Scaled advice: What financial advisors must know to meet their legal obligations
In 2012, the Australian government introduced the Future of Financial Advice (FOFA) reforms.
FOFA reforms had one primary goal:
Improving retail clients' access to high-quality financial advice, including scaled advice.
Legal obligations and 'the best interests duty' are at the core of scaled advice.
But what exactly is scaled advice? What are its key aspects and the government regulations associated with it? How do you ensure you follow legal obligations when giving scaled advice?
This guide reveals the law-based meaning of scaled advice and how it is different from general advice. You will also discover its key aspects and the legal obligations tied to it.
Most importantly, you will know what you must do to meet your legal duty when giving scaled advice. Let's dive deeper to learn more.
What is scaled advice?
Scaled advice is a targeted form of personal advice that is limited in scope. It is also called single-issue, narrow-scope, or piece-by-piece advice. After thorough research, the Australian Securities & Investments Commission (ASIC) introduced 'scaled advice.'
ASIC's research reveals that a third of Australians prefer narrow-scope advice. As a result, ASIC introduced scaled advice, which focuses on a specific issue about a subject matter.
Suppose a client seeks financial advice about retirement planning. The client may be requesting tailored recommendations on one of the following topics:
- Transition-to-retirement (TTR) strategy
- The right pension products to buy
- Whether the retail client should pay debts before retiring
In this case, scaled advice focuses on a specific area within retirement planning. This could be a TTR strategy depending on the client's needs.
If the client needed recommendations on both TTR strategy and suitable pension products, you'd still consider it scaled advice.
Depending on the nature of the advice, it can be 'scaled up' or 'scaled down' to correspond with the client's needs. When giving scaled advice, what matters the most is basing your recommendations on the client's best interests.
General advice vs. personal advice
Personal and general financial advice are different. When giving personal advice, you consider the client's objectives, financial situation, and specific needs.
With personal advice, retail clients can readily act on your recommendations. That's because you've tailored the advice to their specific situation.
General advice doesn't consider the client's financial situation, needs, or objectives. With general advice, you warn clients upfront that the recommendations are not personalised.
Clients consider its appropriateness based on their specific situation. Then, if they find it appropriate, they act on it.
What are the key aspects and obligations of scaled advice?
When giving scaled advice, remember this:
Both the financial adviser and clients can suggest the limit of the advice. Clients can specify the recommendations they need from financial planners.
On the other hand, financial planners must scope the advice based on the client's best interest. That means one thing.
Your scaled advice should consider any relevant issues affecting the subject matter. According to ASIC, it's illegal to exclude sensitive issues on the subject matter when giving scaled advice.
Financial advisors should use their professional judgment to give appropriate recommendations. The advice should be consistent with the client's relevant needs and the subject matter.
Additionally, financial advisers can limit the scope of every type of advice. Be it on a simple issue or a complex one. That means scaled advice can involve a single topic or many intertwined circumstances.
The quality of scaled advice is not less than that of comprehensive advice. Instead, it is more tailored and readily executable for the client.
In other words, scaled advice does not mean lesser quality for clients. Neither does it mean lower training standards for financial advisers.
The law: The best interest duty and related obligations when giving scaled advice
Your legal obligations when providing scaled advice depend primarily on two things:
The client's relevant circumstances and the subject matter. Essentially, the law demands the following when giving scaled advice:
- You must act in the best interest of your client
Suppose a client seeks advice from you to help them increase their wealth. After a thorough analysis, you recommend an investment strategy. During the discussions, you point out two things:
The client's risk of losing their income(or assets) and the fact that you're not skilled in risk insurance.
If you exclude the consideration of risk insurance services, you will not meet the best interest duty. In this scenario, acting in the client's best interest means referral to a risk adviser.
Then, you tailor your investment strategy advice based on the risk adviser's recommendations.
2. You must prioritise the client's interest
If you can't act in a client's best interest, you should decline to provide advice or refer the client elsewhere.
3. You must warn clients if the scaled advice is based on incomplete information
4. You must provide appropriate advice to the client
You must only give scaled advice if, beyond any reasonable doubt, the advice is appropriate for the client.
How does scaled advice complement an adviser's service offering?
You can leverage scaled advice to complement your service offering. So you shouldn't treat scaled advice as a sunk cost because it is a cheaper service than comprehensive advice. Instead, use it to attract more clients and streamline your service offering.
Suppose you are currently offering comprehensive advice only. Offering scaled advice might help you appeal to clients seeking specific advice. Advice tailored to their present needs, objectives, and financial situation.
In this case, you risk losing clients to competitors if you don't offer tailored advice.
How can advisers ensure they meet their legal obligations when giving scaled advice?
Your legal obligations depend on your client's situation and the subject matter. However, the following tips will help you meet your legal obligations as an advisor.
1. Clearly communicate your service offering
When giving scaled advice, you should communicate what you're and aren't offering. The implications of the advice and why you've used a specific approach should also be clear.
What matters the most is to help the client understand:
- Your advice
- Related benefits
- Risks related to the subject matter
- The costs of anything you recommend
With clear communication, you are sure that you and the client are on the same page.
2. Leverage your professional judgment to identify the subject matter and the limit of the advice
To meet the best interests duty, you must identify what advice the client seeks. Whether directly or indirectly. The more information you get relevant to the subject matter, the better.
That way, you refine your understanding of what the client wants. This simplifies tailoring your advice to the client's needs. But there's more.
Understanding the subject matter helps you determine the limit of your scaled advice. Once you accurately pinpoint these two — the subject matter and scope of the scaled advice — it is easy to:
- Prioritise your client's needs
- Serve the client's best interests
- Address sensitive issues outside the scope of the scaled advice
With these three points, it's easy to fulfill your scaled advice obligations.
3. Get accurate and complete information about the client's relevant circumstances
Identify the relevant circumstances of your client when giving scaled advice. These circumstances directly affect the quality and appropriateness of your advice.
But how do you identify the relevant circumstances to the subject matter?
Ask all the necessary questions to pinpoint situations related to the subject matter. Suppose you scope out cash flow management when giving scaled advice.
In this case, you must inquire about the client's financial position to ensure your recommendations are affordable. If your recommendations are unaffordable, your advice becomes inappropriate.
Apart from making inquiries, you need to revise the subject matter thoroughly. Take a second look at the client's objectives, needs, and financial situation. Ensure the client's information pinpoints relevant situations to the subject matter.
4. Use reliable processes and systems
With adequate processes and systems, you can prove compliance with obligations. Here's an example that clarifies this point.
Using predetermined questions risks fitting your clients into a box. Instead, you can individually record each client's reason for seeking scaled advice.
The point is that every client has unique motivation when seeking financial advice. Your processes and systems of offering scaled advice should consider this.
Protect yourself against lawsuits
Scaled advice is a targeted form of personal advice. It focuses on the client's financial situation, needs, and objectives. Leveraging best practices can help you meet your legal obligations.
