Scoping and scaling advice

Scoping and scaling of advice was introduced as part of the Future of Financial Advice (FoFA) legislation in July 2012, in an attempt to make financial advice affordable and therefore more accessible to more Australians.

The reforms were introduced after recognition that financial advice is often a trade-off between the cost and complexity of advice. This trade-off can result in inadequate advice being provided to a client who believes they are receiving comprehensive advice when in fact the adviser has limited their advice for various reasons.

The best way for the adviser to overcome this issue and still adhere, as required, to the best interests duty is to take a collaborative approach with the client. This will ensure transparency and facilitate the client’s understanding of the implications of any move away from comprehensive advice.

ASIC has provided some guidelines to help advisers with the scoping and scaling requirements.

To reduce the scope of advice, an adviser must first understand and explore the client’s goals and their broader circumstances to ensure that the scope of advice aligns with their needs. A link should then be established between the client’s needs and how and why that has determined the scope of advice.

All advice is scaled to some extent – it is simply not enough to say retirement planning is in scope and will be covered in the statement of advice (SoA). You need to ask questions like: what aspects of retirement planning will be scaled in or out? Will you be addressing the benefits and costs of a self-managed superannuation fund (SMSF), transition to retirement (TTR) strategy, aged care? Will you be modelling a client’s cash flow in retirement and will age pension payments be taken into account? What about the impact of any investments held outside super and will debt be included?

It is not realistic to expect the client to have the knowledge to ask these questions and so the responsibility rests with you, their adviser, to take the client through them during your conversations.

To act in the client’s best interests, ASIC also wants to see evidence that you have explained to the client the implications of having reduced the scope of advice. For example, estate planning may have been scoped out because the client has a simple will and does not want further advice in this area.

In the retirement example above, the client may have no interest in an SMSF and be too young to be concerned about a TTR strategy and aged care. However, if an adviser has scaled out matters such as the possible effect of aged pension, or the impact of an outstanding mortgage at retirement, then it would be difficult to argue that the client accepted this and had understood that the modelling would not provide a true reflection of their expected position at retirement.

ASIC recommends a process be implemented to filter or triage all the relevant client circumstances in order to provide evidence that the reduced scope of advice still adheres to the best interests duty requirements.

To do this properly an adviser should view the scope of advice as part of a larger process that begins with gathering financial and personal information from the client, recording the client’s goals and any discussions that were conducted around these goals, their priorities and any potential conflicts with other goals, then using this information to determine the scope and scale of advice that is appropriate for the client. All the information must be documented, including the reasons for any reduction in the scope of advice and evidence that the implications of this have been discussed with the client.

Many advisers are still relying on a paper-based fact find to provide the structure and process to complete this onerous and detailed task and so it is little wonder that they are struggling to provide an audit trail that ASIC accepts as meeting its compliance standards.

This process can be simplified by using technology that transfers the relevant information through a series of tools which provide a logical progression for the client and a simple sequence of events for the adviser. This process can automatically produce detailed file notes linking each stage along the required audit trail and efficiently provide an experience that the client both understands and values.

Hans Egger, managing director, AstuteWheel

This is part three of a six part series on the client/adviser journey. To read earlier parts, click for Part 1 'How to stop wasting time' and Part 2 'A practical application of goals-based advice'.

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].