1. Chapter 15 Development of a statement of advice
PowerPoint presentation by
Fariba Ahmadi-Pirshahid
©2014 John Wiley & Sons Australia, Ltd

2. Learning objectives After studying this chapter you should be able to:
understand the disclosure requirements for the provision of a financial product
outline the key principles behind the provision of financial advice
explain when a statement of advice is required and its purpose
explain the circumstances under which a statement of advice is not required
outline the main types of statement of advice documents used in the marketplace
appreciate the importance of effective communication in a statement of advice
understand the importance of the planner–client relationship
explain the six-step financial planning process used to prepare a statement of advice
understand the various ethical and legal compliance issues involved in developing a financial plan
appreciate the important components of a statement of advice.

3. Introduction
To successfully manage finances, a person needs to have a personal financial plan
The plan should include client’s goals and objectives, put forward strategies and recommendations and describe how goals will be achieved
Comprehensive analysis of all disciplines needs to be considered in a typical financial plan formally referred to as Statement Of Advice (SOA)
SOA is the means of communicating the advice to the client

4. Disclosure requirements
Financial planners are required to provide clients with certain information prior to giving advice.
The main disclosure documents are:
Financial Services Guide (FSG)
Statement of advice (SOA)
Product disclosure statement (PDS).

5. Legal obligations relating to the provision of financial advice
New obligations within Part 7.7 of the Corporations Act
These new amendments are part of the Future of Financial Advice Reforms which came into effect in 2012

6. Best interest obligations
The best interest obligations means that a planner has three separate duties:
a duty to act in the client’s best interest
a duty to provide advice that is appropriate
a duty to prioritise the client’s interests in the event of a conflict.

7. Statement of advice (SOA)
The purpose of an SOA is to communicate advice and recommendations concerning the financial affairs of a client
The statement of advice (SOA) must contain sufficient information to enable people to make an informed decision about whether:
the advice is appropriate
they should act on it.
An SOA is required under s. 946A of the Corporations Act

8. Statement of advice continued
Suitability rule — having a reasonable basis for the advice. The planner must be able to show:
reasonable enquiries were made re the clients personal circumstances
the subject matter of the advice was considered and investigated
the advice was appropriate for the client.
A statement of advice (SOA) must be given to the client at the same time as, or as soon as practicable after, the advice is provided (s. 946A) (see also RG ).

9. Statement of advice continued
These elements require the planner to undertake an appropriate and reasonable level of investigation to ensure that the advice provided is fit and appropriate to meet the needs and requirements of the client. Investigations must be made into both:
the client’s situation (know your client)
into suitable financial products (know your product).
Information presented must be tailored to the clients level of financial literacy.

10. Statement of advice continued
SOA is generally required when personal advice is given to retail clients.
SOA is not required when:
the client is not a retail client
personal advice is provided to clients having a small amount of funds to invest (S 946AA) (< $15 000)
the advice does not involve the purchase of a financial product and where the entity providing the advice does not receive any remuneration
providing further advice to a client.

11. Obligations when providing further advice
When a client is provided with further advice, SOA is not required if:
an SOA is already provided which includes client’s circumstances
the client’s circumstances have not changed significantly
the basis of advice is not significantly different from the advice in the previous SOA.
In such cases, the financial adviser can provide an alternative advice document to the client known as a Record Of Advice (ROA).

12. Incorporates all six steps of financial planning process
Types of SOAs
There are three types of financial plans (written advice) that financial planners are expected to provide.
No advice
A document signed by a client stating that no advice was given by a planner in respect of a transaction
Limited Advice
Known as scaled advice, sought by clients in various specific circumstances — for example to execute a transaction
Comprehensive SOA
Incorporates all six steps of financial planning process

13. Types of SOAs continued
Pursuant to s. 945B clients must be provided with a warning if advice is based on incomplete information
Care should be taken to ensure that all strategies and discussions contained in the body of the SOA are specific to the client’s circumstances
Should be prepared with
the client’s level of financial
sophistication in mind

14. Effective communication in SOA
SOA should provide detailed strategies and projected outcomes
It should be written in plain English understandable by the client
ASIC’s Good Disclosure Principles promote disclosure to:
be timely, relevant and complete that provides product understanding and allows product comparison
highlights important information
have regard to consumers’ needs.

15. Introductory meeting — purpose:
to establish the relationship between the planner and the client
to provide the planner with an opportunity to learn about the client, their circumstances and needs and to determine what the client is hoping to accomplish from the relationship
to provide the client with an opportunity to learn about the planner and the services they offer and whether the planner is likely to be able to satisfy the client’s requirements.

16. The six steps of the financial planning process

17. Step 1: Gather client information
Fact finders are used to create a basis for the financial plan
The financial planner needs to look beyond the quantitative information provided by the client, and ensure that qualitative issues are also considered
The planner normally also assesses the client’s risk profile to determine risk profile and risk capacity — an integral part of the ‘know your client’ process

18. Step 2: Establish financial goals and objectives
Examples of asset allocations for different risk and return profiles

19. Step 2: Establish financial goals and objectives continued
The planner’s role is to help the clients develop and clarify their objectives in the short, medium and long term
Client objectives need to be clear, specific and measurable
Planner discusses with client the extent to which the goals are achievable, realistic or optimistic

20. Step 2: Establish financial goals and objectives continued
Identify problems / conflicts between goals and strategies / recommendations:
analysing opportunity costs
agreement on trade-offs
decisions about priorities
confronting ethical issues.

21. Step 3: Analyse data and identify financial issues
Issues include:
ascertaining cash inflows and outflows to determine saving capacity
assessing income tax obligations
assessing the appropriateness of the asset allocation
determining the extent to which the current wealth creation of a client is likely to generate sufficient funds for retirement
assessing social security entitlements
determining whether personal insurance cover is adequate and appropriate
comparing proposed strategies and investment products versus the client’s risk tolerance and objectives.

22. Step 3: Analyse data and identify financial issues continued
Preparation of personal financial statements:
Balance sheet
Income statement
Cash flow statement
Use of ratio analysis to assess client position via personal financial statements
The planner may also undertake financial modelling to determine whether the strategies being recommended will achieve their desired purpose…

23. Step 4: Prepare written recommendations
The planner communicates appropriate recommendations and strategies in a way that allows clients to make informed decisions
This is done through a comprehensive and detailed SOA

24. Step 4: Prepare written recommendations continued
Reasonable assumptions included in SOA:
Tax rates
Inflation
Interest rates
Income and capital investment returns
Life expectancy of clients

25. Step 5: Implement the agreed-upon plan
Planner and client agree on
how recommendations and strategies are to be implemented
who should perform them.
A timetable should be established for each stage of implementation together with breakdown of responsibilities. For example:
Action When Who
Client to salary Immediately The client to organise through their employer
sacrifice $1500 per month into their superannuation
fund

26. Step 5: Implement the agreed-upon plan continued
This will normally be followed by documents for client to sign
Comprehensive record keeping crucial at this stage for both planner and client

27. Step 6: Review, revise and maintain the personal SOA
Periodic review (typically 6-monthly) required to ensure ongoing appropriateness of recommendations and strategies developed under SOA
Review should follow Steps 1–5
Written agreement is recommended to set out role and responsibilities of the financial planner

28. Ethical and legal compliance issues
Financial planners have a professional and fiduciary obligation to look after the interests of the client without bias or conflict and in a manner that establishes a relationship of trust, confidence and discretion

29. Ethical and legal compliance issues continued
Two tests to gain a reasonable basis for recommendations
Know your client
Know your product
A financial adviser who is found not to have complied with these two tests may be liable to compensate clients who suffer financial losses from relying on adviser recommendations

30. Ethical and legal compliance issues continued
Know your client
Client records must be stored safely and kept confidentially
Access to client files may be required by the courts or ASIC
Ownership of client records and files always lies with the licensee and not the adviser

31. Ethical and legal compliance issues continued
Obligation to provide a full, transparent and frank disclosure of all remuneration within the SOA
Remunerations models varies and may based on commissions, fee-for-service, or an hourly rate
Example of the disclosure of remuneration:
Corporations Act and Regulatory Guides (RG) requires remuneration of planner in the SOA
All forms of remuneration to be disclosed – including ‘soft-dollar’ payments
Financial planner must provide prospective clients with Financial Services Guide (FSG) at earliest practical opportunity
Preparation of checklists encourages compliance and streamline administrative processes of planner

32. Important components of SOA
Prepare a complying covering letter
Prepare a contents page
Prepare an executive summary
Scope of the advice
Refer to the client’s present position
Goals and objectives
Strategies
Fees and charges including the cost of advice

33. Important components of SOA continued
The recommendations set out for the client should enable the client to determine:
what the advice is
why the advice is appropriate
the benefits of the advice
the risks and disadvantages associated with the advice
the consequences of replacing financial products.
To facilitate understanding and comprehension, advice may be displayed through the use of graphs, tables and charts.

34. Important components of SOA continued
Develop appropriate strategies
Cash flow projections
Income tax planning
Risk management and insurance
Social security matters
Investment planning
Superannuation and retirement planning
Estate planning
Cost of the advice and how the planner is paid
Specific disclaimers
How to proceed

35. Planning for implementation
Plan needs to be agreed upon, signed and consented to prior to implementation
It is reasonable to expect that clients will take time to decide on implementation of the plan
It is unrealistic to expect prospective clients to give immediate agreement
Clients’ outstanding queries should be resolved and any necessary amendments made to plan
Service agreement defining rights and responsibilities of client and planner should be prepared and signed

36. Periodic review and maintenance
Financial planner should describe:
the process of review, maintenance and monitoring of the plan
the frequency proposed
the charges for providing these services to clients.
A review is an evaluation of whether the existing plan continues to meet the clients’ needs or requires adjustment.

37. Periodic review and maintenance continued
Steps in the Review Process
Review clients’ goals, objectives and needs
Assess investment and financial strategies
Modify portfolio for better performance
Assess health of investments against benchmarks
Implement the investment decisions
Discuss client’s current risk profile
Discuss effect of legislative changes
Assess existing investment portfolio
Record everything in writing

38. Periodic review and maintenance continued
Disclaimers are useful tool in the preparation of personal SOAs but have limitations
Cannot disclaim fiduciary obligations to:
act in the best interest of the client
exercise a duty of care.

39. Periodic review and maintenance continued
Examples of commonly used disclaimers include:
no responsibility to parties other than the SOA recipient
taxation issues referred to client tax accountant
sunset clause for recommendations
recognition of client provided information as basis for recommendations.

40. Summary
The practise of financial planning encompasses many disciplines:
investments
retirement planning
superannuation
insurance
taxation planning
portfolio management
social security
debt management
financial analysis.

41. Summary continued
Effective communication — an open, honest, trusting relationship is vital
6 step financial planning process provides framework for development of the SOA
Planners have a professional, fiduciary obligation to look after the interests of the client

42. Summary continued
Skills considered essential for the professional financial planner:
critical thinking
analysis
interpretation
problem solving.