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© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor

Financial Planning in Australia5TH EDITION • Sharon Taylor • Roger Juchau


Constructing a Statement of Advice

CHAPTER 4


Overview

• A well produced SOA provides clear evidence of the value of advice.• The first step is to engage with the client to collect data and analyse it.• The SOA must be developed in a logical and compliant manner.• The advice must relate to client goals, needs and expectations.• Recommendations must be clear, specific and fully justified.• Appropriate disclosures, disclaimers and warnings must be included.• Communications must be clear, concise and appropriate for each particular client.


• Effective data collection and client discussions mean that advisers can show they have a basis for advice.

• Standardised risk tolerance assessment and matching of recommendations to the client’s risk tolerance will lower the business risk of having unhappy and litigious clients.

Principles of Preparing Advice


• Plans and strategies should be kept as simple as possible within the requirement to meet the client’s goals, if possible. Complexity should only be added if a simple plan will not achieve the client’s goals.

• Where a client is provided with full information regarding strategies and recommendations, the client can make his or her own decisions about what actions to take. This is called informed consent. It shifts the final decision making from the financial adviser to the client. The client is then responsible for the outcomes.



• In this chapter, we will use the term financial adviser to encompass both authorised representatives and employee representatives.

• The Financial Services Reform Act 2001 (Cth) introduced the requirement to provide clients with a Statement of Advice (SOA). A full SOA will exceed the requirements at law for a Statement of Advice. We will use the abbreviation SOA to denote a full Statement of Advice.



In Chapter 2 we considered the steps necessary to construct a comprehensive SOA. They were:• Step 1 — Collect and assess the financial data of

the client.• Step 2 — Determine the objectives and goals of

the client.• Step 3 — Identify any financial problems that

may exist.• Step 4 — Prepare a written plan which contains

alternatives and recommendations.• Step 5 — Implement the agreed written plan.• Step 6 — Review the plan.

Steps in the Financial Planning Process


• Clients will be a diverse group, with different backgrounds, experiences, resources, concerns and goals: each will present a unique challenge. It is both a legal requirement and common sense for the financial adviser to be aware of the client’s specific circumstances.

Step 1 - Collect Client Data


Each life stage presents differing issues and problems.

There are a number of identified life stages:

• savings versus consumption phase — generally younger people, trying to get established, new jobs, wanting cars, saving for home, enjoying life;

• early family formation — young families, both partners may be working, issues with mortgage payments, child care, school fees, need for insurance, trying to stretch their budgets;

Life Cycle


• wealth accumulation phase — the mortgage is not taking up so much of their income, they are earning higher salaries, balancing work and leisure, assisting their children, creating personal wealth and saving for their retirement;

• approaching retirement — generally associated with people in their early fifties up to age 65 — people seeking to maximise their retirement savings so that they can comfortably fund their retirement income needs;

• post-retirement — managing income needs to ensure a lifelong comfortable retirement.

Overview


The information in this category includes:• financial data – this includes the client’s

individual income and expenditure statement as well as a personal balance sheet;

• personal information as to age and investment time horizons; and

• financial objectives — the client provides details as to the level of future income required in order to maintain his or her desired lifestyle.

Quantitative Data


The information in this category includes:

• Risk Tolerance Assessment

• Financial Literacy Assessment

Assessed Data


The information in this category includes:

• goals and objectives;

• issues and concerns; and

• preconceptions as to the client’s needs in retirement.

Qualitative Data


• The financial adviser has to work with the client to determine his or her goals and objectives both for the short term and long term. It is important to determine if the goals and objectives are attainable given the client’s current and expected financial resources.

Steps 2 and 3: Determine the Client’s Objectives and Goals and Identify any Financial Issues


• If, after analysis, some goals are unattainable or not obtainable within the time frame the client has set, then the financial adviser must work with the client to determine trade-offs and prioritise the goals.

• Clients may have unstated goals, which the financial adviser may have trouble uncovering. These can only be identified through extensive questioning of the client and sometimes only through observation of the client’s body language and facial reactions when questioned or when certain issues are discussed.


The financial adviser will have to seek:• points of clarification;• assurance and verification that the data has been

interpreted correctly; and• discussion regarding clashing objectives.

Generally speaking, clients will have to consider:• saving more and spending less – saving smarter and

more tax effectively;• working longer – postponing planned early retirement;• accepting a lower income in retirement; or• accepting a higher level of investment risk seeking

higher levels of return.


• The financial adviser will have to make certain assumptions in order to develop the strategy and recommendations for the client.

• The financial adviser must ensure that the client understands the need for these assumptions and how they will impact the advice being given.

• These assumptions need to cover personal events in the future, ongoing receipt of current income levels, and continuation of good health.

• They also need to include assumptions about the behaviours of markets, regulations, inflation etc.

• These assumptions will need to be tested at each annual review.

Assumptions


Most SOAs are written with a standardised format. To start

they have:

• a personalised and complying covering letter;

• a standardised and complying cover page;

• an Executive Summary that provides the client with a general understanding of the actions recommended and a summary of expected outcomes; and

• a Table of Contents that clearly outlines the structure of the SOA.

Step 4: The preparation of a written plan


• The covering letter should use professional but not necessarily formal language. The language you use for this letter, as in the rest of the written plan, should be clear and concise and readily understandable to the client.

• The covering letter should:– be written on letterhead with contact information (address,

telephone number, email etc)– include the name of the licensee and its licence number and

ABN; and– be signed by the financial adviser, stating that he or she is an

Authorised Representative (or Representative)of the Licensed Dealer.

Covering Letter


• This letter should invite the client to contact the financial adviser if any of the information is incorrect or if the client requires clarification of any of the issues or recommendations.

• It also needs to warn the client that decisions regarding implementation of the SOA must be made within 30 days. After that, it may need to be reviewed to ensure that any changes over that time will not affect the recommendations that have been made.

• It is also important to get the client to understand the need for annual reviews.

Covering Letter


All SOAs require a cover page that provides the following information:

• that it is a Statement of Advice;

• the name of the plan recipient;

• the date that the plan becomes effective;

• the name and contact details of the financial adviser who provided the plan;

• the name and contact details of the licensee who authorised the SOA;

Cover Page


• a statement that the plan is private and confidential; and

• a warning box that reminds the client that this is an important document, that it should be read carefully and in full, that if the client has any questions the client should speak with the financial adviser, and any information required about cooling off periods.

Cover Page


• The Executive Summary should be no more than two pages in length and in bullet point form.

• The Executive Summary sets out the key personal details of the client, so the client can see that the financial advisor has understood his or her position.

• The second section summarises the client’s goals and objectives, in his or her terms, so the client can see that the financial advisor understands what is wanted from the SOA and the planning process.

Executive Summary


• The next section needs to state each main recommendation, who is to act, how much money is involved, where the money is to come from.

• The final section, after providing a warning in relation to projections, needs to state the expected outcomes from each investment portfolio, including retirement savings, and confirm likely goal achievement, including adequate retirement income past the client’s life expectancy.

Executive Summary


• This page clearly outlines the structure of the plan and can be used in future to locate specific sections of the plan.

• Make sure all pages are numbered, even those in appendices.

• Keep to major headings so that the plan does not seem to be overly complex.

Table of Contents


The body of the SOA usually has six distinct parts:– the basis for advice: client details, assumptions, discussion of

risk tolerance and asset allocation and, potentially, a source of funds and a use of funds table;

– the recommendations, their justification, their impact on the client’s cash flow and net worth, and a cost-benefit and risk analysis;

– an implementation schedule;– disclosures and disclaimers;– client sign-off (Authority to Proceed); and– appendix (including product disclosure statements).

Body


• This section provides the information upon which the financial adviser has based his or her advice. If this section is not completed fully and then used to make recommendations, the advice provided will be inappropriate.

This section must have:• a clear and concise restatement of all of the pertinent client information;• an estimated cash flow for the current financial year that identifies any

excess savings capacity which the client can use to fund goal achievement;

The Basis for Advice


• a chart showing the client’s assets and liabilities;• an analysis of the client’s current investments (including

superannuation);• a full discussion of the client’s personal risk tolerance, what

asset allocation he or she would prefer to hold and what benchmark asset allocation the client will need to accept if he or she is going to achieve stated goals;

• a list/discussion of all personal and financial assumptions;• a discussion of the client’s concerns and issues that may

impede goal achievement; and• a source and use of funds chart if it will clarify the client’s

situation and the funds available for investing.

The Basis for Advice


• The core of every SOA is a statement and analysis of the client’s current cash flow which sets out his or her income and expenditure and indicates available cash after all expenditures have been met. The financial adviser can then use that cash flow to meet the client’s goals and create future wealth.

• The financial adviser needs to ensure that the client has an emergency fund set aside to meet any unexpected needs for immediate cash.

• An assets and liabilities table can provide a significant amount of information. The financial adviser should be able to see what the client owns, any debt, when the debt is expected to be paid, what cash the client has and what other investments are held. With this knowledge, the financial adviser can move to reduce debt, recommend sale of non-performing assets and, hopefully, free up funds for investment.

Cash flow, Assets and Liabilities


• The analysis of current investments should include a full discussion of the client’s personal risk tolerance, asset allocation preference and what benchmark asset allocation the client will need to accept to achieve his or her goals.

• The result of the client’s risk tolerance should be a preferred asset allocation, based on the level of growth assets the client is comfortable with.

Risk tolerance assessment


It will be necessary for the financial adviser to make assumptions about the future and state these assumptions early in the plan. The financial adviser should ensure that the client reviews this section and understands the impact of these assumptions on the advice being provided.

Assumptions


There will be specific concerns that the client will voice, questions they will ask and attitudes or financial situations which will impede goal achievement. It is important to summarise and settle these concerns and issues in writing within the SOA before beginning work on specific recommendations.

Concerns and Issues


Sometimes it is necessary to move clients’ funds around in order to clear up debt, sell non-performing assets and identify funds available for investing. Where there are a number of cash movements, a Source and Use of Funds Chart will help illustrate these movements.

Source and Use of Funds Chart


The client needs to see a clear statement of the strategy behind the recommendations. The strategy must be flexible enough to deal with the likely changes of circumstances that most clients experience and be supported by recommendations which are detailed and specific to a client’s individual needs.

The RecommendationsStatement of Strategy


Most financial advisers do not discuss insurance issues sufficiently with their clients. This discussion is essential, as appropriate and affordable risk cover can help to ensure that the client’s goals can be achieved, given that unforeseen events may cause financial loss. A full review, including estimated cover requirements, must be completed even if the client will be referred to a specialist for specific product advice.

Risk Management and Insurance Cover


The discussion should include strategies for coping with:• the death of the client(s) and loss of financial stability for their

dependants;• accidents causing permanent and total disablement to the client(s)

or a dependant;• loss of the ability to earn an income due to illness or accident; • the costs associated with a traumatic illness; and• the need for private hospital cover.

Risk Management and Insurance Cover


It is important to discuss strategies for risk management, such as:

• avoidance or elimination of the risk (often not possible);

• management and control – possible to some extent; can lower insurance premiums;

• self-insurance; and

• transfer of the risk.

Risk Management Strategies


The process of assessment should be:• assessment of risks;• non-insurance solutions; • attribution of a dollar cost to the loss;• the offset of existing cover or savings;• determination of cover levels required;• matching product features to needs; • development of a full insurance plan for each individual and the

family as a whole (where relevant); and• disclosure of indicative premium costs and their inclusion in

cash flow.

Risk Management Strategies


• Most clients are uncomfortable discussing death, Wills and disposal of their wealth.

• However, it is important to point out to clients the importance of having a written structure (a Will) to back up their wishes on the transference of their wealth.

• While the adviser is not a legal practitioner, it is the adviser’s responsibility to discuss these matters with the client and prepare the client for a visit to an appropriate legal professional.

• Such discussion should revolve around issues such as Wills, beneficiaries, trust mechanisms to preserve assets, insurances and other taxation structures, as well as Powers of Attorney.

Estate Planning


• While no strategy should be recommended simply for tax reduction purposes, a financial adviser must thoroughly understand the tax implications of the recommended strategy and product selected. Advisers should seek to recommend tax-effective outcomes consistent with the client’s ability to accept legislative risk.

• Wherever a discussion of taxation occurs, the financial adviser must clearly inform the client that he or she is not a tax adviser.

Taxation


Investment recommendations first need to be generic and should move from the most tax-effective (usually superannuation) to the least tax effective (usually managed funds). Each recommendation must be referenced to the client’s risk tolerance asset allocation or the asset allocation agreed to by the client.

Investment Recommendations


• Within the investment strategy, it is important to consider the most appropriate investment vehicles (tax structures), for example:

– holding assets personally (direct investments);

– unit trusts;

– insurance bonds;

– superannuation-based investments; and

– retirement and non-retirement income streams.

• For most clients, investment recommendations will be a mix of all of the above.

Investment Recommendations


• In relation to retirement planning, there are both financial and emotional considerations.

• It is the role of the adviser to look at the client holistically and view retirement first as a lifestyle choice.

• Retirement financial security and wealth preservation usually involves the best use of superannuation balances and possible social security benefits.

• This section of the plan should also take into consideration such issues as changes in the ability to make additional contributions to superannuation and the changes to taxation and social security assessments.

Superannuation, Retirement Planning and Social Security Issues


Specific Product Recommendations

• After the generic discussion on strategies, specific products must be recommended. It is necessary to clearly identify the characteristics of each product, the product provider and how the product matches the client’s risk profile and financial needs.

• Each and every product should be fully justified, and a risk-benefit analysis completed so that the client can fully understand the risks that he or she may be taking and the benefits that he or she should be able to expect.


• The client must be able to see that they can afford to implement the recommendations.

• A post-implementation cash flow will show the client that he or she still has enough money to manage daily living requirements, even after implementing the recommendations.

• It is important to include indicative costs for additional insurance and the cost of legal work and periodic reviews.

Post – Implementation Cash Flow


The regulatory environment and best practice require that a financial adviser disclose all fees and commissions to the client in dollar and percentage terms, including any pecuniary interest the adviser may have in any of the products recommended.

Fees and Commissions


A financial adviser must disclose in writing:

any remuneration including fees, commissions or any other pecuniary or non-pecuniary interests that are either direct or indirect in relation to the plan presented to the client or any other financial services (including any fees in dollar and percentage terms for the placement of investments (entry and exit fees) as well as the costs of review);



• any other benefit that might influence the recommendation of a particular investment (often called soft commissions, for example, a paid overseas holiday provided by a fund manager);

• any benefit a third party might receive in relation to the recommendations being made; and

• any other costs to be borne by the client.



The financial adviser reminds the client what areas of financial advice he or she may provide and the types of products and services he or she can offer.

Disclosure of Capacity


• Disclaimers act as a warning as to how the information provided in the plan can be used and that it is specific to the client and not for general use.

• The disclaimer points out to the client upon what the client can rely.

• Disclaimers are used to avoid possible legal action by making the client aware of the scope of the advice.

Disclaimers


• This needs to be personalised for the specific client.

• The client needs to see why it is so important for his or her goal achievement to undertake an annual review.

• The client needs to know what the annual review process will be, what will be discussed, and the cost, even if it is only a statement that the cost of the annual review will be covered by trailing commissions from the investments made.

Monitor and Review Process


• This schedule is a detailed statement of all actions, including the completion of forms, the drawing of cheques and the making of appointments that the client and the financial adviser need to undertake in order to implement the plan.

• The more detailed the schedule is, the more likely plan implementation will go smoothly. It should include: who, what, when, how much, what name the cheques are to be drawn for, what documents need to be completed, who will lodge them, and so on.

Implementation Schedule


• The Authority to Proceed is a formal business letter provided by the financial adviser for the client to sign. It asks the client to confirm that he or she has received and read the Financial Services Guide, agrees with the risk tolerance assessment, has received and read the Privacy Statement and so on. The letter should have all product recommendations listed, in whose name the product is to be purchased and the amount of the initial investment.

• There should be a place for the client(s) to sign and date the document.

Authority to Proceed


• Appendices should be strictly limited. They should contain the financial worksheets that back up the recommendations in the SOA and summary graphs.

• Do not place educational materials in here. Cluttering up a SOA with generic educational materials is seen as a major flaw by ASIC.

Appendices


The implementation of the recommendations can make or break the relationship with the client. Even in a rather simple plan, there will be a number of things that the client will have to do, the financial adviser will need to do, and perhaps other people who are providing legal and insurance advice will have to do. It is the financial adviser’s responsibility to monitor the implementation process, ensuring that each step is completed in a timely and accurate manner.

Step 5: Implement the agreed plan


• Scheduled reviews are essential to allow for the changing nature of the client’s circumstances and that of the external environment, including financial markets. The review process is exactly the same as that of the initial financial review, except there is now additional work to be done.

• The financial adviser must ensure that no personal changes have occurred that might change the recommendations that have been made. The adequacy of the client’s insurance cover should be reviewed.

Step 6: Review the plan


• In a review, a client should be supplied with an updated value of the investment portfolio and a comparison with previous reviews indicating the return on the portfolio over the intervening period. This needs to be compared against the expected results.

• Where additional actions need to be taken by the client, a new SOA needs to be issued. Where a recommendation is made for a change in products, a Product Replacement Form must be completed so that the client can see what benefits he or she may be giving up and weigh them against any new benefits that will be received.

Step 6: Review the plan


The SOA provides details of:

• the basis for the advice;

• the rationale behind the advice;

• a restatement of the advice, its benefits and drawbacks;

• benchmarks that the client can use to measure progress towards goal achievement;

• the cost of implementation of the plan and any other benefits the financial adviser may receive; and

• a detailed implementation plan.

Critical Elements


• While the resulting document may be long and contain a lot of information and many recommendations, the actual structure of an SOA is relatively simple. Most of the work has already been done with the client, who has agreed on the different strategies.

• What is behind the plan is the critical thing. Financial advisers must not only have a reasonable basis for their advice, but must be able to show it within their data-collection process and with the construction of the plan.

Critical Elements


• A well produced SOA provides clear evidence of the value of advice.

• The first step is to engage with the client to collect data and analyse it.

• The SOA must be developed in a logical and compliant manner.

• The advice must relate to client goals, needs and expectations.

• Recommendations must be clear, specific and fully justified.

• Appropriate disclosures, disclaimers and warnings must be included.

• Communications must be clear, concise and appropriate for each particular client.

Summary

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