How do you know your financial advice is suitable?
Advice Processes & Best Practice Advice & Compliance & Financial Advice & Financial Planning

How do you know your financial advice is suitable?

July 15, 2019

by Tony Vidler  CFP logo   CLU logo  ChFC logo

Knowing that your financial advice is suitable for a client is something that every professional adviser is willing to attest to, but proving it when challenged can be incredibly dificult.

Advisers are increasingly being challenged and therefore seeking assurance that their practices are robust and will withstand such scrutiny.  Whether that scrutiny is a client complaint or a regulatory audit, or even a second opinion being provided by a peer to the same client, the question lurking at the back of the mind is

“How does my advice look?”

As practice and oversight standards continue to evolve there is doubt or confusion around how the suitability of specific advice to a client could be assessed by a critic at a much later date who is operating with the benefit of hindsight (and often more data and facts than the adviser might have originally had at the time of providing the financial advice).

So let’s look at an area of the financial advice spectrum which gets more challenges than most: investment advice.

If the investment advice was reviewed at a later date by an independent and qualified observer they would look to the following points:

  • is the advice consistent with prevailing academic consensus?
  • is the advice, or recommendations, based upon research and analysis?
  • does the desirability of diversification or risk profiling match the recommendation?
  • what is the nature of existing investments and property, and is that consistent with the stated risk profile?  If not, why not?
  • has the need to maintain real value of the capital base been considered, and what assumptions or calculations underpin it?
  • have the risk of capital losses or depreciation been fully considered and explained?
  • has the potential for capital appreciation been considered, and is it reasonable and prudent?
  • what are the likely (actual) income returns?
  • does the length of the term of proposed investments match the investors requirements, and is there sufficient flexibility to adapt without unreasonable cost or delay?
  • is the ownership structure appropriate, and have all existing ownership entities been captured and considered?
  • have liquidity issues been fully considered?
  • are their specific tax liabilities or advantages which are material to the recommendation?  If so, what impact would a change in the taxation position have upon the recommendation?

Rating

The list could go on and become ridiculously exhaustive of course, but the key point is that when it comes to assessing “suitability” of any particular piece of professional advice we are no longer giving great weight to to behavioural or process matters. The emphasis shifts almost entirely to establishing relevance of the specific recommendations to a specific set of circumstances.

The criteria by which the relevance is assessed is whether prudent and responsible analysis has been performed to ensure recommendations are most likely to achieve the clients objectives.

This is where it becomes imperative that practitioners actually really understand what constitutes a reasonable “duty of care” when dealing with clients affairs.  Regardless of the nuances of between “fiduciary duty” or “best interests” of a client or “clients interests first” (& whichever version might apply to any individual adviser) the test for suitability will be fundamentally the same.

The real testing area for any specific piece of advice for any given client will swing on “suitability”, and in order to ensure the suitability standard is met there does need to be some robust thinking, analysis and scenario planning underpinning the advice – and the compliance or documentation obligations really are just about ensuring that this is evidenced.

You may also find this post useful:
How To Create A More Effective Client Report
 
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