How does my advice look?
Best Practice Advice & Compliance & Sales Tips & Strategic Issues

How does my advice look?

July 3, 2015

by Tony Vidler

Advisers are increasingly seeking assurance that their practices are robust and will withstand 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 would be assessed.  It is worth considering one of the thornier parts of the financial advice spectrum and quickly review a range of issues that would be expected to be considered in the provision of investment advice as an example.  If the investment advice was considered 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?

RatingOne could go with a substantial list 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 considering behavioural or process matters.  The emphasis is entirely upon the relevance of the specific recommendations.

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.

As the financial advice industry moves ever closer to full professionalism – albeit painfully slowly at times – one of the biggest challenges is ensuring that all practitioners actually really understand what constitutes a reasonable “duty of care” when dealing with clients affairs.  The issues around having a documented process, privacy concerns, the fiduciary duty and so on, are pretty well understood. These are essentially only behavioural, attitude or conduct areas though.

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.

You may also find this post useful: Beware of…well, just Beware When Giving Advice

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