This article highlights the confusion and conflicting opinions on the legal certainty of financial advisers providing ‘scaled advice’. Some believe scaled advice breaches the BID obligations and Standard 6 of the FASEA Code of Ethics, whilst others believe scaled advice is permissible and fully supported by ASIC and the legislation. We explore ASIC’s view on scaled advice and how it compares to ‘comprehensive advice’, and the implications for creating a compliant and client-friendly Statement of Advice (SOA).
Some in the industry believe that delivery of low-cost scaled advice to clients would need to sit outside the current best interests duty obligations in order to become a workable proposition. Lifespan Financial Planning chief executive Eugene Ardino, in a recent interview, stated while it was currently possible to deliver “limited scope” advice, such advice still fell under best interests duty obligations and required the same amount of research and administrative time as full personal advice.
“The difficulty with limited scope advice, [where] the client wants advice on one small thing like insurance or super, is that best interest duty and parts of FASEA seem to want you to widen the scope of your investigation and the things you have to consider,” Mr Ardino said.
Others in the industry, such as Pat Garret of Six Park, believe “Scaled advice works, and is flourishing overseas to meet the financial advice/wellness needs of the broad consumer markets. Financial Advisers have the ability to deploy scaled advice in a way that is compliant, efficient and economical.”
According to Garrett, “Providing affordable, scaled advice will only be possible if practices overcome the myths and implement digital solutions.” The myths identified are:
- that it is not compliant with BID (Best Interest Duties),
- that ASIC does not approve of it, and
- that it competes with traditional advice.
What’s the Regulator’s view?
ASIC has stated that “all advice is scaled to some extent”. ASIC’s position is that advice is either less or more comprehensive in scope along a continuous spectrum of advice. Removing barriers to the delivery of scaled advice was a priority for the regulator given increasing consumer demand for specific, low-cost advice around particular financial issues.
ASIC will soon release a consultation paper that will ask industry participants what barriers are stopping more licensees and advisers from providing scaled advice, which it says is “what most customers want”. The scaled advice consultation would not attempt to give specific definitions around terms such as ‘scaled’ or ‘limited’ advice, but would ask industry for feedback on the current regulatory hurdles around giving such advice.
Can personal advice be “scoped”?
The short answer is “yes”.
Since the introduction of the best interests duty and the challenges that industry have identified ASIC has released regulatory guidance on the issue of ‘scaled advice’ in Regulatory Guideline 244 (RG244) Giving information, general advice and scaled advice.
Some points to consider when giving scaled advice:
- all advice is scaled to some extent, including advice about complex issues. Advice is either less or more comprehensive in scope along a continuous spectrum, and cannot be ‘categorised’ as ‘scaled’ or not;
- either the Adviser or client can suggest limiting the subject matter of the advice. However, the Adviser must scope of the advice in the best interests of the client;
- when the Adviser is deciding on the scope of advice to provide to their client they need to ensure that they do not reduce the scope of advice to exclude critical issues that are relevant to the subject matter of the advice;
- the rules that apply to ‘scaled advice’ and ‘more comprehensive advice’ are identical – scaled advice must comply with the best interests duty and other legal obligations for providing personal advice;
- scaled advice can include advice on a single topic or advice on multiple topics;
- the enquiries the Adviser makes need to reflect the nature of the matters they are providing advice on;
- scaled advice does not mean that the Financial Adviser who gives the advice can have lower training standards; and
- processes can be used to help an Adviser provide scaled advice, although the Adviser still needs to use their expertise and skills to deliver good quality scaled advice.
Where advice is scaled, the scaling must itself be in the client’s best interests, especially since the client’s instructions may at times be unclear or not appropriate for his or her circumstances. A Financial Adviser needs to use their expertise and skills to deliver good quality scaled advice that meets legal obligations.
What are the legal and professional obligations of a Financial Adviser?
A retail client and a Financial Adviser may agree on the subject matter of the advice the client is seeking advice on. The Financial Adviser is under no obligation to enquire into the client’s circumstances that would not be reasonably considered relevant to the subject matter of the advice.
A note to section 961B of the Corporations Act states “The matters that must be proved (under the safe harbours provisions) relate to the subject matter of the advice sought by the client and the circumstances of the client relevant to that subject matter (the client’s relevant circumstances). That subject matter and the client’s relevant circumstances may be broad or narrow, and so the subsection anticipates that a client may seek scaled advice and that the inquiries made by the (Adviser) will be tailored to the advice sought.”
Corporations Act & FASEA Code of Ethics
The best interest duty and related obligations as set out under s961 of the Corps Act apply to all personal advice, regardless of the scope of the advice.
When assessing whether a Financial Adviser has complied with the best interests duty, ASIC will consider whether a reasonable Financial Adviser would believe that the client is likely to be in a better position if the client follows the advice provided.
The Adviser is required to satisfy the best interests obligations in relation to the scaled advice agreed upon, and this includes complying with Standard 6 of the FASEA Code of Ethics which states “You (the Adviser) must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances.”
Standard 6 must be adhered to in the context or scope of the advice being sought.
Standard 6 does not seek to add a more onerous level of investigation by the Financial Adviser. FASEA have confirmed, in its recently released FG002 FASEA Code of Ethics Guide that the, “…requirement to actively consider client interests and circumstances applies regardless of whether the advice is intra-fund, scoped, limited, single issue and/or comprehensive advice. However, the depth and detail of the enquiry and determination should reflect the scope of the advice sought.”
The Statement of Advice and ‘scaled advice’
If you give personal financial advice to retail clients, you must provide a Statement of Advice (SOA). It is a legal requirement to do so. The fact is the requirements regarding a Statement of Advice do not differ when a Financial Adviser provides ‘scaled advice’.
The Regtech provider, Fourth Line, has analysed almost 4,000 SOAs in the past 12 months, from various licensees and Advisers, and the top 10 issues we have found through this analysis are:
- The SOA is missing some of the client’s personal and financial details
- The costs of all the products recommended/investigated have not been detailed clearly.
- Financial products are being mentioned before detailing the strategy recommendations.
- Forward projections do not adequately illustrate why the client will “likely” be better off financially.
- The SOA does not demonstrate that the benefits of the recommended strategy/product are superior to the alternatives
- The client’s goals/objectives are not clearly stated and/or they appear to be templated. Recommend goals/objectives clearly stated and in the “client’s own words”.
Fourth Line’s analysis indicates many Advisers are still struggling to adequately explain the scope of advice in SOAs. Adviser can find it challenging to clearly or accurately articulate how the scope of advice aligns with the client’s relevant circumstances (that is, the client’s objectives, financial situation and needs that would reasonably be considered as relevant to the advice sought).
Licensees and Advisers, alike, need to ensure they interrogate the SOAs they present to clients thoroughly, prior to presentation, to ensure the advice provided and content of the SOA meet all legislative and regulatory requirements.
Fourth Line helps licensees undertake a thorough analysis of individual pieces of advice offered by Advisers. The system uses a rules-based approached, coupled with human oversight, to interrogate advice to consider items such as:
- if the Adviser has adequate identified and accurately detailed the client’s objectives, financial situation and needs (including the client’s tolerance for risk) relevant to the subject matter of the advice sought;
- if the scope of advice is clearly and appropriately defined, and does it reflect all issues relating to the client’s relevant circumstances and subject matter of the advice sought;
- if the Adviser made reasonable enquiries into the client’s objectives, financial situation and needs based on the subject matter of the advice sought by the client;
- if appropriate alternative strategies and recommendations have been considered, and if the SOA demonstrates the benefits of the recommended strategy or product are superior to the alternatives.
A clear and concise SOA is like a story – it has a beginning, middle and an end. It makes sense to the reader and draws evidence based conclusions, and is a document which a “reasonable bystander” could read and understand.
Considerations when providing ‘scaled advice’
The table below sets out some considerations for Financial Advisers in meeting the requirements of the best interests duty and related obligations when giving scaled advice. It includes a summary of some issues that ASIC believes are important for Financial Advisers to consider when they are giving scaled advice to clients.
Financial Advisers should…
What this means in summary
Use their judgment and training to decide whether, by limiting the scope of the advice, they can provide scaled advice that meets their legal obligations.
In many cases, a Financial Adviser can give scaled advice that is more limited in scope (for example, for certain advice about less complex issues and for clients with less complex relevant circumstances) and comply with their legal obligations, including the best interests duty and related obligations.
Either the Adviser or their client can suggest limiting or revising the subject matter of the advice. However, the Adviser (as the advice provider) must use their judgment when deciding on the scope of the advice. The Financial Adviser must determine the scope of advice in a way that is consistent with the client’s relevant circumstances and the subject matter of the advice they are seeking.
See RG 244.65–RG 244.68 &
RG 175.261–RG 175.280
Adjust the level of their inquiries to reflect the nature of the advice being provided.
To meet the safe harbour for the best interests duty, a Financial Adviser must identify the client’s relevant circumstances. The Adviser can adjust the fact-finding process (that is, the inquiries the Adviser makes about the client’s relevant circumstances) to be either limited or expanded.
For example, when a client’s relevant circumstances are straightforward, the scale of the Adviser’s inquiries may be quite limited. In general, as the complexity of a client’s relevant circumstances increases, it is likely that the Adviser will need to expand the scale of their inquiries.
See RG 244.69–RG 244.73 &
RG 175.281–RG 175.297
Implement systems to help decide whether scaled advice can be provided to a client in a way that meets their legal obligations.
One approach a Financial Adviser can use when deciding if they can provide a client with a limited scope of advice is to perform a ‘triage’ or filtering process.
For example, ASIC would expect an Adviser to ask a series of questions to determine how advice that is limited in scope can be provided to a client in a way that complies with the Adviser’s legal obligations, including the best interests duty and related obligations.
See RG 244.74–RG 244.80 &
RG 175.236–RG 175.241
Communicate clearly to the client the type of advice service being offered.
ASIC considers that scaled advice will be unlikely to meet the best interests duty and related obligations if the client does not understand any of the significant limitations or qualifications that apply to it. When assessing whether a Financial Adviser has complied with the best interests duty in providing scaled advice, ASIC expects to see the client in a ‘better position’ if they follow the scaled advice provided.
An Adviser must take reasonable steps to explain to a client the limited scope of the advice they are giving in a way that will be clear to the client.
For example, this could involve explaining the scope of the advice to them, and that the Adviser will not be considering any other issues. This will help the client understand what advice they are getting and ensure there is no misunderstanding about what they are, and are not, being advised on. It is also good practice to give a simple and accurate explanation about why the scope of the advice has been limited.
 Such opinions would also suggest scaled advice might also breach Standards 2 and 5 of the FASEA Code of Ethics.
 Financial Planners & Advisers Code of Ethics Guide, page 25