As an independent auditor, I have observed numerous instances where financial advisers struggle to comply with the FASEA Code of Ethics Standard 5 fully. The Standard emphasises that all advice and financial product recommendations must be in the best interests of the client and appropriate to their circumstances. Advisers must ensure clients understand the advice, including the recommended financial products’ benefits, costs, and risks. Here are some common pitfalls and tips to help financial planners meet this standard effectively while building business value.
Common Pitfalls
- Inadequate File Noting Post-ATP Signing: Many advisers neglect to do thorough file noting once the client has signed the Authority to Proceed (ATP). This oversight can lead to significant compliance issues. Documenting all discussions and decisions made after the ATP is signed is crucial to ensure transparency and accountability.
- Overreliance on Template Wording: Generic template wording such as “I ran through the Statement of Advice (SoA) with the client; they fully understood and had no questions” is insufficient. Each client’s understanding and questions should be documented in detail to reflect the unique nature of their circumstances and the advice provided.
- Lack of File Notes: In some cases, there are no file notes. This is a serious compliance breach. Every interaction with the client, especially those involving advice and decision-making, must be meticulously documented.
- Insufficient Client Discussions: Advice and paperwork are often sent to clients by mail or email without any follow-up discussion. Advisers must contact the client to acknowledge receipt, discuss the SoA, and meet all code guidelines. This practice not only ensures compliance but also enhances client understanding and satisfaction.
- Incomplete Advice to All Parties: When advising couples, all individuals must understand the advice and its implications. Presenting advice to only one member without checking in with the other can lead to misunderstandings and non-compliance with Standard 5. Documenting these interactions is equally important.
Benefits of Engaging Conversations
In addition to meeting compliance requirements, having engaging conversations with clients offers several benefits:
- Strengthening Client Relationships: Engaging discussions demonstrate that the adviser genuinely cares about the client’s well-being. This enhances the relationship and builds trust.
- Perceived Value of Fees: Clients are likelier to see value in their fees when they feel heard and understood. This can reduce client attrition due to a perceived lack of value.
- Defence Against Complaints: Detailed file notes can be invaluable in defending against complaints. In volatile markets, clients may claim they did not understand the advice. Comprehensive documentation showing that the adviser met Standard 5 can significantly bolster the adviser’s defence and potentially avoid costly compensation.
By addressing these common pitfalls and embracing the benefits of engaging in client conversations, financial planners can comply with the FASEA Code of Ethics Standard 5, enhance their client relationships, and safeguard their practice.
Are you confident that your financial planning practice fully complies with the FASEA Code of Ethics Standard 5? Ensuring that your advice is in your client’s best interests and that they fully understand your recommendations’ benefits, costs, and risks is crucial. An independent audit can give you the assurance and insights needed to enhance your practice.
Why Engage an Independent Audit?
- Unbiased Evaluation: An independent auditor objectively assesses your compliance with regulatory standards, identifying areas for improvement without any internal biases.
- Enhanced Compliance: An audit helps you meet Standard 5’s stringent requirements by pinpointing common pitfalls and providing actionable recommendations, safeguarding your practice against potential breaches.
- Improved Client Relationships: Demonstrating a commitment to transparency and thoroughness builds trust with your clients, showing them that you prioritise their best interests and understand their unique circumstances.
- Risk Mitigation: Comprehensive documentation and adherence to best practices can significantly reduce the risk of client complaints and legal issues, protecting your reputation and financial stability.
- Professional Growth: An audit provides valuable feedback and learning opportunities, helping you refine your skills and stay ahead in a competitive industry.
Take the Next Step
Invest in the future of your financial planning practice by engaging in an independent audit today. Ensure that your advice meets regulatory standards and exceeds client expectations. Contact us to schedule your audit and take the first step towards a more compliant, transparent, and client-focused practice.
Further reading – Summary of FASEA Code of Ethics Standard 5
Key Principles and Standards
- Client First: Prioritize the client’s best interests.
- Objectivity and Fairness: Provide unbiased and fair advice.
- Professionalism and Diligence: Maintain high professional standards and thoroughness.
Practice Standards
- Engagement: Document terms of engagement and understand the client’s circumstances.
- Collecting Information: Gather comprehensive client information.
- Analyzing and Assessing: Evaluate the client’s situation and identify suitable strategies.
- Implementing Recommendations: Ensure the implementation of financial planning recommendations.
- Professional Judgment and Conflicts of Interest: Exercise sound judgment and manage conflicts of interest.
Requirements
- Best Interest Duty: Advice must be in the client’s best interest, considering their broader, long-term interests and likely future circumstances.
- Client Understanding: Ensure clients understand the advice, benefits, costs, and risks.
- Clear and Simple Advice: Provide advice clearly and simply.
Tips for Compliance
- Document Client Circumstances: Document the client’s current and future needs.
- Map Advice to Client Needs: Align advice with the client’s short, medium, and long-term goals.
- Consider Broader Interests: Include the client’s broader, long-term interests and potential future needs.
- Use Clear Communication: Utilize plain English, summaries, and visual aids to enhance understanding.
- Demonstrate Client Understanding: Engage with clients to ensure they understand the advice and document these interactions.
Adhering to these principles and standards can help financial advisers meet the FASEA Code of Ethics Standard 5 and provide appropriate and comprehensible advice to their clients.
