How I review financial advice

Sonnie Bailey

21 July 2015

I’ve had the enormous privilege of working with a lot of financial advisers. I’ve spoken with them in detail about their advice processes and how they run their businesses. I’ve had the opportunity to review countless client files. 

Despite the reputation that the financial industry often has in Australian and New Zealand, the vast majority of advisers are good people. They are well intentioned professionals, and they put their clients in a better position than they would have been in had they not sought advice. You can’t find a better advocate for good quality financial advice than me. 

Based on my experience working with financial advisers, I thought it would be useful to provide a perspective on how I conduct advice reviews, and some of my personal thoughts based on this experience. 

I’ll start by saying that the title of this article is a bit of a misnomer. It should read “How I like to review financial advisers”. The nature of the review depends a lot on the reason for the review and what I’ve been tasked to do.

What I discuss below relates to where I’ve been asked to independently review some advice, with the spirit of working with the adviser and his or her business, to get a view of how the advice stacks up, and how to minimise risks to the adviser, the business(es) he or her are affiliated with, and, of course, to the clients to whom they are providing advice.

Before the review

It’s important to conduct a review in the right spirit. I don’t like using the term “auditing” advice, because it creates an oppositional frame. (And technically, I’m not conducting an “audit” in a strict sense.) 

To conduct a review effectively, enjoyably (read: sustainably), and in a way that gets adviser buy-in (ie, results in behavioural change where necessary), you need to work with the adviser. 

It’s really important to communicate this clearly with advisers before any review. It’s important that other stakeholders, such as the adviser’s business who might be requiring this review, communicate this as well. 

Before meeting with an adviser, I like to see some examples of the advice files that they have provided to clients. Reading through several files (particularly statements of advice) also gives me a feel of recurring themes for that adviser. From these files I invariably have questions that will influence my meeting with the adviser. 

I don’t necessarily go for random files.  I like to ask for an advice file that is characteristic of the advice the typically provide. I also like to ask for an example of advice that they found challenging. From there, I might look at a sample of other files. Some may be selected randomly. Some may be selected based on other criteria, for example, because a particular piece of advice generated a disproportionately large amount of revenue for the adviser. 

The extent of preparation I will do depends on a number of factors. The more at risk an adviser is (of regulatory scrutiny or otherwise), the more files I will want to see, and the more time I will spend considering these files before meeting with the adviser. Assessing the “risk level” of an adviser is determined by a number of factors, including subjective assessments of the business, the type of advice they typically provide, histories of complaints and disputes, size of business (eg whether they work on their own or as part of a team), nature of their business (eg whether  they provide other services, such as mortgage broking or accounting services), and amount of funds under advice. After glancing through one or two files I can also get a feel for how they might be perceived by a regulator or in a dispute resolution forum, and this will educate my perspective.

Focusing on the advice rather than “peripheral” aspects

I like to go straight for the advice, as it is communicated to the client. In the event of a dispute or regulator scrutiny, this is likely to be the first item that they are likely to see. It’s also one of the few places where the adviser showcases his or her advice to the client in writing. 

I almost always make notes on each statement of advice. They might be areas that are out of the ordinary, unique to the client, or questions that come to mind (many of which are addressed as I continue to read).

I’ll pay attention to the scope of the advice (ie, what the client has asked the adviser to do – for example, undertake a comprehensive review of their financial situation, including insurance needs; an insurance review only; whether it is a review of arrangements or a rebalancing exercise; or whether it is restricted to one very narrow aspect of their circumstances). Often the scope isn’t articulated as well as it could have been, but I can usually get a pretty strong feel for what the adviser and client agreed upon. 

My primary focus is always on the quality of the advice. Specifically, how the advice addresses the client’s circumstances, needs, and objectives, in light of other characteristics such as the various elements of their risk profile. 

In most cases, I need to consider broader regulatory requirements, such as whether disclosures have been made. This can usually be done pretty quickly, and I often use a checklist to make sure I don’t overlook anything. But in my view these matters are secondary to whether the advice is appropriate. Regulatory issues can usually be sorted out. Poor quality advice is what will really cause pain. So if I need to direct my limited time towards minor regulatory issues or understanding the advice and whether it is suitable, I’ll look at the advice every time. 

Once I know what the scope of the advice is and what the client’s circumstances, needs, and objectives are, I’ve got a pretty good idea of the type of advice I’d expect to see. There can be variations, in terms of specific strategies and products recommended, but they are usually variations of a theme. After seeing so many pieces of advice, chatting to so many advisers, and reading and thinking about financial advice for so long, it’s almost an intuitive thing. 

The big thing I look for are anomalies. Advice given that doesn’t seem to fit with the narrative I’ve created in my mind. Why, for example, should this young man be so heavily invested in one particular equity? Why should these empty nesters be borrowing against their home equity to invest in financial products? 

In most cases, if there are anomalies, there are good reasons for this. Often they are explained in the statement of advice. But often they are not. For example, the young man could be invested in one particular equity because he is an employee of that firm and is subject to a shareholder agreement which restricts his ability to divest while he is an employee. The empty nesters might have uncharacteristically high risk profiles, and might need to take risks in order to have the retirement lifestyle that they hope to have. Especially in the latter case, I’d want to see this detailed and emphasised. This is high risk advice and there needs to be clear evidence that there has been robust discussion about the strategy recommended and steps taken to ensure the clients understands the risks involved. 

It’s not uncommon for me to review a sample of statements of advice before meeting with an adviser, and be fairly concerned about the adviser. In most cases, my concerns are assuaged when the adviser explains their advice processes.

This is where their advice documentation does not clearly reflect the advice they have given, or the reasons for their advice. And these are often the advisers that break my heart – they have exposed themselves to potential scrutiny and disputes simply because they haven’t clearly explained what they have done and why.

The other advisers? Well, that isn’t the topic of this conversation. But especially in the first instance, I need to get them to open up to me and to treat this as being on the same side. It’s about exposing themselves to less risk, as well as other stakeholders, not to mention their clients. If we need to address issues in the past and going forward, we need to present this in a way that gets their buy in. It’s why conducting a review in the right frame and spirit is so important.

Chatting with the adviser is an important part of the review process

To conduct a comprehensive review, it’s not usually enough to review advice files. You need to speak with the adviser, and chat with them about their business and advice process. 

I often find myself spending the majority of my time at the adviser’s office chatting with them. It’s very common that their advice files don’t do justice to the services they provide their clients. 

Furthermore, reviewing client files can be a good way of identifying potential issues. However, it can  be difficult to identify systemic issues, through which you’d only see the symptoms in the client files. Getting an understanding of the adviser, their business, and their advice processes, is absolutely central.

Presenting findings is professional development

When I present findings, it’s important to keep the ultimate end in mind. It’s about ensuring clients get good quality advice. For the adviser and his or her business, it’s about providing advice in a way that minimises risks, in terms of regulatory scrutiny and disputes.

If possible, I will make suggestions that will make advisers’ lives easier. A big one often relates to scoping advice. Surprisingly, many advisers also include way too much information in their statements of advice. They either repeat information in different ways. Or they include information that isn’t relevant to the scope of the advice, which creates more work than necessary, and also creates the inference that the scope was broader than it really was, exposing them to greater liability than necessary.

Unless the adviser is at the top of their game, there is almost always something that they can do to improve. So ultimately, as a reviewer, you are providing tailored professional development.

There may be regulatory or internal policy issues that need to be addressed. But they need to be proiritised and addressed in the broader context of risk and potential loss to clients and the adviser and their business.

What are some of the things that show me I’m looking at excellent financial advice?

In 2012 ASIC published a Shadow shopping study of retirement advice, suggesting that although there was a disconcertingly high amount of “poor advice” (38%), the majority advice was “adequate” (59%). Perhaps most surprising was how few advisers provided “good advice” to their clients: 3%. 

(Notably, the criteria for what constituted “poor”, “adequate”, and “good” advice, was agreed upon not by ASIC but by an expert reference group comprising of “12 nominees from advice groups and superannuation funds nominated by the Financial Planning Association, Association of Financial Advisers, and Association of Superannuation Funds of Australia”.)

In my experience, the 38% figure significantly over-represents the amount of “poor advice”. It might not be far off the mark if you consider the disclosure provided to clients. But after talking through the advice with advisers, the number is much lower than this.

The 3% figure might not be too far from the mark in terms of excellent financial advice. Many advisers are close, but few really nail it. When you see it, it’s really obvious you’re looking at the work of an adviser at the top of their game.

Some of the common things I’ve seen in excellent advice are:

  • When, based on the statement of advice, or even the file as a whole, I can get a real sense of who the client is.

In particular, the client’s objectives are especially well written, and they are unique to the client. There may be variations on a theme, but even these are specific. For example, the goal isn’t just to retire comfortably but to aim for a retirement income of $70,000 per annum by the time they turn 65 in 13 years’ time.

But you get more. You get a feel for what they want to do in the next ten years, and even their priorities. You know about the cars they want to buy, their holiday plans, the renovations they plan on making, the lifestyle changes they want to make (for example, their plan to “rightsize” soon, or to buy a holiday home). You also get an understanding of whether and how they want to help their family, like how they want to help their children with their education and property purchases, their grandchildren with their orthodontia, and perhaps help out with less fortunate siblings.

  • The recommendations are explained in terms of the clients objectives.

In particular, the adviser focuses on strategy rather than product. Does the client need a full page explaining why this particular product is the way to go? In most cases, no. What the client needs to know is that the product is from a reputable product issuer, has suitable fees/premiums, and that it fits with the broader strategy that conforms with their circumstances, needs, and objectives. There might be some specific things about the product that are relevant, such as underwriting considerations for insurance, but even this is secondary to the strategic advice that they actually need insurance. 

  • The advice is straightforward and internally coherent. There are a lot of advice documents that I find difficult to decipher. I’ve seen a lot of financial advice, and worked with a lot of product providers. If I can’t understand it easily, how can you expect a client who doesn’t work in this area to understand it? 

Also, you’d be surprised but how many statements of advice include contradictory statements. It’s not a great sign. 

  • The adviser looks beyond what is normally defined as “financial advice”. Is the adviser making simple recommendations like paying off debt, or perhaps not spending so much on that car or next house? These things can have a huge impact on a client’s long-term outcomes and often aren’t addressed.
  • There are file notes that show that the adviser has had robust, ongoing conversations with the client. These might be in the form of documented communication (eg emails). But more often, it’s notes from meetings and telephone conversations. Only rarely do I get the impression that great quality advice has been provided where the only client notes are in clearly completed fields on the client fact find. 

This is particularly the case with existing clients where the adviser has conducted a review of their financial situation. For anyone, circumstances change, needs change, and objectives change. It gives me a lot of confidence if an adviser is clearly having these conversations with clients.

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