Structuring Recommendations

Presented by Shannon Durrant

2

Agenda

• Where do SoAs go wrong?• Compliance Requirements• Features of a Quality SoA• SoA Structure• Recommending Super• Replacement of Product

3

Where do SoAs go wrong?

?

4

Where do SoAs go wrong?

• unnecessarily long and complex

• too generic

• The areas of insurance and estate planning are generally not well explained

• Analysis and modelling is not sufficiently explained (e.g. there are charts and graphs with no explanations of what they mean or why they are relevant).

5

Compliance Requirements

?

6

Compliance Requirements

• a statement setting out the advice (scope)

• information about the basis on which the advice is given (i.e. the client circumstances, the analysis and the reasoning that leads the adviser to make the recommendations)

• information about remuneration or other benefits

• Information about any interests, associations or relationships that might influence the provision of the advice

7

Compliance Requirements

• Disclaimers and Disclosures

• where the advice recommends the replacement of one financial product with another a replacement of product table must be completed which explains the benefits and consequences.

• If the financial product is like for like then a comparison of the products must be done – which includes costs.

8

Features of a Quality SoA

• use simple, understandable language

• avoid inclusion of irrelevant information

• make limited use of appendices

• treat partners equally and respectfully (e.g. not referring to either as a spouse)

• not promise what it cannot deliver (e.g. avoid words such as ‘ensure’ and ‘guarantee’)

• not contain generic educational or product material

9

SoA Structure

• summary of current situation and relevant goals

• key recommendations and rationale/justification

• advantages/disadvantages/key issues (possibly including alternatives considered)

• projection of expected outcomes.

10

SoA Structure

•clearly identify the recommendations

•explain each recommendation

•outline the benefits and risks of the recommendations

•explain how each recommendation fits within the overall financial plan.

11

Your first recommendation should be….

?

12

Your first recommendation should be….

Reviewing the client’s current insurance cover before

the investment recommendations are made.

Clients should consider cover for immediate risks

to their person, their ability to earn income and their

property before any investment program can

be secured.

Investments can provide goal achievement over the

longer term, death, disability and loss of income can

completely destroy the client’s or their dependants’

lifestyles unless there is adequate insurance cover

13

Recommending Superannuation – First Steps?

?

14

Recommending Superannuation – First Steps

Review existing Super arrangements!• Is the superannuation money invested in an option

that reasonably matches the client’s preferred or required risk tolerance?

• Has the performance of the fund been adequate given the asset allocation?

• Are the fees and charges acceptable?

• Can life and/or total and permanent disability (TPD) and/or income protection insurance be purchased within the superannuation fund and is the available cover adequate?

15

Recommending Superannuation – First Steps

• Will health issues mean that the client will not be able to get insurance outside of superannuation?

• Does the client have a sufficient balance in superannuation for their stage of life?

• If the client has more than one superannuation account, does this need to be rationalised?

• Does a superannuation account need to be maintained because of its access to insurance or other benefits?

16

Recommending Superannuation – First Steps

• What are the components of their existing funds (taxable and tax free)?

• Would a self-managed superannuation fund be suitable for the client?

• Are the clients still able and willing to continue their existing self-managed superannuation fund?

• Will any recommendation to switch products be compliant with ASIC replacement of product rules?

17

Superannuation Adjustments

Possible recommendations in the SOA include:

•switching funds, but only where necessary. Exit fees, entry fees, increased fees and lost benefits must be clearly explained and justified to the client

•switching investment options within the existing superannuation fund where necessary

•contributing more to superannuation, perhaps for one spouse

•reducing superannuation contributions.

18

Strategy Considerations

• Ensure that sufficient liquidity remains outside of superannuation in the form of an investment such as a cash management fund or high-interest online savings account.

• Ensure recommendations take into account recent or proposed legislative changes and current superannuation rules.

• Ensure that the product recommended is suitable for the client’s circumstances and goals.

• Recommend a review process to ensure the recommendations remain relevant over time

19

Estate Planning for Super

• document the potential death benefit tax implications for clients of holding their funds and insurance within superannuation.

• describe which nominated beneficiaries can be selected and accepted by a superannuation fund, including whether the estate should be the nominated beneficiary.

• highlight what potential beneficiaries are valid under superannuation laws and whether there are claims to the estate from undesired beneficiaries who potentially have a claim

20

Estate Planning for Super

• Cash flow implications - recommending that a client contribute to superannuation before tax will reduce their gross and after-tax income. It is therefore important that the SOA includes a reconstructed cash flow so that the client can see the impact of such a recommendation.

21

Considering Insurance and Estate Planning Goals

• The goals a client might initially identify may not extend to the areas of insurance and estate planning.

• Having appropriate insurance cover would not be seen as a goal in itself - it is the mechanism whereby personal goals can be achieved even in the face of death, disability or trauma. For example, having sufficient term insurance can mean that a client’s desire to have their home secured for their family will be achieved.

22

Product Recommendations

• Must have research by an external provider

• Financial advisers are required to do their own research so that they understand the features, benefits and risks associated with the products.

• Many product providers offer product training, seminars on strategies for the products and opportunities for advisers to talk with the investment managers.

23

Product Recommendations

• Research is only the first step in recommending a product. The SOA should explain how the expected results of investing in a product match the specific needs of the client.

• Some of the product features that a financial adviser must research and assess are as follows:

• Asset allocation: From the discussion of the client’s risk tolerance, a preferred (or recommended) asset allocation will have been determined. The sum asset allocation of all product recommendations must be in line with the client’s risk profile.

24

Product Recommendations

Volatility: Products can be either sector funds or

diversified funds.

An investor with a higher risk tolerance would be able

to sustain the volatility associated with an Australian or

an international sector fund.

A less risk-tolerant investor may need a diversified

fund, so that the volatility of the equity component is

dampened by the performance of the defensive

components.

25

Product Recommendations

Specific outcomes: Managers provide investment styles that result in different outcomes.

For example, one Australian equity fund might concentrate on long-term growth and fully franked dividends.

Another fund might be looking for relatively fast growing companies who pay lower levels of dividends, putting their profit to work building the company.

A client who wants a solid income stream with high franking credits would be unhappy with the second fund.

26

Product Recommendations

Fees and charges:

•The product recommendation must provide good value for the investor’s money when fees and charges are taken into account.

•The adviser needs to be able to discuss different fee options (such as deferred entry fees or exit fees) and explain how they will impact the client’s investments.

27

Product Recommendations

A fund manager may be recommended because:• it is large, well-known and well-established•it is a boutique manager whose focus matches the client• it offers a large range of investment options•it offers particular investment options, such as socially responsible investing or exposure to emerging markets, that the client wants.

Features: Many clients will not have large sums of money to invest. Features like automatic reinvesting of income and direct debit savings plans may be important to them.

28

Product Recommendations

• A short summary needs to be included as to why the products were selected and their main features and risks outlined.

29

Replacement of Product Recommendations

Where the assets do not meet the client’s needs, a recommendation for sale should be made together with a recommendation for reinvestment of the sale proceeds.

In making any recommendation to change an investment:•the advantages of the change must be explained•all disadvantages must be explained•all tax implications, including capital gains tax (CGT), should be explained•all switching costs such as brokerage, exit fees, entry fees should be explained•any loss of benefits must be justified

30

Basis for advice

1. Relevant costs

2. Range of investment options

3. Asset allocation

4. Insurance cover

5. Investment performance

6. Independent research

7. Other factors such as: Binding Death Nominations, Direct shares and acceptance extra SG contributions.

All factors must be considered for every client

31

Switching

What can/can’t you use as a basis for advice?• Consolidated reporting is not a basis to switch –

most funds offer it anyway.• Funds performance – on it’s own this is not a basis

to switch• It’s important that a client’s fund is a quality fund

but you need to consider everything else including fees.

• If you cannot create a portfolio using Lonsec or

Zenith rated funds within the clients existing fund

then you can use this as a basis to switch.

32

Also outline:

• the timeframe for the client to benefit must be outlined

• potential impacts on social security benefits should be explained

• all conflicts of interest must be noted.

• Where analysis shows that the client would benefit by selling but they have chosen to retain the assets, this fact should be documented within the SOA.

• Clearly document how the advantages outweigh any known disadvantages.

33

Recommendations on assets

Link the risks involved with the specific recommendations so the client can:

•see how the risks affect them

•see what risk management tools have been put in place

•decide if they are willing to accept the risks involved.