SUPERANNUATION – THE PLANNING CONVERSATION STARTER

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Please read the advice warning below this article.

Superannuation is so much more than a financial product.  It is the start of a ‘strategy conversation’ that can be used to reach into every aspect of a client’s financial life.

Think about it.  If you undertake even the simplest ‘superannuation review’ you will address the following issues:

  • Investment
  • Insurance protection
  • Retirement saving strategies
  • Estate planning.

All of these planning disciplines have broader application outside super as well.  In fact, if you look at the sum of these planning disciplines, you will see it represents a large proportion of what financial planners discuss with clients every day. So in a sense,  superannuation can be regarded as a microcosm of the broader spectrum of financial planning.

So if you are talking to a client who is resistant to super (which is usually based around the preservation rules, i.e. super being locked up), then the conversation can be easily moved to the same or related strategies outside super with something like:

“I understand your concern, so let’s address the preservation issue by looking at the same planning strategies both inside and outside super; and develop a combination  of super / non super strategies, which might include:

  • Retirement saving inside super & shorter term lifestyle saving outside super
  • Combined super & non-super insurance protection
  • Binding Death Benefit Nomination in super with all other estate planning needs outside super.”

This approach does require a strategy mindset, rather than a product mindset.  Once you, the adviser, are across superannuation strategies, you realise that there is so much more to gain, not just in terms of additional revenue, but also in terms of increased client satisfaction and their long term retention.

My view is that the super conversation should be introduced early in the client relationship (i.e. more than just an item on a fact find); and early in your client’s life-cycle.  Many young people are super-resistant because quite apart from the preservation issue above, (a) retirement seems so far into the future and (b) there are more pressing financial needs.  So it is important to have younger clients on the same page early with their approach to superannuation.

For example, an appropriate conversation starter may be the First Home Super Saver Scheme for individuals and couples buying their first home.  Whether or not this particular strategy is ultimately pursued (given its specific terms & conditions) is irrelevant for the purpose of this article.  The point is you have brought it to their attention, and introduced superannuation early as a possible short term saving solution.  You have showed younger clients how superannuation can be used to achieve both short term goals and long term goals; i.e. saving for a home and saving for retirement.

My Superannuation and Retirement Coaching Pack is now available.

WARNING: The above article about superannuation is for financial advisers only.  It should not be mistaken by other readers for any form of personal or general product advice.  If you are reading this article and you are not a financial adviser, please seek advice from an authorised adviser to suit your particular situation and needs.

GOING ‘FEE FOR ADVICE’

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The removal of grandfathered commissions, a decrease in insurance commissions and a rise in compliance and ASIC costs has forced a lot of smaller product-based practices to rethink their business model.

An obvious solution is to move to a fee-for-advice model but this is often easier said than done.  It is much more than a mathematical conversion.

It’s a mindset conversion; and one that requires changing career-long habits.

The receipt of product commissions has traditionally added to an adviser’s ‘book of business’, with a relatively light touch from the client perspective.  Clients consent to them but they don’t feel the impact directly, unlike the impact felt of premiums paid to the insurer.

Therefore, product advisers have rarely had to grapple with issue of valuing their own worth.  Product providers have done that for them by substituting a proxy value being the quantum of commissions paid; a value which the government has subsequently driven down.

This brings me to the next point of ongoing service.  Because a contract of insurance is between client and insurer, there has never been an obligation on the risk adviser to provide ongoing service, unless there is a formal ongoing advice agreement in place with client.  This point was made in AFCA determination # 736062.

So risk insurance advisers often lack experience when it comes to the ‘ongoing fee-for-advice’ concept.  Recall that the payment of insurance premiums by clients and the receipt of commissions by advisers are excluded from the FDS obligations.

So when an insurance adviser tries to move from commission income to fee-for-advice income, they do so with considerable lack of experience in a world where the client is the only person paying; and the first question a client will ask is, “I am already paying premiums to the insurer, so what value can you add to justify a fee that is the commission-equivalent?”

It is a fair question and one that is difficult to answer whilst looking through the lens of a product driven business model.  Hence the need to change!

The question becomes easy to answer once the true value of financial advice is understood.  And this requires letting go of the product agency mindset and moving to an advice service model where the adviser is the central valuable resource who determines his or her own value.

The price placed on value is different for every adviser and it depends on a number of factors which include – area of practice, degree of specialisation, education, experience, opportunity and the extent to which the adviser is open to new ideas and new learning.

The real risk in the move to fee-for-advice is the tendency for advisers to undervalue their worth and therefore significantly undercharge clients for the services they provide.  This in turn leads to a stressful business model.

Undercharging often comes from a fear that existing clients won’t see the same value as the advisers does and won’t accept the advice value proposition.  It is also a common human trait to err on the side of modesty when trying to self-assess self-worth and value to others.

So before transitioning from commissions to fee-for-advice, advisers need to acknowledge the change of income source; grapple with the concept of their own worth in order to be able to espouse their advice model and pricing going forward.

RISK ADVISERS CAN’T AVOID SUPER

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Here’s why:

(a) It’s part of your ethical obligations

In December 2021, ASIC released an Information Sheet INFO267, titled Tips for giving limited advice.  Although ASIC uses the term ‘limited advice’, it is referring to ‘limited personal advice’ (i.e. scaled advice).  In the section, sub-titled, “Revising the subject matter of advice”, the following example appears:

“When providing advice about personal insurances, you should inquire about and consider the client’s existing superannuation and insurance policies. Where advice is provided to hold insurance(s) through superannuation, you may need to consider whether to also provide superannuation advice. (see Standard 6 of the Code of Ethics.)”

AND

(b) It’s a great opportunity good for business

  • Most people who have worked or are currently working have superannuation and to most, it remains a mystery
  • Competition is relatively low as many advisers continue to be intimidated by superannuation and its inherent investment component
  • 70% of employees passively accept their employer’s MySuper default fund because they don’t know what else to do
  • For many Australians, compulsory super is the only savings they have and together with their home, these are their two major assets
  • Superannuation is the #1 tax-advantaged investment in Australia
  • Most people don’t need to leave their current super fund to be put into a better position
  • Demonstrating high level expert super & investment knowledge to clients quickly engenders trust
  • For all of its tax advantages, super is preserved; therefore it represents only one aspect of a client’s financial life (i.e. retirement). Most clients need advice about more immediate aspects of their family budget – i.e. debt reduction, accessible savings and wealth building

WARNING: The above article is for financial advisers only.  It should not be mistaken by other readers for any form of personal or general product advice.  If you are reading this article and you are not a financial adviser, please seek advice from an authorised adviser to suit your particular situation and needs.

GENERAL ADVICE FRAUGHT WITH DANGER

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Many advisers struggling to pass the adviser exam have asked me what I think of the option of transferring to a general advice licensee.

This is a way of circumventing the need to pass the FASEA adviser exam because the Code of Ethics only applies to personal advice provided to retail clients.  The Code doesn’t apply to general advice.

My advice is to think it through!  ASIC will be closely watching this trend.

One of the positives to come out of the adviser exam is that it has forced advisers to come to grips with the advice rules, and in particular, the difference between personal and general advice.

On 3rd February 2021, in an ASIC case against Westpac subsidiaries, the High Court of Australia clarified the difference between general and personal advice.

One of the main issues highlighted was the immense difficulties in providing one-to-one general advice to an existing personal advice client where their individual objectives and other relevant circumstances are already known.

I suppose the adviser argument in this instance would be that financial product information is forwarded to the client; making it clear to the client that it is general advice rather than personal advice; and the client would then be expected to follow the steps outlined in the accompanying general advice warning to make up their own mind to buy the product, or not.   By doing so, it would be argued that none of the client’s objectives, financial situation or needs were considered.

I see difficulties mounting this argument, given prior knowledge of client relevant circumstances, their personal advice history, the high level of expectation and trust that clients can place on their advisers; and the universal lack of understanding of the difference between personal and general advice.  It has been my experience that a significant proportion of advisers don’t understand the difference.  So how could could clients possibly understand it?

It is likely that ASIC’s argument, as it was in the Westpac case, will be that because the adviser already has the client’s objectives, financial situation and needs, “the reasonable person might expect the person giving or directing the advice to have considered one or more of these matters”.   In my opinion, this ‘reasonable person expectation’ test which forms the second part of the personal advice definition will prove to be potent in general advice cases.  

And then there’s the matter of deliberately providing general advice to avoid the personal advice disclosure and conduct obligations; or providing general advice where client relevant circumstances clearly warrant the provision of personal advice; and failing to refer it.  With or without the Best Interests Duty, advisers have common law obligations to clients.  In my view, it’s fraught with danger.

It would be much easier to stare down the adviser exam and continue providing personal advice than it will be to stare down ASIC.

Reference: 21-013MR ASIC successful against Westpac subsidiaries’ appeal to High Court

 

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FEE-FOR-ADVICE MAY BE HERE SOONER THAN YOU THINK

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Enormous changes that would normally take 20 years to filter through any other industry are currently being crunched though the financial advice industry in a very condensed time frame.

Older advisers are being hit the hardest and it is taking a toll.  But the pain is by no means over.

Whilst passing the adviser exam looms as the hurdle with most urgency attached to it, it is not the one that will do the most damage.  That is yet to come.

And it is likely to come in the form of two Hayne Report recommendations which have the potential to be industry transforming.

They are:

  1. The requirement to declare non-independence to clients; and
  2. The total reduction of insurance commissions to zero.

If they become law, which appears likely if the government makes good on its promise to implement all Hayne Report recommendations, the combination will force every commission based business in Australia onto a fee structure.

The non-independence declaration (the term ‘independent’ is defined and discussed at RG175.64) is likely to kick-start the transition away from commissions to fees.  Reducing insurance commissions to zero will abruptly finish the job because it will mean the elimination of the last bastion of non-client revenue.

As a result, many long-time advisers will have to face the reality of having to rebuild their practices, or risk the value of their businesses falling through the floor.

Converting a commission-based business to a viable fee structure is not simple and it is certainly not an overnight change.  It is not a matter of commission income one day and fee income the next.

Very few clients are likely to want to pay a fee to a product intermediary for what they perceive as a commodity-based insurance transaction. Suddenly superannuation based insurance and direct insurance will become much more attractive.

If risk advisers are to survive, they will need to stop being product purveyors and start providing valuable advice that will set them apart from institutional product providers who will always be able to provide a commodity transaction service at a cheaper price.

Two major challenges that risk advisers face in the practice conversion process are:

  1. Coming to terms with a fundamental shift in mindset from a commission-for-commodity business to a fee-for-advice.   These concepts are poles apart.
  2. Changing from a fixed pricing structure where adviser value is determined by an insurance company, to a self-determined pricing structure which is potentially unrestricted provided that it is fair and represents value for money.

In a nutshell, practice conversion boils down to:

  • Redesigning an advice proposition that represents superior value to clients and makes the desired profit for the practice
  • Building a fair value fee structure around the advice proposition; and
  • Connecting with clients who are attracted to the new offer

Unfortunately, any new advice proposition is not likely to sit well with existing clients who were initially attracted to the commission-for-commodity proposition years ago and have been comfortable with it ever since (a point repeatedly overlooked by pollies and academics).

So the rebuild will be a two-pronged process involving (a) the practice and the skills within it, and (b) a transitioning client base.

This process will continue until equilibrium has been achieved once again.

ARE YOU PLANNING FOR ADVISER INDEPENDENCE DAY?

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OPINION ARTICLE

Passing the adviser exam is critical to staying in the industry but it’s not the biggest challenge heading the way of licensees and self-employed financial advisers.

How to structure advice services and remuneration into the future will be a challenge soon to be faced by commission dependent advisers.  And this is not only about the loss of grandfathered commissions.

The government has recently made it clear that it is pressing ahead with the implementation of the Hayne Royal commission recommendations.

New legislation is on its way that will further restrict the ability of advisers to be paid by means other than the client.

However, the sleeping giant among the Hayne Royal Commission recommendations is # 2.2 – Disclosure of lack of independence, which has the potential to hit advisers and licensees like a horseshoe in a boxing glove.

Current law (Corporations Act) forbids advisers from using words like ‘independent’ to describe themselves or their businesses unless certain criteria are met.  These criteria are set out in s923A and RG175.64-89 and involve strict remuneration conditions, including the treatment of commissions received.

Currently, advisers are still permitted to receive initial and ongoing insurance commissions provided they are all rebated to the client in full under the conditions set out in RG175.79-81.  This includes crediting initial and ongoing commissions in full against a client fee agreed before the commission is received.

It is unknown at this stage whether the proposed s923A amendment will require the lack of independence disclosure to be made as a note in the FSG or as a separate disclosure document to be acknowledged and signed by the client prior to the provision of advice.

If it’s the latter, the effect may be the powerful enough to motivate financial advisers to choose whether to walk away from insurance advice, leave the industry or become independent advisers.

Because it is being driven by government legislation, the advice supervision authorities are likely to promote the client benefits of adviser independence in their efforts to restore community trust in the industry.

The designation Independent Adviser could well become the industry gold standard.

In a few short years, the financial advisers could find themselves on notice to either make the change to independence or be squeezed out of the industry.

Furthermore, the government could ultimately force the issue by fully implementing recommendation #2.5 of the Royal Commission Final Report that the cap on life risk insurance commissions be ultimately reduced to zero.

This would effectively remove the last non-client income source and, although it would severely damage the risk insurance industry in Australia, and the value of associated commission-based books of business, remaining advisers would have no option but to become independent.

And it gets worse.  You see, the independence issue won’t be just confined to advisers and advice practices.  It will also become a problem for licensees.

The reason is that, as RG175.67 Example 1 shows, an adviser who meets the s923A criteria is still unable to use a restricted term such as ‘independent’ while ever their licensee or any other adviser in their group continues to receive a commission.

The effect of this is would be that the task of meeting the independence criteria will need to be undertaken as a licensee group.

The groups with the most work to do will be the larger licensee groups and those with a heavy bias towards risk insurance.  Each group as a whole will need to coordinate and work together to bring about the change.

The smaller boutique licensees are likely to make the change early and then will only accept advisers who meet the independence criteria, whilst excluding and expelling those who don’t.

Conversely, practitioners who qualify as independent advisers but can’t use the term, will actively seek out independent licensees.

Unfortunately, the race for independence is likely to become a real life game of musical chairs where many self-employed advisers might not be able to find a licensee willing to accept them.

To exacerbate the problem, introducing fee-for advice and moving away from commission-based income models, is not going to be achieved overnight.  It takes time to transform an adviser’s business from a product intermediary service to a fee-based advice practice.

It is a cultural and attitudinal shift that involves a complete rethink of the business.

 

Gary Weigh

 

FASEA ADVISER EXAM PREPARATION – FINDING LOGIC IN THE VOLUME

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One of the most challenging aspects of preparing for this exam is to understand the volume of current law underpinning the provision of advice.

However, a good working knowledge of the current rules is necessary for two reasons. Firstly, it is hard to understand the additional impacts of the new Code of Ethics with knowing the current rules.  Secondly, it is difficult to apply the advice rules to practical scenario-based situations in the exam if you don’t know them.

So instead of trying to rote learn several hundred pages of legislation, try asking why the law is there in the first place and what are the consequences for all parties of non-compliance.

I find that understanding the reason why is much more helpful than merely remembering lists and words.

For instance, every adviser should know the legal requirements of a Statement of Advice.  That’s a list you can find in the legislation or related Regulatory Guide (RG).  But that’s not enough.  Being able to apply this knowledge in various situations is the point of the adviser exam.

So try turning it around to look at the flipside and ask, “What makes a SoA defective, how could a defect disadvantage the client, and what are consequences for the adviser?”

Similarly, the elements of the Best Interests Duty are listed in the legislation and by now, the listed elements should be second nature.  Again look at the flipside, “Why do advisers not always act in the best interests of clients, and how could that adversely affect clients?”

Of course, there are many influencing factors including self-interest, money, greed, licensee pressure, time pressure, poor advice models, poor product knowledge, lack of communication, lack of records, insistent clients who think they know best, and so on.

Clients are adversely affected because they don’t receive the advice they deserve.  As a result, the advice fails to solve the problem at hand, or achieve the goal set.  The more this happens, the less trust is placed in the profession as a whole.

Conflicts of interest play a big role in the provision of sub-standard advice.  Whilst a lot of conflicts revolve around adviser remuneration paid from a non-client source, other common examples relate to inherent product conflicts (many of which are related to adviser or licensee remuneration) as well as client conflicts such as advising both parties to a broken business partnership or domestic divorce.

These are the issues the Code of Conduct seeks to redress.  To understand them in a real world context will enable you to identify ethical issues in the scenario-based questions on the adviser exam.

So although exam preparation at first glance might appear to be an insurmountable mountain of unrelated legislation, they are in fact related and all come down to one sharp point.  That is doing the right thing by the client.

 

FASEA EXAM INSIGHTS – WHAT YOU SHOULD KNOW!

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#1 June Exam Wrap-up

This is the first of a 6-part series of insights into the FASEA adviser exam.

Some 600 advisers sat the first round of FASEA exams this month. Even though the specific content of future exams will continue to change across and within the next 8 sittings or so, there are some valuable takeaways that can be applied to every exam.

Firstly it is important to understand the significance of the exam curriculum published by FASEA.

  • Financial advice regulatory and legal obligations
  • Applied ethical and professional reasoning and communication
  • Financial Advice Construction

I interpret this as:

  • Know the rules that existed pre-FASEA (i.e. Ch7 Corporations Act, Privacy Act, AML / CTF, TASA)
  • Know the new Financial Planners and Advisers Code of Ethics 2019 plus Explanatory Statement) really well; and be able to recognise breaches and potential breaches in any personal advice situation
  • Know how to construct personal advice lawfully and ethically that is genuinely in the best interests of the client by any definition

In your exam preparation, the first step is probably the most challenging.  That is, knowing the pre-FASEA rules.

A large part of it is contained in ‘Vol 4 & Vol 5’ of the Corporations Act (ref. FASEA reading list).  The reading list reference looks innocent enough but there is a lot of it.

Even though every adviser was expected to have known all of this for the past few years, my experience to date is that most don’t.  And then there’s the other legislation mentioned above.

Many advisers have missed the fact that the Tax Agents Services Act 2009 also contains its own Code of Professional Conduct which binds every adviser by way of membership of the TPB. There is a lot of examinable information relating to tax financial advisers on the TPB site.

Expect a question on privacy because it is paramount for clients. Know the requirements for inter-office transmission of personal information, as well as local and overseas outsourced services (e.g. para planning, investment and audit services) plus third party referral situations.

Because financial advisers are ideally placed to detect suspicious individuals, organisations, beneficiaries and financial transactions, focus on suspicious matters that must be reported to Austrac. It is not only about money laundering and terrorism financing issues. It also includes tax evasion, superannuation and Centrelink fraud.

The new Financial Planners and Advisers Code of Ethics 2019 is FASEA’s pride and joy. It will feature prominently in every exam so know both the code and the Explanatory Statement inside out.  The latter contains some helpful examples in the Appendix.

It is also vital to understand where and how the Code of Ethics extends adviser obligations in the Corporations Act.  And don’t forget to read FPS003 Professional Year Policy and FPS004 CPD Policy.  They too will feature in an exam..

When looking for ‘applied ethics’ examples, focus on the long and unflattering history of the financial advice industry.  Consider the structure of the industry, where advisers and planners are employed, and the various pressures that advisers work under in different employment environments.

Focus on where the law has changed in response to society pressure and government policy e.g. conflicted & banned remuneration, fee for service and product switching.  More to come later!

Finally, some words of warning for financial advisers who specialise in one area only, e.g. risk insurance advisers.  This is an exam for all advisers.

This means exam scenarios, from which several questions will subsequently flow, are likely to cover a multitude of situations.  Whilst it is doubtful that the exams will be over-technical, it will help to understand the basics and terminologies of all relevant advice disciplines.

 

#2 Understanding how the adviser exam is generated

What became obvious in the first FASEA adviser exam sitting is that the content of the exam over the duration of the June exam period changed.

Exams written in different venues on different days were similar but different.  The reason for this is the way in which exam questions are generated.

The adviser exam process was contracted out to Australian Council for Educational Research (ACER) and there is a very good reason that the adviser exam is sat via dedicated computer rather than via printed exam papers.

It allows questions to be easily generated digitally from a ‘question bank’ via an algorithm directly onto the screen in front of each adviser.

Typically, exam question banks of this nature consist of a variety of questions in a number of ‘degree of difficulty’ categories.

It is therefore possible that each adviser sitting an exam on the same day could be presented with a different exam.  However, these exams contain open ended questions that may require human intervention to assess, so these may be some practical limits.

Notwithstanding, there is not a lot to be gained by trying to share the contents of any given exam because the questions are always changing, albeit subtly.  And, as the question bank grows, there will be many more options for individualising exams.

The question bank will continue to grow because examiners have plenty of question fodder, given the chequered history of the financial services industry over the past decade or so.

There’s no shortage of dodgy schemes, deception, fraud, other illegal activities, spectacular collapses, licence cancellations, adviser banning and incarcerations that can be used to construct scenarios and questions.

Whilst a positive result in this exam is very achievable, it should not be taken for granted.  The only way to approach it is to put in some serious reading time to gain a good general knowledge across all areas of the curriculum.

However, who said that advisers can’t work smart as well as hard in the exam preparation.  Working smart will be the subject of the next article.

 

#3: Short Cuts to understand BEFORE taking the exam

Working smart can help put structure and logic into your adviser exam preparation.

So there are two parts to preparing for the adviser exam.  They are acquiring knowledge and applying knowledge.

ACQUIRING KNOWLEDGE

There is such a lot of reading to go through so it makes sense to prioritise.  So try applying the 80/20 rule as follows:

20%

These are the really important bits that you need to know inside out.  At the minimum these include:

  • Financial Planners and Advisers Code of Ethics AND Explanatory Statement
  • Disclosure and conduct obligations
  • Best Interests Obligations
  • TPB basics for tax financial advisers PLUS the Code of Professional Conduct
  • AML / CTF basics and resources for financial planners
  • Privacy as it applies to financial advice situations

80%

At the minimum, you should have a good general knowledge of everything else on the FASEA suggested reading list.  Your level of understanding needs to be good enough so that if you see it in an exam question, at least you will recognise it and be able to make some educated decisions.

Tip: Reading the Corporations Act will get you a good night’s sleep but the way to absorb the important stuff is to use the Regulatory Guides where possible.  These guides exist where ASIC deems the subject matter to be important. RG121, RG175, RG244 and RG246 should be your best friends. And like best friends do, they provide helpful summaries of the important bits and many very useful examples. 

APPLYING KNOWLEDGE

For this, NOTHING BEATS PRACTICE!

Sitting in workshops and presentations is helpful but doing is learning!

In my 10-part program, I have created over 240 practice questions in multiple choice true-false and open-ended formats where you can test and apply your knowledge and check your answers.  You will get to practice on every topic.

And just when you think you have exhausted yourself, I have another multi-question mock exam for you to attempt.  This will be made available to you prior to sitting your adviser exam.

 

#4: A practical approach to preparing for an ethical advice exam

The aim of the adviser exam is to ensure every advice provider has the knowledge and ethical reasoning ability to be able to navigate their way through the obstacle course of incentives, conflicted remuneration, competing priorities and work pressures to achieve great advice outcomes for clients.

Therefore, a very important part of your exam preparation should be to practice recognising Ch7 Corporations Act breaches and Code of Ethics breaches in a wide variety of adviser-client situations.

It starts by being able to identify illegal and unethical behaviour and unfortunately, there is a long unflattering history to call upon.

These behaviours include baseless product switching, over the counter super & insurance selling, SMSF property scams, hawking, inducement, early super release schemes, inappropriate margin lending, and so on.

Whilst many of these practices are being quickly being consigned to history, I am not certain that all advisers recognise the fact that cookie-cutter (one-size-fits-all) advice and client over-servicing, even in small doses, are also on the no go list.  In RG175.255 & RG175.403 respectively, ASIC makes it quite clear neither is permitted.

Doing the right thing relies on an ethical mindset and having advice processes in place that reflect this mindset.  After all, an adviser’s advice process is the engine room where all client recommendations are generated.  If it is flawed, so is the advice.

ASIC provides specific guidance on advice processes in RG175.254 and clearly sets out its expectation that advice providers must have advice processes that ensure compliance with the best interests duty.

Also noteworthy is subsection (d) of this same section, ASIC clearly expects that advice providers focus on providing advice that is not product specific, whether or not it is in combination with product advice.

Adding to the importance of getting the advice process engine room right, the new Code of Ethics weighs in on the issue in Standards 7-9, which specifically highlight areas such as money, consent, ‘good faith’ product recommendations and record keeping.

Not only does this suggest the need for regular and honest assessment of adviser advice processes, it also demonstrates that the new Code of Ethics isn’t the only show in town.  The Corporations Act (from which the Regulatory Guides are derived) is alive and well and continues to play a big role in shaping good advice.

So, to identify Licensee and adviser behaviour to be avoided and at the same time prepare for the exam, there are a number of places to look for examples:

  • RG175 Licensing: Financial product advisers—Conduct and disclosure has over 20 helpful examples in section E – “Acting in the client’s best interests and related obligations”
  • RG244 Giving information, general advice and scaled advice has many helpful examples plus a very useful Appendix starting at page 37
  • Explanatory Statement to the Financial Planners and Advisers Code of Ethics 2019, contains examples and case studies
  • ASIC News Centre – Media Releases https://asic.gov.au/about-asic/news-centre/find-a-media-release/ a good source of relevant real life examples that had resulted in licence cancellation and adviser banning and, in some cases, custodial sentences.
  • Royal Commission Final Report is listed on the FASEA extension reading list. Volume 2 of that report contains many real life examples that could be drawn upon (e.g. selling of superannuation through CBA branches p79; Aon Hewitt non-consent super switching p263)

 

#5 Key Knowledge areas to understand BEFORE the exam

This is an ethical advice exam.  One of the key knowledge areas will be to know the interrelationship between the Chapter 7 Part 7.7A Best Interests Duty (BID) and the new Code of Ethics.

At first glance, the Code of Ethics appears to be adding an ethical overlay on top of the Part 7.7A Best Interests Obligations.

However, on a closer reading it does far more than that.   The devil is usually in the detail and this is the case with the Explanatory Statement to the Code of Ethics.

The ethical platform is laid down in Standard 2 in a two-part statement, “You must act with integrity and in the best interests of each of your clients”

It demands that advisers act ethically to the highest professional standards, but it expressly binds advisers to do, or not to do certain actions.

Here is just one of many examples.

This one is found in Paragraph 36 of the explanatory Statement:

“You should take into account your client’s express wishes but these do not override your duty to give advice that is in the client’s best interests.”

This effectively removes a long held belief by some that the client is always right; and that advisers should give demanding or misguided clients what they want, regardless.

Indeed it is an adviser’s job to help clients to achieve the outcomes they want, but not always via the means the client wants.

As all advisers know, clients are sometimes prone to acting on impulse and reacting to peer pressure and greed; and all too often it can override caution and common sense.

This interpretation of the code prevents an over-obliging adviser from taking advantage of an insistent client, and / or appeasing demanding or misguided clients with inappropriate advice that would not be in their best interests.  In other words, it expressly obligates advisers to save clients from themselves.

The Code reinforces advisers as professionals with the training and experience to know the risks, problems and liabilities that can await clients down the track; with a duty to steer them in the right direction.

The following are some example of situations that are likely to be addressed by this statement (this is not an exhaustive list):

  • Agreeing with insistent clients to proceed with a SMSF, knowing that it is inappropriate advice, and without sufficient inquiry into their relevant circumstances
  • Acting for both spouses in separation and divorce proceedings
  • Willingly over-gearing greedy clients into margin lending products when it is clearly inappropriate to their relevant circumstances
  • Recommending over-risky superannuation investments to achieve an over-ambitious  client retirement target where the client clearly doesn’t understand the risks
  • Willingly going along with client wishes and allowing them to getting themselves into trouble as a result of a range of ‘bar-b-que’ advice received from friends and relatives

 

#6: Handy tips on how to prepare for your exam

No adviser should take the FASEA exam lightly.  It is not a tick and flick exam.  I have yet to speak to an adviser who came out of their June exam brimming with confidence.

The exam requires a significant amount of reasoning ability, not only base knowledge.  So rote learning isn’t going to cut it.

The reason is that most questions in the exam are case study based.  In other words, there are many scenarios which contain a set of circumstances, from which a series of questions flow.

To add to the degree of difficulty, you can expect an academic treatment of a profession practice exam.  In other words, the persons setting the exam are more likely to have a PhD rather than an authority to practice as a financial adviser.

So it is very important to get the feel of the type of questions you will encounter by studying the practice questions published by FASEA in the PDF document “The Financial Adviser Exam Practice Questions” Version 1.0, May 2019.

Because this is an exam for all advisers in a variety of employment situations, you will be confronted with examiner-created situations you have never encountered before.

You will see artificial scenarios that seem overly long winded and sometimes confusing.  You may be asked questions where you have to choose ‘the most likely’ from a range of possible options.

And yet you have to prepare!

So my answer to this challenge is to be ready for anything and everything.  The best preparation for a challenge of this nature is to know your stuff.

Know the rules and how to apply them, and know how to construct personal advice knowledgeably and ethically, that is genuinely in the client’s best interests by any definition.

How to prepare

The answer is to learn the base knowledge and then practice, practice and practice.  And when you think you have done enough practice, do more practice.

Change your mindset

I have heard some older advisers say, “I have been in the industry for 25 years and if I can’t pass this exam, no one will”.  That attitude will not get you through this exam.

The reason is that although many advisers will have a general, intuitive understanding of the advice rules, only a relative few will know it to examination standard.

A large part of preparing for this exam is to change your mindset and adapt to what is clearly a rapidly changing advice landscape.  Resistance will be useless if you want to stay in the industry.  If you hang onto past practices, you risk going the way of the dinosaurs.

Whilst, I disagree with the compressed time frame for existing advisers to pass the exam, and the brutal consequences for those who don’t pass by the end of next year, I do believe that this exam has a lot of merit.

The intense and focused preparation; plus the sitting and passing this University standard exam under strict exam conditions may ultimately be a blessing in disguise, both for your education upgrade and overall improved knowledge as an advice professional.

Finally, my advice to every adviser going into their exam is:

  • Study in detail every document, example and (candidate) video related to the adviser exam that FASEA has released
  • Prepare and practice well for the exam, then learn and practice some more
  • Don’t be fooled by the prospect of an open-book exam.  In my experience, they are the most difficult because it is so easy to waste time searching for information.  It is best to have a good working knowledge of the subject matter going into the exam

In the exam:

  • Manage your exam time well
  • Stay calm
  • Take the time to read every question properly
  • Don’t walk out of the exam if you finish early. Use the extra time wisely

GOOD LUCK!

FASEA ADVISER EXAM – THERE IS NO WAY AROUND IT

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If you are an existing adviser, you have until the end of 2020 to pass the adviser exam.

I have had a few advisers ask me this same question lately: “Can I dodge the exam and retain my business after 1 January 2021 by employing a financial adviser to service new and existing clients while I take a back seat and run my business as a director of my (corporate authorised representative) company.”

The answer is NO.

Licensees will prevent that situation from ever arising. They will require that you be personally authorised to retain your clients and to be paid.

Clients have to be protected in the event that your employed adviser leaves your company, takes holidays or in some way becomes incapacitated to perform the job. Clients cannot be orphaned these days.

Also, would it be in the best interests of your business to employ an adviser who has full control over advice provided to your clients while you legally have none?

The brutal truth is that if you are removed from the adviser register on 1st January 2021, your Licensee will have no option but to redistribute your clients if you haven’t sold your business by then.

At the moment, which ever way you turn, it appears you are faced with a n0-win option. You won’t be able to stay on the adviser register after 1 January 2021 if you don’t pass the adviser exam; and the price you can expect should you be successful in selling your business between now and then will be heartbreaking.

Supply of commission-based books of business is high and rising as advisers exit the industry. Demand is low because what is for sale is rapidly diminishing. Therefore, prices continue to be driven down.

A much better option to consider is to prioritise the time to study for the adviser exam and then either:

(a) retain your clients, work on a new advice model and rebuild your business, or

(b) sell your business in 2-3 years time before the educational upgrade deadline arrives in 2024 (no guarantee of a better price then).

To continue a profitable business after 2020 will mean a complete re-think of how you provide your financial services.  The commission-based remuneration model is already in its death throws as grandfathered commissions are set to disappear in less than 17 months time; and insurance commissions will continue to be squeezed.

No adviser will survive even in the medium term by selling products alone.  Advisers will have to shift their mindset to selling advice.  But the transition will not be an easy one.  It is not as simple as jumping across to fee for service.  Besides the fact that almost no one will pay a fee for risk insurance (for which they have to pay ongoing premiums as well), you can’t create a fee for service model out of thin air.

It will require some heavy duty planning to build your marketable service package and price it.  Then there is the age old question of who is it targeted at, and who will buy it.  And the most critical question is what special expertise or service offering will distinguish you from the sea of advisers in exactly the same position as you, who also can’t distinguishable themselves from the rest?

So passing the adviser exam is the first step in a serious business rebuild, or a business sale at a slightly more opportune time after 2021.

 

 

FASEA EXAM INSIGHTS #6: Handy tips on how to prepare for your exam

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No adviser should take the FASEA exam lightly.  It is not a tick and flick exam.  I have yet to speak to an adviser who came out of their June exam brimming with confidence.

The exam requires a significant amount of reasoning ability, not only base knowledge.  So rote learning isn’t going to cut it.

The reason is that most questions in the exam are case study based.  In other words, there are many scenarios which contain a set of circumstances, from which a series of questions flow.

To add to the degree of difficulty, you can expect an academic treatment of a profession practice exam.  In other words, the persons setting the exam are more likely to have a PhD rather than an authority to practice as a financial adviser.

So it is very important to get the feel of the type of questions you will encounter by studying the practice questions published by FASEA in the PDF document “The Financial Adviser Exam Practice Questions” Version 1.0, May 2019.

Because this is an exam for all advisers in a variety of employment situations, you will be confronted with examiner-created situations you have never encountered before.

You will see artificial scenarios that seem overly long winded and sometimes confusing.  You may be asked questions where you have to choose ‘the most likely’ from a range of possible options.

And yet you have to prepare!

So my answer to this challenge is to be ready for anything and everything.  The best preparation for a challenge of this nature is to know your stuff.

Know the rules and how to apply them, and know how to construct personal advice knowledgeably and ethically, that is genuinely in the client’s best interests by any definition.

How to prepare

The answer is to learn the base knowledge and then practice, practice and practice.  And when you think you have done enough practice, do more practice.

Change your mindset

I have heard some older advisers say, “I have been in the industry for 25 years and if I can’t pass this exam, no one will”.  That attitude will not get you through this exam.

The reason is that although many advisers will have a general, intuitive understanding of the advice rules, only a relative few will know it to examination standard.

A large part of preparing for this exam is to change your mindset and adapt to what is clearly a rapidly changing advice landscape.  Resistance will be useless if you want to stay in the industry.  If you hang onto past practices, you risk going the way of the dinosaurs.

Whilst, I disagree with the compressed time frame for existing advisers to pass the exam, and the brutal consequences for those who don’t pass by the end of next year, I do believe that this exam has a lot of merit.

The intense and focused preparation; plus the sitting and passing this University standard exam under strict exam conditions may ultimately be a blessing in disguise, both for your education upgrade and overall improved knowledge as an advice professional.

Finally, my advice to every adviser going into their exam is:

  • Study in detail every document, example and (candidate) video related to the adviser exam that FASEA has released
  • Prepare and practice well for the exam, then learn and practice some more

In the exam:

  • Manage your exam time well
  • Stay calm
  • Take the time to read every question properly
  • Don’t walk out of the exam if you finish early. Use the extra time wisely

GOOD LUCK!

To catch up missed EXAM INSIGHTS read them at http://garyweigh.com/blog/