How can you be sure that your advice will pass the test?
Best Practice Advice & Compliance & Practice Management

How can you be sure that your advice will pass the test?

July 2, 2024

by Tony Vidler  CFP logo   CLU logo  ChFC logo

The nagging worry for financial advisers in today’s environment is “how can I be sure that my advice will pass the test?”

The concern is understandable given that policymakers typically do not understand the difficulty of applying any sort of objective assessment of suitability to professional opinions – which is fundamentally what advice is. Then consumers, and consumer advocates, the media, disputes resoultion schemes all have the benefit of being able to question anything and everything with the benefit of perfect 20/20 hindsight years down the track.

The problem with “advice” as a measureable is that the tests of suitability or appropriateness are subjective and vague usually: in other words the test becomes a matter of someone else (usually not as well qualified or experienced) applying THEIR opinion to your opinion, and that is always “after the fact”.  They get to say “it is good” or “it is bad” without any consequences.  We all know “bad” advice when we see it of course, but the line between “not really good enough” and “acceptable” is vague…and that is even when being assessed by objective professional outsiders.

The actual customers themselves apply a wholly different standard – one which is rooted in outrage, frustration or dissatisfaction.  Legality is not such a defining line….nor is fairness….nor is “accepted process or practice” either…the focus is firmly upon the “outcome”, and whether or not it is what they want.

These subjective, vague and often unfair assessments have the benefit of 20/20 vision applied to them – often many years after the advice was given.  More information, updated technical knowledge, further disclosure of material information from consumers…all of these types of things get provided to the party applying the “suitability test”, but which were not available to the original provider of the advice.

It is little wonder then that even great professionals worry about how they will be judged in the heat of the moment when an irrational and unhappy client decides to complain.  The adviser will often be on a hiding to nothing.

Unhappy clients have a plethora of choices from dispute resolution schemes and professional bodies complaints processes, through to litigation.   In each of these domains somebody, or a group of somebodies, must assess what is at the heart of the client’s unhappiness.  Is it the result of product non-performance? Is it simply an unwanted, but not unanticipated, market aberration?  Is it because the adviser missed the mark and didn’t provide an appropriate solution? Is human error or pure negligence responsible?

Regardless of the forum for the dispute, and regardless of the essence of the client complaint there is a key question that lies at the heart of determining whether the adviser has done the job to a satisfactory standard or not:

Why was the advice appropriate for the client at that time?

The adviser responsibility essentially swings upon establishing a suitable course of action after taking into account the clients circumstances, instructions, and the range of appropriate choices known at that time.  This is the core of suitability.

An adverse market outcome is not necessarily a shortcoming on the part of the adviser or the advice if it was understood to be one of the range of possible outcomes, and accepted as such.  Non-coverage of an insurable event is not negligence on the part of an adviser if a deliberate decision to ignore that possibility was made by the client, and so on.

The secondary question therefore that establishes a defensible advice process is:

Can you evidence why it was suitable at the time?

Regardless of what the regulators may ask for in the way or process, documentation or disclosure make sure you apply these 2 questions to your advice and your records.  Regardless of what your competitors, employers, or licence holders may ask for…apply these two questions.

They are effectively the only way of ensuring (as far as you possibly can “ensure”) that your advice will pass any test applied to it in the years to come.

You may also find this post useful:
How do you know your financial advice is suitable?
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