser, this will be identified in your audit review and you may be required to undertake remedial actions and additional training. Links to Best Interests Licensee Standards Repeated failure to comply with your obligations (including relating to record keeping) will result in consequence management and may adversely affect your remuneration, incentives, fees and benefits. In addition to the Seven Safe Harbour Steps Licensee Standard, you must comply with the other Best Interests Licensee Standards listed below: Page 3

4 Page 4 Product Research and Replacement; Prioritising Clients Interests; Appropriate Advice; and Record Keeping.

5 Seven Safe Harbour Steps Step One: Identify objectives, financial situation and needs Step One of the Seven Safe Harbour Steps requires you to identify, discuss and document the objectives, financial situation and needs of your client, through the instructions they provide to you. Your client s objectives and needs may be the reason that prompted your client to seek advice and the outcomes they want to achieve. For an existing client, their objectives could include confirming that the information previously provided to you remains relevant. Alternatively, some clients will have advice needs that they are unaware of and you may need to clarify issues with your client relating to their objectives, financial situation and needs. Objectives should be client directed, specific (not generic) and prioritised. Your client s instructions may be provided at face to face meetings, by telephone or communications or by entering information into an online form or program. It is important that you continually and accurately document these interactions with your client in XPLAN. Where advice is requested for more than one client, the process of ascertaining and documenting the objectives, financial situation and needs for each client must be followed. How to meet Step One Clients may not know or fully understand what their objectives, financial situation or needs are and may provide instructions and information that are unclear or inconsistent with their circumstances. Your role involves: educating your client on financial matters relating to their objectives; helping them articulate their needs and objectives by expressing them as SMART (specific, measurable, achievable, relevant and time bound) goals; asking relevant questions and collecting information about their circumstances; identifying additional needs they have not considered and are relevant to their circumstances; and helping your client clarify their instructions including through education, understanding the benefits, costs and risks. Examples of financial situation and needs: financial position (income, expenses, assets and liabilities); personal circumstances (age, relationship status, family situation including all children, dependents and carer responsibilities); health status; accommodation; living arrangements (citizenship, residency status); any foreseen changes to financial position (e.g. inheritance, home renovations, divorce, new baby, sale of business, retirement, redundancy, job or career changes); Page 5

6 existing investments / savings (including superannuation); existing insurance arrangements (including in superannuation); insurance needs (and relative priority of those needs); existing structures and entities; and estate planning information (wills, enduring powers of attorney, death benefit nominations). Objectives may relate to: cash-flow management and budgeting; debt reduction and repayment; building short and medium term savings and wealth; building retirement (superannuation) savings; planning for retirement; personal insurance cover; investment of a lump sum; business insurance; and intergenerational considerations (e.g. aged care). In ascertaining your client s objectives you should ask what your client wants to achieve and why it is important to them. Help your client articulate objectives as SMART goals and to prioritise those objectives where they conflict. Example of client objective: I want enough money to live on in retirement I want to be debt free I want my kids taken care of if something were to happen to me Example of SMART goal I would like to retire in 10 years live by the beach in Avoca on an income of approximately $50,000 p.a. I want to repay my outstanding debts of $346,000 within the next 15 years We want to make sure our children would be financially secure and well educated until after school if either of us were sick, injured or died. We want to make clear who should look after them Example of inconsistent objectives: Your client instructs you that they want high returns, but is unwilling to accept a reasonable level of risk required to achieve those returns. As this information provided by your client in relation to their needs and objectives illustrates the client has unrealistic and/or conflicting expectations, you should explain to your client (educate) that their expectations cannot be met and seek further information from your client about which objective is the priority (clarify instructions). You are required to document these discussions and the agreed outcome in a file note (or the FNA conflicts section) and store it in the client file in XPLAN. Page 6

7 Record keeping New Clients You are required to document the information you gather from new clients about their objectives, financial situation and needs in file notes as well as in a Financial Needs Analysis (FNA). This is required to be saved to the client file in XPLAN. File notes are not a substitute for a FNA and the information captured in file notes should complement rather than duplicate the FNA. Existing Clients You are required to ask existing clients to confirm that the information they have previously provided regarding their objectives, financial situation and needs is still up-to-date and relevant. This interaction should be documented in a file note and stored on the client file in XPLAN. Where there is a change in your client s objectives, financial situation and needs to those provided as part of a previous interaction with your client or as part of a review, you must perform the following in XPLAN: o save the existing (prior) FNA to the client file; o o update and save the new FNA to the client file; and compare the old and new circumstances to ascertain whether a ROA or SOA is required (i.e. is the change significant?). Client file Your client s instructions may be provided on multiple occasions through a combination of face to face meetings, by telephone or communications or by entering information into an online form or program. To show that you have completed Step One of the Seven Safe Harbour Steps, you are required to keep a complete and accurate record of all action taken by you and all interactions with your client in the client file in XPLAN, including: individual file notes of all client interactions; relevant s between you and your client; a fully completed FNA; and clear client objectives articulated as SMART goals. Page 7

8 Step Two: Identify the subject matter of the advice and your Client s Relevant Circumstances Step Two of the Seven Safe Harbour Steps requires you to: identify the subject matter of the advice sought by your client (i.e. the relevant topics your advice should cover); ensure that the scope of the advice does not exclude any critical issues that are linked to the subject matter of the advice sought by your client. If any critical issues are excluded you will need to decline to advise; agree the topics to be included in, or excluded from, the subject matter of the advice with your client; if the subject matter is limited in scope at the request of your client, outline the risks of limiting the subject matter of the advice and carefully record the risks discussion with your client and your client s decision to proceed; identify the objectives, financial situation and needs that a Reasonable Adviser would identify as relevant to the subject matter of the advice sought by your client (i.e. identify your Client s Relevant Circumstances); and demonstrate that you have completed Step Two of the Seven Safe Harbour Steps through the documents and information stored on the client file in XPLAN. How to meet Step Two: Identifying the subject matter of the advice Explicit vs Implicit subject matter The subject matter of the advice sought by your client could be a goal your client is seeking to achieve OR a request about a specific product or strategy your client is interested in (explicit). Alternatively, your client may seek advice as a result of an event (such as divorce, a redundancy or receiving an inheritance) or because of a particular situation they find themselves in (e.g. they are struggling with debt). In these situations, the subject matter of the advice is implicit in what your client is seeking. These events or situations do not necessarily correlate with a type of advice but are instead indicators that one or more advice strategies may be of benefit to your client (either now, or in the future). It is important that you assist the client to articulate clear SMART goals in these situations. Examples of factors that may be relevant to identifying the subject matter of the advice include: What are your client instructions? Why is your client seeking advice? What outcomes does your client want to achieve if they follow your advice? How much is your client willing to pay for your advice? Needs identified by you In completing Step Two, you are required to consider (and document) whether there are any obvious needs arising from your client s circumstances as disclosed to you. The process of converting a high level objective or client need into a SMART goal should also include identifying any subject matter that is implicit in what your client is seeking to achieve. Page 8

9 If you identify any additional needs, you should raise them with your client and explain the importance of addressing them, and the consequences of not addressing them, in the subject matter of the advice you will provide. It is ultimately your client s decision whether or not to include the additional needs you identify in the subject matter of the advice and you will need to ask them whether they want you to provide advice on these additional needs. This is an example of scaling the advice (increasing or decreasing the subject matter that will be addressed in the advice). Example: Additional needs Your client is seeking investment advice only. Your client is 45 years old and is married with two dependants. You identify that your client has a large amount of debt. During a face to face meeting with your client, you suggest that the subject matter of the advice should also address insurance and debt management based on the additional needs that you identified from your client s financial situation. You should explain the benefits of including these needs, as well as the associated risks and consequences of excluding those needs, from the subject matter of the advice. You should record whether or not your client wishes to include these needs within the subject matter of the advice. Example: Advice as a result of an event and additional needs Your client seeks advice as they are in the process of divorcing their partner. You ask them what their key concerns are and they say: 1. financial support for 2 homes once the divorce goes through; and 2. ability to fund private school fees until the youngest is out of school. You mention that in many cases, divorce may require changes to estate planning arrangements, including binding death nominations in superannuation and offer to provide advice that falls within your expertise. You may wish to suggest that the client seeks legal advice from a specialist lawyer on matters that fall outside your expertise. You should explain to the client the benefits of including additional needs relating to binding death nominations and estate planning. You should explain the risks to the client of excluding those needs from the subject matter of the advice, including not having a binding death nomination. You should record whether or not the client wishes to include these needs within the subject matter of the advice. Scaling of advice: holistic or limited advice Scaling refers to adjusting the scope of advice. The scope of advice can be scaled up or down according to the complexity of the subject matter of the advice sought by your client and your client s objectives, financial situation and needs. You are required to complete the Seven Safe Harbour Steps regardless of whether you are providing holistic advice or advice that is limited in scope. While you may suggest to your client how the advice may be scaled, ultimately, your client decides the scope of the advice they are seeking from you. Your role is to assist your client in deciding Page 9

10 whether the scope of the advice they are seeking is too broad or too narrow having regard to the subject matter of the advice and their objectives, financial situation and needs. For clients with a less complex subject matter of advice and less complex circumstances, the advice may be scaled down and less extensive enquiries may be required by you (e.g. your enquiries may be narrowed to a specific aspect of your client s objectives, financial situation and needs). However, for clients with a more complex subject matter of advice and more complex circumstances, the advice may need to be scaled up, placing a greater responsibility on you to make more extensive enquiries to capture and consider more of your client s objectives, financial situation and needs. Your client s ability to afford advice sometimes can influence the scope. For example, if you quote your client for full advice at a price your client considers is beyond what they would like to spend at this time, your client may prioritise their objectives and ask you to defer future goals that are not current priorities for a later time. You should make such enquiries that a Reasonable Adviser would make, given your client s objectives, financial situation and needs and the subject matter of the advice sought by your client. Example: Life insurance advice Your client seeks your advice about life insurance. A Reasonable Adviser would make sufficient enquiries to establish precisely what your client is seeking to insure, including whether your client wants to secure their spouse or dependants in the event of their death or to cover debt or business expenses if they fall ill. If you do not make sufficient enquiries about what your client wants to insure, it will be difficult to correctly scope the advice sought by your client. Where your client asks to limit the scope of the advice, you should consider and discuss the risks of limiting the scope of the advice with your client and keep a detailed record of these discussions in your client file on XPLAN. You cannot exclude critical issues that are so relevant to the subject matter of the advice that their exclusion from the advice could be a risk to your client. These critical issues must be included in the scope of the advice by agreement with your client or you should decline to provide the advice. Example: Superannuation advice Your client seeks your advice about how to boost their retirement savings. Your client has an interest in a defined benefit superannuation fund, but you limit the scope of the advice so that it excludes advice about whether your client can increase their superannuation through the defined benefit fund. This scaling of the advice will fail this Step Two of the Seven Safe Harbour Steps. You should either have expanded the scope of the advice to consider your client s interest in the defined benefit fund, or decline to provide the advice. Page 10

11 How to meet Step Two: Identifying your Client s Relevant Circumstances In completing Step Two of the Seven Safe Harbour Steps, you are also required to identify the objectives, financial situation and needs of your client that a Reasonable Adviser would identify as relevant to the subject matter of the advice sought by your client. This is known as identifying your Client s Relevant Circumstances. You should make such enquiries that a Reasonable Adviser would make to identify your Client s Relevant Circumstances. Your client may not always know or fully understand what objectives, financial situation or needs are relevant to the subject matter of the advice sought by them. Your client may also provide instructions that are unclear or seem inconsistent with their objectives, financial situation or needs. In these situations, you should exercise your judgement and make further enquiries of your client to identify their relevant objectives, financial situation and needs. This is particularly important if the advice is complex or it appears that your client may have a low level of financial literacy. Connecting the subject matter to your Client s Relevant Circumstances Once you determine the subject matter of the advice and your client s objectives, financial situation and needs that are relevant to the subject matter of the advice sought by them, you should confirm this with your client. You may have to move between Steps One, Two and Three of the Seven Safe Harbour Steps to ensure that the subject matter of the advice is broad enough to address each of your client s identified objectives and needs. Record keeping Client file The client file stored in XPLAN should together demonstrate: why your client is seeking advice; the subject matter of the advice; the enquiries you made with your client concerning the subject matter of the advice; any obvious needs you identified and discussed with your client having regard to their financial situation; the objectives, financial situation and needs that you identified as relevant to the subject matter of the advice sought by your client; any variations to the subject matter of the advice you agree with your client; and for advice that is limited in scope: o your client s request and reasons for limiting the scope of the advice; o the associated risks and consequences that you explained to your client; and o your client s decision to proceed with the limited scope advice. To show that you have completed this Step Two of the Seven Safe Harbour Steps, you are required to keep a complete and accurate record of all Page 11

12 ! Warning If you do not: Other requirements action taken by you and all client interactions in the client file in XPLAN, including: individual file notes of all client interactions; relevant s between you and your client; and a fully completed (or updated) FNA. identify and raise an obvious need of your client arising from the client s financial situation and that need is relevant to the subject matter of the advice that was sought by your client; or make reasonable enquiries with your client about that identified need; or communicate the risks and consequences associated with scaling the advice as requested by your client, this will be identified in your audit review and you may be required to undertake remedial actions and additional training. You are required to warn your client not to act on any strategic discussions with you until such time as you have provided a formal advice document. Step Three: Make enquiries where information is incomplete or inaccurate Step Three of the Seven Safe Harbour Steps requires you to: make reasonable enquiries to obtain complete and accurate information where it is reasonably apparent that the information relating to your Client s Relevant Circumstances is incomplete or inaccurate; consider whether to decline to provide the advice where it is still apparent that information is incomplete, inaccurate or inconsistent; provide a Limited Information Warning to your client where you decide to provide advice and there is still incomplete, inaccurate or inconsistent information; and demonstrate that you have completed this Step Three of the Seven Safe Harbour Steps through the documents and information stored on the client file in XPLAN, including documenting enquiries undertaken to obtain complete and accurate information and relevant client interactions and communications. How to meet Step Three When collecting information about your Client s Relevant Circumstances, you are required to carefully and critically assess the information provided by your client to identify whether there are gaps, inaccuracies or inconsistencies. You are required to use your knowledge, skill and professional judgement to identify incomplete or inaccurate information relating to your Client s Relevant Circumstances and the advice they are seeking. Page 12

13 Reasonable enquiries A reasonable standard applies to the testing of the information for gaps and inaccuracies AND the enquiries that must be made to obtain complete and accurate information about your Client s Relevant Circumstances. Where there is incomplete, inaccurate or inconsistent information relating to your Client s Relevant Circumstances, you are required to ask your client to provide you with further information or clarification. The nature and extent of your enquiries will vary depending on the complexity of the subject matter of the advice and your client s circumstances. The objective is to obtain complete and accurate information on which to provide your advice. Example: superannuation advice The superannuation account balance provided by your client is less than it should be given your client s income and years of employment. In this scenario, you should ask your client whether they have any other superannuation accounts or have tried to locate any lost super. If, after having made enquiries, the information provided by your client is still incomplete, inaccurate or inconsistent, you should consider whether you should decline to provide the advice. Limited Information Warning If, after having made enquiries: it is still apparent that information relating to your Client s Relevant Circumstances is incomplete, inaccurate or inconsistent; and you decide to provide advice to your client, then you are required to warn your client that: a) the advice you give is or may be based on incomplete or inaccurate information relating to your Client s Relevant Circumstances; and b) because of that, the advice may not be appropriate having regard to your Client s Relevant Circumstances. This is known as the Limited Information Warning and it must be communicated to your client at the same time as the advice is provided, which usually means that it is contained in the SOA or ROA. It is important to keep in mind that inserting the Limited Information Warning does not change your obligations to your client and you are still required to complete each of the Seven Safe Harbour Steps and provide appropriate advice to your client. Record keeping Client file The client file and the SOA/ROA stored in XPLAN should together demonstrate that there is no incomplete, inaccurate or inconsistent information or, if there is, they should demonstrate: any enquiries you made with your client regarding incomplete, inaccurate or inconsistent information; any response provided by your client; and Page 13

14 where applicable, any warnings you gave your client including any Limited Information Warning. To show that you have completed this Step Three of the Seven Safe Harbour Steps, you are required to keep a complete and accurate record of all action taken by you and all client interactions in the client file in XPLAN, including: individual file notes of all client interactions; relevant s between you and your client; the Limited Information Warning issued to your client (usually contained in the SOA/ROA). Step Four: Self-assessment of expertise Step Four of the Seven Safe Harbour Steps requires you to: assess whether you have the expertise required to provide your client advice on the subject matter sought and, if not, decline to provide the advice; and demonstrate that you have completed this Step Four by completing the adviser declaration in the FNA. How to meet Step Four Step Four of the Seven Safe Harbour Steps is designed to prompt you to self-assess your own expertise (i.e. your knowledge and skill) regarding the subject matter of the advice sought by your client AND to decline to provide the advice where you lack the required expertise. In most cases, as long as you are competent for the purposes of the Corporations Act to provide advice for that class of financial product, you will satisfy this requirement (provided you conduct the self-evaluation, believe you have the requisite expertise and have recorded this on the client file in XPLAN by completing the adviser declaration in the FNA). In completing the adviser declaration in the FNA, you are required to consider: your professional qualifications, accreditations and training (including whether you are RG146 compliant); the scope of the licence under which you are authorised to provide advice; any limitations placed on you by the licensee; and your knowledge and skills in relation to the strategy and financial products you are advising on (including your client s existing and requested products and any potential products you may recommend). You are required to consider the frequency and how recently you have delivered advice on a particular area as part of the assessment of whether you have the required expertise to provide the advice sought by your client. Page 14

15 Where your client requests or needs advice on a particularly technical or complex subject or product, you may not have the requisite expertise to provide this advice. This may be the case even where you are generally competent to provide advice about that class of product (e.g. your client wants advice about an SMSF but you do not adequately understand the role and obligations of SMSF trustees). In this situation, you are required to decline to provide the advice. You may refer your client to an adviser with the appropriate knowledge and skill. Record keeping Client file To show that you have completed this Step Four of the Seven Safe Harbour Steps, you are required to: complete the adviser declaration in the FNA and store this in the client file on XPLAN; and make a file note on XPLAN if you decline to provide the advice because you do not have the relevant expertise. If you refer your client to another adviser, you are required to obtain your client s consent to the referral, including passing on their personal information and store this consent in the client file on XPLAN.! Warning You cannot provide advice in areas for which you do not have the recognised professional qualifications, authorisation, accreditations or training or are otherwise not competent to advise on. Other requirements When you make a referral to another adviser or professional (e.g. a lawyer/ accountant) refer to the Referral Arrangements Licensee Standard or, for CFP Step 1 - Engagement Licensee Standard Page 15

16 Step Five: Reasonable investigation and assessment of financial products Where it is reasonable to consider recommending a financial product, Step Five of the Seven Safe Harbour Steps requires you to: conduct a reasonable investigation into the financial products that might achieve your client s identified objectives and needs, given the subject matter of the advice; assess the information gathered in the investigation; and demonstrate that you have completed this Step Five through the documents and information stored on the client file in XPLAN. Under this Step Five, you are required to: consider relevant strategies that may require non-product solutions; assess whether it is reasonable to recommend a financial product, taking into account your client s identified objectives and needs and the subject matter of the advice; consider relevant strategies that may require product solutions; conduct a reasonable investigation into your client s existing financial products to determine whether they are capable of achieving your client s identified objectives and needs; conduct a reasonable investigation into your client s requested products and any products that you may potentially recommend; consider whether it is appropriate to restrict your further research to products on your licensee s Approved Product List or whether you should research outside of your licensee s Approved Product List; and collect and assess sufficient information to enable you to conduct an effective like-for-like comparison of the product features of each of the existing, client requested and potential financial products you may recommend. It is not acceptable to omit any of your client s existing financial products if they are relevant to the subject matter of the advice, or simply select one of the existing products to research and investigate. How to meet Step Five Formulating an advice strategy In some cases, a product recommendation will not achieve your client s identified objectives and needs given the subject matter of the advice sought by your client. For this reason, before recommending that your client dispose of, or acquire, a financial product (or modify their interest in an existing financial product), you need to formulate an advice strategy that is capable of achieving your client s identified objectives and needs. This includes considering whether you should make a financial product recommendation at all. Your client s identified objectives and needs are those objectives and needs that were identified as part of Step Two of the Seven Safe Harbour Steps (set out above). You are required to document the basis on which your advice strategy is capable of achieving your client s identified objectives and needs and record those reasons and any supporting documents in the client file in XPLAN as well as in the SOA/ROA. Page 16

17 If you form the view that it is reasonable to recommend a financial product as part of your advice strategy, the next step is to conduct a reasonable investigation into the financial products that are capable of achieving your client s identified objectives and needs. What is a reasonable investigation? A reasonable investigation does not require an investigation into every financial product available but it does require you to investigate: your client s existing financial products (where applicable); any financial products specifically requested by your client; one or more other financial products that may achieve your client s identified objectives and needs; and any financial product you may wish to recommend. In selecting the products to be investigated, it is important to consider what products a Reasonable Adviser would consider having regard to the subject matter of the advice and your Client s Relevant Circumstances (which includes your client s specified solution or product needs). In conducting the investigation, you need to research and collect sufficient information to enable you to conduct an effective like-for-like comparison of the product features of each of the existing, client requested and potential financial products you may recommend. You can consider product research conducted by the Advice Research team and external research houses to assist you although product research is generic and does not take into account your client s specific objectives, financial situation or needs. It is critical that you understand the workings of the products you research, what they are designed to achieve and how products complement or offset each other when owned collectively. It is important to consider potential conflicts of interest associated with the research produced by the Advice Research team and external research houses (e.g. some research is paid for by the product manufacturer). You are required to carefully consider the disclosures made by the Advice Research team and any external research house, including disclosures made about their business model and related parties, the product selection process they adopt, the methodology they apply and the rating spread. One way you can conduct a reasonable investigation into financial products is by benchmarking the product at appropriate intervals against the market for similar products to establish its competitiveness on key criteria, such as: performance history over an appropriate period; features; fees; and risks. Ultimately, it is your responsibility to assess the weight and suitability of the research you use for the purposes of conducting a like-for-like comparison and whether the researched financial products are capable of achieving your client s identified objectives and needs. Page 17

18 Approved product list When conducting a reasonable investigation, you should consider financial products from your licensee s Approved Product List (APL). It is important for you to understand the mechanics of how the APL construction process works and assess whether the financial products on the APL are capable of achieving your client s identified objectives and needs. The Advice Research team may assist you by providing information about platforms, investment products and risk products. There are instances when it will be necessary for you to consider and investigate financial products that are not on the APL, including where: your client has specifically requested a non-apl financial product; or your client s existing products are not on the APL; or the criteria used to assess products for inclusion on the APL is not relevant for your Client s Relevant Circumstances; or the financial products on the APL are not capable of achieving your client s identified objectives and needs. Before you recommend a product that is not on the APL, you must follow the non-apl approval process of your licensee. Existing financial products If your client has existing financial products that are relevant to the subject matter of the advice, you are required to investigate whether your client s identified objectives and needs could be achieved by retaining and/or modifying some or all of these existing financial products. You are required to: make reasonable enquiries to identify your client s existing financial products; ask your client to provide relevant information and clarify any incomplete, inaccurate or unclear information provided; investigate each existing financial product that is relevant to the subject matter of the advice; and exercise your professional judgement in relation to each existing financial product having regard to your Client s Relevant Circumstances. It is not acceptable to omit any of your client s existing financial products if they are relevant to the subject matter of the advice, or simply select one of the existing products to research and investigate. Client requested financial products Where your client has requested a specific financial product, regardless of whether that product is on the APL, you are required to investigate and assess whether it is capable of achieving your client s identified objectives and needs. Page 18

19 Potential replacement financial products Product replacement advice, also referred to as switching advice, is a recommendation that your client disposes of, or reduces their interest in, all or part of an existing financial product in order to obtain or increase their existing holding in another financial product. You should be especially diligent when investigating and assessing whether a replacement financial product is capable of achieving your client s identified objectives and needs, given the subject matter of the advice. Examples of product replacement advice include: consolidating multiple superannuation funds; replacing an existing account based pension with an annuity product; consolidating multiple investment funds; and replacing any life, TPD, Trauma or Income Protection cover with cover from another insurer or any alternative product from an existing insurer. Assessing the information gathered After conducting a reasonable investigation into the financial products (existing, requested and potential), the next step is to assess the information gathered to determine which financial products might achieve your client s identified objectives and needs, given the subject matter of the advice. As part of your investigation and assessment, you are required to collect and assess sufficient information to enable you to conduct a like-for-like comparison of the product features of each of your client s existing and requested financial products and of any financial products you may recommend. At a minimum, this like-for-like comparison should compare the costs, the financial and non-financial benefits and any significant consequences of each existing, client-requested and potential financial product, using the proposed recommendations as the baseline. Further details relating to the considerations that are relevant to this comparison exercise are contained in the Product Research & Replacement Licensee Standard. Record keeping Client file The client file and the SOA/ROA stored in XPLAN should together demonstrate: the investigation you conducted into any non-product strategies and the reason why/why not those non-product strategies were capable of achieving your client s identified objectives and needs; the investigation you conducted into your client s existing financial products (including use of external research); the investigation you conducted into financial products that your client requested (including use of external research); Page 19

20 the investigation you conducted into potential or recommended financial products (including use of external research) and whether it was appropriate to limit your investigation to products on the APL; your assessment of whether the existing, client-requested and potential financial products were capable of achieving your client s identified objectives and needs based on genuine reasons (including the results of the effective like-for-like comparison you prepared); any non-apl approvals you obtained from your licensee; and all interactions you had with your client and/or a product provider in relation to the matters outlined above. To show that you have completed this Step Five of the Seven Safe Harbour Steps, you are required to keep a complete and accurate record of all action taken, and of all judgements made, and all interactions with your client in the client file in XPLAN, including: individual file notes of all client interactions; relevant s between you and your client; each of the documents required to be kept on the Research File as detailed in the Record Keeping Licensee Standard; a record of your decision as to whether you considered it appropriate to limit your research to products on the APL; a record of your consideration of key product feature comparisons between existing products, any client-requested products, any potential products and recommended products; a fully completed Strategy Working Document; and a fully completed and signed SOA/ROA. You should consult the further guidance contained in the Product Research & Replacement Licensee Standard and the Record Keeping Licensee Standard. Step Six: Base all your judgements on your Client s Relevant Circumstances Step Six of the Seven Safe Harbour Steps requires you to: base all judgements in advising your client on the Client's Relevant Circumstances (this requires you to have completed Step Five of the Seven Safe Harbour Steps above); not base your decisions on irrelevant considerations, such as your own interests or some generic benefit of a financial product that is not important to your client; and demonstrate that you have completed this Step Six through the documents and information stored on the client file in XPLAN. How to meet Step Six You are required to demonstrate how the strategies, and financial products, recommended are based on your Client s Relevant Circumstances. Page 20

21 It is your responsibility to match the financial and non-financial consequences of the advice directly to your Client s Relevant Circumstances. You must not base your decisions on irrelevant considerations or any assumptions, such as your own interests, bias or some generic benefit of a financial product that is not important to your client. When assessing whether you have based your judgement on your Client s Relevant Circumstances in recommending a product with a specific benefit, specific things you should consider are: Did your client request the benefit or indicate it was important? Does the benefit respond to your Client s Relevant Circumstances? Did you highlight the relevance/importance by reference to your Client s Relevant Circumstances? Where the benefit comes at additional cost: o What importance has your client placed on cost? o Does your client s cash-flow support the increased cost? o Does the increased cost adversely impact on another need of your client (and if so, does the advice adequately address the trade-off)? o Has your client indicated they are prepared to pay more for these additional benefits? Worked example of basing all judgements on Client s Relevant Circumstances Your client seeks retirement planning advice from you regarding his existing account based pension. Your client is unhappy with the high fees and is receiving an Age Pension. You did not make any further enquiries about your client s Age Pension and you recorded the subject matter of the advice as Review existing account based pension with a view to reduce fees. Your recommendations made no mention of any Centrelink implications and simply recommended commencing a new account based pension which addressed your client s identified fee related objective. The new account based pension resulted in a loss of the Centrelink deductible amount attributable to your client s existing account based pension. This meant that the new pension was subject to deeming as a financial investment which was assessed to have reduced your client s age pension benefit by more than the saving in fees. The recommendation you made may be assessed as failing Step Six of the Seven Safe Harbour Steps because your client s financial situation was not taken into account. Record keeping Client file The client file and the SOA/ROA stored in XPLAN should together: record each of the matters you considered when formulating the advice strategy; demonstrate that you have based your advice on relevant considerations supported by research papers, files notes and analysis conducted by you; Page 21

22 explain how your client s identified objectives and needs have been addressed by the advice strategy and/or financial products you have recommended; and document any trade-off discussions you had with your client. To show that you have completed this Step Six of the Seven Safe Harbour Steps, you are required to keep a complete and accurate record of all judgements made by you and all client interactions on the client file on XPLAN, including: individual file notes of all client interactions; relevant s between you and your client; full evidence of your strategy workings and analysis; and a fully completed SOA or ROA. Tools File Note template Strategy Working Document or strategy papers Research and Product Comparisons (for product replacement) Research Files Step Seven: Other reasonable steps Step Seven of the Seven Safe Harbour Steps requires you to: take any other step that, at the time the advice is provided, a Reasonable Adviser would regard as being in the best interests of your client, given the Client's Relevant Circumstances; and where additional steps are required, document your consideration of these additional steps and when and how the additional steps were actually taken through the documents and information stored on the client file in XPLAN. How to meet Step Seven This is the final catch-all Safe Harbour Step. You are required to exercise your knowledge, skill and professional judgement in considering whether there are any other steps that need to be taken to comply with this Step Seven. If you identify other steps that you should take, you are required to also complete those steps properly (to the standard of a Reasonable Adviser) in order to comply with this Step Seven of the Safe Harbour Steps. The test is to identify any other steps that a Reasonable Adviser exercising care and diligence would take in the interests of the client given the Client s Relevant Circumstances and the subject matter of the advice sought by the client. The assessment you are required to take will depend on a variety of factors including: the subject matter and complexity of the advice sought by your client; Page 22

23 your Client s Relevant Circumstances; and your clients existing or requested financial products, as well as any financial products you may recommend. Examples of other steps: You may need to undertake further steps if you haven t already done so, including for example: When recommending investments, assess your client s tolerance to the key risks associated with: o investing in financial product classes or specific financial products that you consider may achieve your client s identified objectives or needs; and/or o asset allocation ranges for a particular portfolio of investments that you consider may achieve your client s identified objectives or needs. Clearly addressing any inconsistencies recorded in the client file and advising on the risks of any trade-off, such as between: o the recommended investments and your client s risk tolerance or acceptable asset allocation; o your client s risk tolerance and their identified objectives and needs (e.g. if growth investments are more likely to meet their objectives but your client has no tolerance for volatility/risk); and/or o a risk profile, asset allocation or investments that are more likely to achieve your client s identified objectives and needs than those specifically directed by your client. Warning your client of significant adverse consequences such as: o by limiting the scope of advice; o by not implementing your advice by a particular deadline; and/or o consequences that may otherwise flow from implementing your advice even though the recommendation may achieve your client s identified objectives or needs (e.g. insurance exclusions or loadings, insurance cost impact on retirement savings or your client s cash flow). When recommending financial products, providing strategic recommendations that at the time of giving the advice are reasonably likely to achieve your client s identified objectives or needs. Highlighting that it may be appropriate for your client to obtain advice (from you or from a third party) on other key issues identified by you. Record keeping Client file The client file and the SOA/ROA stored in XPLAN should together demonstrate: your consideration of any additional steps in a file note or other working document; and when and how the additional steps were actually taken. To show that you have completed this Step Seven of the Seven Safe Harbour Steps, you are required to keep a complete and accurate record of all action taken by you and all client interactions on the client file on XPLAN, including: Page 23